ChargePoint Stock: How Profitable is EV Charging?
Our recent piece on finding the next Tesla proposed that autonomy may be the thesis we ought to be looking at as opposed to electrification. Investing in automakers isn’t something we’re keen on unless they’re pure plays on electric, and even then, we’re not convinced we’ll see another Tesla-like success story from all the EV special purpose acquisition companies (SPACs) that debuted over the past several years. Charging infrastructure represents another way to play the electrification thesis, but we’re having a tough time conceptualizing where the money is supposed to come from. Gas stations make very little money on the gas they sell, with profits coming from all the stuff sold inside gas station stores. Will selling electricity be any different?
Earlier this year we wrote about 6 Electric Vehicle Charging Stocks For Green Investors and noted that ChargePoint (CHPT) was the biggest, both by market cap and revenues. Now that the SPAC dust has settled, and we have some proper filing documents to peruse, we’re going to take a closer look at ChargePoint’s business model to try and understand what sort of an opportunity exists in electric vehicle charging.
The value of a charging station to every property owner will be unique, so we need to consider ChargePoint’s three key customer markets: commercial, fleet, and residential. Commercial customers have parking places largely within their workplaces and include retail, hospitality, and parking lot operators. Fleet includes municipal buses, delivery and work vehicles, port/airport/warehouse and other industrial applications, ride-sharing services, and is expected to eventually include autonomous transportation. Residential includes single-family homes and multifamily residences.
Unfortunately, we’re not provided the revenue segmentation numbers to see which key customer market is working out best for ChargePoint. Instead, 2021 revenues are broken down by “Networked Charging Systems” (72%), “Subscriptions” (22%), and “Other” (6%). Our concerns around EV charging have always been around how profitable the business could be. It’s assumed that ChargePoint is investing a lot in expansion, so the fact they’re losing money right now isn’t a concern. However, a look at gross margin can provide an indicator of future profitability.
|Networked Charging Systems||15%||5%||-5%|
Gross margins for hardware are expanding over time thanks to cost dilution, while subscriptions are maintaining a healthy margin as we would expect from recurring revenue streams. We’ve omitted the “Other” revenue segment which largely reflects regulatory credits that ChargePoint receives which customers could claim but don’t. The result is a “blended” gross margin in the low 20s that’s expanding over time. Compare that to the gross margins you see at quality SaaS companies such as the below examples.
There’s a much bigger question to answer when considering ChargePoint’s future potential. If charging station operators can’t make a return on their investment, what’s their incentive to continue offering EV charging services and paying ChargePoint’s subscription fees?
Selling Energy to Power Vehicles
Whenever exploring a disruptive technology thesis, we always gravitate towards the leader because larger companies have a competitive advantage due to principles like economies of scale and network effects. ChargePoint claims to have seven times the market share of their closest competitor in North America, where 85% of their revenues are from the United States. Somewhere around one-third of ChargePoint’s chargers are free because the property owner subsidizes the costs. The remainder are allowed to set whatever price they like with typical rates ranging from $2 to $3 per hour for Level 2 charging. (Oftentimes, there’s a penalty for keeping the vehicle on the charging port once the battery is fully charged.) This is where we need to distinguish between two primary use cases – slow charging (Level 2) and fast charging (Level 3).
There are more than 145,000 fueling stations across the United States and 85% of those have convenience stores attached to them. Gas station owners don’t make the lion’s share of their profits from gas, it’s all the overpriced junk and 98% gross margin fountain drinks they’re selling. Because EV charging can be detached from gas stations, there’s no need to continue with that old model. The most common type of charging – Level 2 – adds about 20 to 30 miles of range per hour. Grocery outlets would be a prime place for such outlets, or places like Starbucks. Casinos have probably already outfitted their parking lots with EV chargers as they’ll do anything to get patrons to walk inside.
Realistically, most EV owners will look to charge their vehicles when they’re not in use. When they’re on the road covering distances, consumers will look for Level 3 fast charging options of the type that oil companies like BP and Shell are now investing in heavily.
Usage of EV Charging Stations
Multiple data sources show that 80% of the time spent charging an electric vehicle is at home where all you need is an outlet, not necessarily an expensive piece of charging equipment. The JD Power EV ownership study showed that people were about equally happy using a permanent Level 2 station vs a portable Level 2 charging cord. If EV owners drive less than usual – one study shows they drive half as many miles as other drivers – then do we really need a “convenient and equitable network of 500,000 chargers” per President Biden’s stated plan? Since the infrastructure bill doesn’t allow for the deployment of Level 3 stations, most of what gets built will probably be Level 2 stations. (Fast Charging stations are 50 to 100 times more expensive than Level 2 stations, which only cost a few thousand dollars each to deploy.)
Skating to where the puck will be requires investors to think about what the ideal scenario looks like for electric vehicle owners. Public charging availability is said to be one of the least satisfying aspects of owning an electric vehicle so that’s a pain point that needs addressing. The speed at which you can charge a vehicle dictates how many cars you can service, and nobody likes waiting for their car to charge when they’re on the go. In the future, when autonomous cars run the roost, robotaxi operators will also want to maximize vehicle usage through fast charging. Therefore, the ideal EV charging model is fast charging except for home, hotel, grocery store, and workplace use cases, all of which need to show a positive ROI for the operator to be sustainable.
Perhaps EV owners of all types will adopt a hybrid model that goes something like this. At home or work, slow EV charging – Level 2 – is perfectly sufficient. When an EV isn’t occupied, it’s ideally being charged. When taking longer road trips, Level 3 charging is the clear winner. Tesla’s quickest charger can add 200 miles of range in just 15 minutes, and Tesla has nearly 1,300 Supercharger stations in the U.S., with over 13,000 fast-charging ports. ChargePoint’s latest investor deck claims 12,000 fast charging ports, about 6% of the 188,000 ports they have in service.
The Optimal Business Model
Uncertainty equals risk. We’re not certain what the optimal business model looks like for EV charging, but we know that ChargePoint is subject to the demand for charging stations which is probably nowhere close to any sort of equilibrium given how relatively new the technology is. What’s likely to happen, particularly when we consider the subsidization factors, is that an excess supply of charging infrastructure will be made available, and companies won’t see usage numbers that merit the infrastructure investment. If customers can’t be asked to claim credits that ChargePoint claims instead, then how much thought are they really putting into a return-on-investment? Or is it all about public perception, the ability to tick some ESG checkbox?
Selling energy to vehicle operators was never profitable which is why 85% of gas stations have a convenience store attached to them. Are we to believe that selling electricity instead of petrol to vehicle owners has more profitability associated with it? Fortunately, ChargePoint carries none of the risks associated with the profitability of charging equipment which is a one-and-done sale that’s ideally accompanied by a service/support contract. There’s also “ChargePoint as a Service” which bundles ChargePoint-owned and operated systems with Cloud Services and other benefits into one subscription.
Overinvesting in EV infrastructure may provide short-term benefits to ChargePoint, but what happens if usage plummets because of widespread availability? No consumer would pay for charging services because there would be too many free or heavily subsidized options available. Perhaps the opportunity lies in maximizing utilization through the ChargePoint software app which would help solve the following pain point.
Charging remains costly because stations are underutilized. Unprofitable stations are not replaced and the total number of charging stations declines. A negative feedback loop is created by the diminishing car sales causing the number of charging stations to fall, thus making new electric cars less desirable.Credit: Reuters
For example, think about how efficiently Uber can utilize the vehicles in their fleet. That’s all about software. Understanding where an EV is relative to the nearest open charging slot is just one app away. Perhaps ChargePoint’s app is where their competitive advantage lies, and they seem to be moving in that direction. The latest investor deck talks about “320,000 ports accessible via roaming integrations” vs 188,000 ports operated by the company.
If you believe EV charging has a profitable future, ChargePoint would be a stock worth looking at now that their valuation has floated back down to earth. But, with a simple valuation ratio of 14, they might still have some room to fall further (below data from late June).
Last quarter, ChargePoint raised $300 million in a convertible note which now gives them around $545 million in dry powder to weather the current bear market. As much as they need geographic diversification, perhaps the European expansion plans should be put on hold in favor of using their dry powder to pave the way towards a more profitable business. We like their market leadership but find the uncertainty around the optimal EV charging business model too risky and the current margins too low.
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