EVgo (NASDAQ:EVGO) has lost more than half of its market value in the past 12 months, as the market climate remains unforgiving to long-duration growth stocks – especially those that are not yet profitable. The implementation of the most aggressive rate hike cycle not seen in decades by the Fed to counter runaway inflation has essentially dulled the lustre of valuations pinned on future cash flows which many growth companies depend on. Yet, EVgo’s fundamental performance has been largely resilient, riding on the coat-tail of still robust EV adoption and demand over the past year despite inflated MSRPs that reached $66,000 on average for a new battery-powered whip.
Surging oil prices following Russia’s invasion of Ukraine has also brought attention to and incentivized EV purchases over the past year, which favoured constituents across the broader supply chain as well, including public charging infrastructure operators like EVgo. Despite the slight earnings and sales miss during the third quarter, primarily due to “persistent utility labour shortages and transformer supply chain constraints [exacerbating] utility work backlogs at the front and back end of the charger development process”, the company still grew sales by almost 70% y/y. Growth of network throughput by more than 50% y/y to 12.1 gigawatt hours (“GWh”), coupled with 54,000 net new customer adds and 188 new stalls that came online in the third quarter also underscores increasing take-rates at EVgo.
However, despite expectations for continued resilience in the EV market relative to the broader auto industry due to protracted, though easing, supply chain constraints, compounded by looming recession headwinds, EVgo will likely remain vulnerable to market volatility over the coming months, similar to trends observed through 2022. Specifically, we expect EVgo’s near-term fundamental performance to resemble the resilience expected in the EV economy this year. But the unprofitable nature of the company, paired with its long-duration cash flows will remain an overhang on the share performance from the valuation perspective amid tightening financial conditions in the near-term. This would accordingly increase the stock’s exposure and vulnerability to further volatility in tandem with an anticipated continuation of risk-off sentiment as markets continue to work through mounting macroeconomic challenges spanning surging interest rates, persistent inflation, and a looming global economic downturn through at least the first half of 2023.
3 Key Themes in the U.S. EV Economy and Implications for EVgo
With operations based in the U.S., EVgo remains well-poised to benefit from a breakout year for EV adoption, which has lagged behind its Chinese and European peers in prior years. Thanks to a combination of easing supply chain constraints, expanded “EV manufacturing capacity and refreshed federal tax credits” under the Inflation Reduction Act (“IRA”), resilience is expected to remain the theme in the nascent industry this year, despite the weakening consumer amid tightening financial conditions. And much of this resilience is expected to be buoyed by fleet demand, which is currently viewed as a potential compensatory factor for risks of looming consumer weakness. Easing supply chain constraints and the growing influx of favourable policy support by the U.S. government is also expected to help the American public charging fleet “steadily expand” through 2023.
1. A Breakout Year for U.S. EV Adoption
Approximately 4 million to 7 million Americans are still in the market for a new vehicle despite looming economic weakness, as they were either priced out of the new car market due to surging prices in the past two years or are still waiting to buy their preferred model in the supply constrained industry. With inventories coming back after two years of chip shortages and broader supply chain constraints showed signs of structural easing – “new-vehicle inventory was up 81% toward the end of 2022, with almost 740,000 more vehicles available than in 2021” – many American consumers remain incentivized to return to auto show rooms this year.
This is further corroborated by anticipated acceleration in U.S. EV sales in the current year, albeit deceleration at the global scale due to the combined overhang of macroeconomic-driven demand risks and protracted supply chain bottlenecks in the nascent industry. The U.S. is expected to add 1.6 million EVs in 2023 (estimated +60% y/y), up from close to 900,000 to one million projected for 2022 (estimated +22% to +35% y/y). The growing momentum in U.S. EV adoption is further fuelled by renewed EV purchase tax credits under the IRA, which will help cushion some of the impact of rising prices and dwindling savings among Americans within the near-term. Specifically, there have been close to $30 billion in new investments within the EV economy since President Biden signed the IRA into law in August. And more than 20 new EV models will be introduced in the U.S. passenger car market this year, adding to 84 models already in the market at the end of 2022, expanding options across all pricing segments to better cater to wide-ranging consumer preferences. This, alongside global automakers’ plans to “spend nearly $1.2 trillion through 2030 to develop and produce EVs”, remains strong longer-term tailwinds for American public charging infrastructure.
And EVgo stands at the forefront of capitalizing on said trends going forward. The company currently boasts more than 2,600 operating stalls with uptime currently maintained at approximately 98% across its network for its more than 500,000 active customers. And more than 4,500 stalls remain in the development pipeline, fostering growth in the number of Americans that will be living within 10 miles of an EVgo charger – a key goal for the company, with the figure currently standing at 140 million.
As discussed in our previous coverage on the stock, EVgo’s focus on building direct current fast chargers (“DCFCs”) fitted for almost all types of charging outlets to service to a wide range of EV brands and types – including the American EV leader Tesla (TSLA) – remains a key competitive advantage, especially as battery technology continues to improve and facilitate demand for fast charging that can juice up to 100 miles of range within 15 minutes.
While the average max-charging power of a BEV [battery electric vehicle] launched in 2019 was 111 kW, this has increased to 195 kW for models launched in 2022. Some high-end BEV models go further, allowing for charging powers of up to 350 kW…more automakers have announced implementation of 800V architectures to achieve 350 kW+ in future models.
Source: Bloomberg
With currently 8,000 DCFCs across the U.S., EVgo’s fleet of more than 1,900 makes it a key solution to EV owners’ growing demand for fast charging to assuage range anxiety, second to Tesla’s sprawling Supercharger network. And the continued build-out of EVgo’s DCFC network across the U.S., which is currently also underpinned by partnerships with automakers like GM (GM), is expected to further its market share as EV adoption continues to gain momentum. This will not only reinforce longer-term demand, but also driving scale for EVgo as it continues to ramp up stall deployment.
Fast chargers make up 40% of annual public charger installations, but 93% of investments. Fast chargers, particularly those over 100 kW, account for the lion’s share of investment in public charging. Vehicle manufacturers continue to push faster-charging vehicles to lower charging times and reduce the barriers to EV adoption. [As such], DC charger costs are expected to decline in the long-term.
Source: Bloomberg
2. Capitalizing on Fleet Momentum
Fleet demand will be a key driver of U.S. EV momentum in 2023. The U.S. EV market is expected to benefit from a surge in demand from commercial construction, rideshare, and passenger vehicle rental fleets in 2023, thanks to the $7,500 tax break extended under the IRA. For instance, Hertz’s (HTZ) growing association with EV monikers like Tesla and Polestar (PSNY) underscores robust commitment from the rental car industry to board the transition to electric. Meanwhile, rideshare companies and EV subscription start-ups like Uber (UBER) and Autonomy are also chiming in on the build-out of an electric fleet economy for the consumer market, which would entail further TAM expansion in the nascent EV industry, and reinforce longer-term demand for EVgo’s public fast charging solutions.
And the company is already capitalizing well on said longer-term secular trends with partnership agreements already in place with existing “autonomous vehicle fleet [and] rideshare partners” including Uber. In the latest development, EVgo has also partnered with MHX Solutions – a “full-service logistics operation based in California – for the deployment of charging infrastructure and “EVgo Optima”, its cloud-based fleet charging management software, for a “Class 8 truck fleet”. This would mark one of EVgo’s inaugural forays in servicing the heavy-duty commercial trucking segment. The partnership underscores EVgo’s potential in the fast-expanding commercial demand environment, as demand from fleet operators reach an inflection point in the U.S. Specifically, the heavy-duty commercial segment has seen an increasing volume of fleet buyers “placing large orders from the likes of GM’s BrightDrop, Volvo Truck (OTCPK: VOLAF / OTCPK: VLVLY / OTCPK: VOLVF), Tesla, Daimler Truck (OTCPK: DTRUY / OTCPK: DTGHF) and others” since the enactment of the IRA, which provides eligible purchases of heavy-duty commercial EVs for an additional tax credit of up to $40,000 if their batteries “contain minerals extracted from or processed in a country the U.S. has a free trade agreement with, and a portion of components [are] manufactured or assembled in North America”.
3. Public Charging Policy Support
In addition to policy support like the IRA favouring the demand aspect for EVgo, the company also benefits from various federal programs put in place to foster the increase in availability of public charging infrastructure across the U.S. In the $7.5 billion allocated out of the Bipartisan Infrastructure Bill towards building out the country’s EV charging network, $5 billion was cut out for the National Electric Vehicle Infrastructure (“NEVI”) Formula Program. The NEVI Formula Program, run by the U.S. Department of Transportation’s (“DOT”) Federal Highway Administration (“FHWA”) will provide funding for “up to 80% of eligible project costs, including:
- The acquisition, installation, and network connection of EV charging stations to facilitate data collection, access, and reliability;
- Proper operation and maintenance of EV charging stations; and
- Long-term EV charging station data sharing”
Under the program, FHWA must distributed all related funds “made available each fiscal year through FY 2026” to all of 52 states across the U.S., including Washington D.C. and Puerto Rico. This includes $650 million allocated to the “first round of investment in fiscal year 2022, which will help build EV chargers covering approximately 75,000 miles of highway”, contributing to the Biden administration’s pledge to add 500,000 EV charging stations nationwide. Related funding will then flow from states to end receivers, including charging infrastructure operators like EVgo, “based on state procurement, RFP processes, and finalization of federal minimum standards”.
The remainding $2.5 billion allocated to the build-out of public EV charging infrastructure across the U.S. under the Bipartisan Infrastructure Bill will go directly towards “communities and corridors through a competitive grant program that will support innovative approaches and ensure that charger deployment meets Administration priorities such as supporting rural charging, improving local air quality and increasing EV charging access in disadvantaged communities”. And EVgo stands as a key beneficiary of both the NEVI Formula Program and designated grant program, as it looks to deploy public DCFC infrastructure across the U.S. to ensure there is a stall operated by the network within 10 miles reach for every American over the longer-term.
In addition to federal funding, EVgo is also a direct beneficiary of favourable tax arrangements aimed at fostering the U.S. EV economy. As mentioned in EVgo’s third quarter earnings call, the U.S. Code 30C, otherwise known as the “Alternative Fuel Infrastructure Tax Credit”, extends a “30% tax credit of up to $30,000” for businesses installing an eligible charging station like ones provided by EVgo, bolstering longer-term demand.
The favourable policy backdrop, paired with easing supply chain constraints that had previously stalled network expansion efforts, will remain key drivers of steady EVgo expansion through 2023 and beyond – in terms of network throughput, reach, and ensuing sales, and inadvertently, market share.
Final Thoughts
In addition to longer-term tailwinds that will continue to reinforce EVgo’s fundamental prospects, near-term resilience in EV sales despite the impending economic downturn will likely help mitigate looming demand risks. However, on the valuations aspect, EVgo will remain prone to looming market challenges, which continue to impact unprofitable long-duration growth names the hardest.
While we expect further volatility in the stock in tandem with broader markets given EVgo’s inherent vulnerability to mounting macroeconomic headwinds in the near-term from a valuations perspective, the company’s robust longer-term demand environment, favourable policy backdrop, and competitive advantage in scalable cross-segment DCFC technology continues to reinforce sustained market share gains, and inadvertently, fundamental improvement over time. As a result, the anticipated continuation of weakness in EVgo’s shares over coming months could create a compelling risk-reward opportunity for sustained longer-term upside potential buoyed by secular electrification growth trends.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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