ChargePoint Holdings: Too Much Cash Burn (NYSE:CHPT)

Thesis

ChargePoint’s (NYSE:CHPT) main source of revenue is low margin and their subscription business is not yet at scale. With only around $102 million in net cash, they might not survive long enough to witness the growth in EV adoption.

Low Margin Main Revenue Source

ChargePoint makes 77.86% of their revenue from their “Networked Charging Systems” segment.

According to ChargePoint’s most recent 10-Q:

“Networked Charging Systems revenue consists of the deliveries of EV charging system infrastructure, which include a range of Level 2 AC products for use in residential, commercial and fleet applications, and Level 3 DC, or fast-charge products for use in commercial and fleet applications.”

This business segment essentially involves ChargePoint selling charging stations to customers. They use the help of contract manufacturers and component suppliers to build these charging stations. This results in a relatively low gross margin profile of 12.06%. This segment of the business is somewhat similar to a retail model, albeit a rapidly growing one. The problem is that their operating expenses are growing too fast for their primary business segment to make up the shortfall given the current gross margin structure.

Fortunately for the company, they have a much higher margin subscription business with great prospects.

Lack of Scale in Subscription

ChargePoint’s subscription business is where a large amount of the potential upside lies. This segment is explained in their 10-Q:

“Subscriptions revenue consists of services related to Cloud, as well as extended maintenance service plans under Assure. Subscription revenue also includes CPaaS revenue which combines the customer’s use of ChargePoint’s owned and operated systems with Cloud and Assure programs into a single, typically multi-year subscription.”

The subscriptions segment boasts a gross margin of 38.16%, which is significantly higher than what they make selling charging stations. This boosts their overall gross margin to 18.1%.

Their subscription model has a lot of potential, especially as continued EV adoption fuels an increase in the utilization rate of their charging stations. As they build more charging stations and those stations get used more frequently, their margins should meaningfully increase due to scale and beneficial operating leverage.

The issue is that their sizeable operating cash burn threatens the long-term survival chances of the company. Even if solvency concerns are off the table, they might put themselves in a poor financial position and be unable to fund additional charging station capex, thus damaging the long-term bull case.

Cash Burn Poses Risk

Over the past nine months ChargePoint has posted a net loss of $266 million and negative operating cash flows of $216 million.

This level of losses and operating cash burn is highly concerning, especially given that the company only has $102 million in net cash. Trying to raise debt or equity financing in this environment would be a nightmare for a company burning this much cash. It’s likely that they will have to do some sort of capital raise this year if the business continues to operate in this way. EV adoption is quickly increasing, but it isn’t increasing fast enough to stem these massive losses without significant financial discipline from management. If management does not make careful financial choices now they will not be able to capitalize on their strategic position when the time for mass EV adoption arrives. ChargePoint risks crippling themselves if their business is unable to become self-sufficient in the coming years.

If they can’t fix their business a forced sale of the company or liquidation event is not out of the realm of possibility. Investors should think carefully about this risk before making an investment.

Risks to the Thesis

In this case, a risk to the thesis is if the company outperforms expectations. If ChargePoint is able to keep up the massive growth in their networked charging systems segment it could move them towards profitability, provided that operating expenses stop increasing so quickly. This would significantly improve their cash flows and take survival concerns off the table.

Another way the company can outperform expectations is if their subscription business begins to achieve scale faster than anticipated. This is entirely possible, especially with the growing adoption of EVs.

Finally, the company could have an easier time than expected raising capital. If ChargePoint is able to efficiently raise capital it could bridge them to the point where they can take maximum advantage of their strengths and fix their cash flow and profitability issues. Raising capital could become easier if the fed begins to lower rates and/or the price of ChargePoint’s stock increases.

Takeaway

There is a lot to like about the secular growth story in EV charging stations, but ChargePoint appears to be too risky of an investment at this point. They are currently burning a lot of cash with no end in sight, causing the growth in EV adoption to be irrelevant if the company can’t successfully make it there. I think the massive levels of cash burn threaten their ability to survive until the utilization rates on their charging stations meaningfully increase and they begin to realize significant operating leverage. It seems like a good idea for investors to remain on the sidelines until ChargePoint management can show the business can be self-sufficient. If and when management shows that they can stem the cash burn and are able to operate profitably, we will likely have a favorable view of the company. For now there seems to be too much risk.