Electric vehicle charging is a rapidly expanding market — but is EVgo stock the way to profit from that growth?
EVgo (New York symbol EVGO) builds and operates charging infrastructure for electric vehicles (“EVs”) — currently in 30 U.S. states. Clients include retail customers, original equipment manufacturers, plus commercial vehicles and fleet operators.
Note that if you drive an electric car in the U.S., you’re likely more familiar with ChargePoint, which was first to this market and has greater visibility. ChargePoint does have agreements with General Motors and the Pilot Travel Center that support its expansion.
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But let’s take a look at EVgo:
EVgo stock comes with a speculative valuation
Much like competitor ChargePoint, EVgo is growing rapidly, with revenues more than doubling in 2022 – with consensus forecasts of 650% further growth until the end of 2025. Gross margins are also improving and are expected to move into positive territory in 2023.
However, that is where the positive news ends. EVgo made considerable – and growing – losses in each of the past four years, and based on consensus forecasts, the next few years will deliver more of the same. Negative free cash flow will remain a drag on cash resources for at least the next three years, and the company will have to raise fresh capital at regular intervals, possibly further diluting the interests of current shareholders.
Prospects for profits in the near term are also not promising, although the same applies to competitors like ChargePoint. As per the company’s estimates, EVgo will lose between $60 million and $78 million at the EBITDA level in 2023, but that could turn positive by 2025.
Meanwhile, the losses will likely continue, and the prospects for profits in the near term also not promising. Based on 2025 estimates, the stock trades on an EV/Revenue multiple of 6.2 times and an EV/EBITDA multiple of 61 times. However, these estimates are subject to many potential factors and should be considered as speculative.
What’s going on with EVgo?
The company was founded in 2010 and listed on the Nasdaq in October 2021 via a business combination with a special purpose acquisition company (SPAC).
EVgo operates in a fast-growing market benefitting from government subsidies and fiscal incentives. In addition, the company has a reasonable share of the fast-charging electric vehicle market in the U.S.
However, financial losses and negative free cash flow are a major problem, and the balance sheet will continue to need reinforcement. In addition, competition in the U.S. market will be intense over the next few years, and the opening of Tesla’s fast-charging network to General Motors and other clients will be particularly negative for EVgo’s future expansion plans. Despite the 80% decline in the share price since early 2021, it is hard to make a case for acceptable returns given the high level of operational risk faced by the business. A takeover bid from a utility or vehicle manufacturer may be the best outcome for EVgo investors.
Competition in the space is heating up as numerous participants battle for market domination.
EVgo has set out to compete in the fast-charging DC market with little presence in the slow-charging market. But there’s significant U.S. competition in the fast-charge market from Tesla, Electrify America (owned by Volkswagen), and ChargePoint. Apart from its GM agreement, Tesla also announced its intention to make 7,500 U.S. chargers, including Superchargers, available to users of all brands of EVs by the end of 2024. Other potential competitors include Hertz and BP which plan to build a national fast-charging network across the U.S. with BP committing to investing $1 billion in EV charging in the U.S. by 2030.
According to data provided by the U.S. Department of Energy, EVgo has a market share of 8% of all publicly available charging point connectors in the U.S. Tesla is the outright market leader with a 62% share of the fast-charging direct current market.
In a survey of more than 5,500 EV owners, the non-profit advocacy group Plug In America highlighted the dissatisfaction of a large number of users with the public charging infrastructure; the most common concerns were broken or non-functional chargers, too few locations, slow charging speeds, and high charging costs. However, the Tesla Supercharger network was considered significantly better than its competitors in every aspect surveyed. More than 20% of all respondents reported a major difficulty using the EVgo network because chargers were often non-functional — although similar concerns were voiced regarding the ChargePoint and Electrify America networks.
What about raising capital?
EVgo had shareholders’ equity of $474 million by the end of March 2023, and total long-term debt (including operating leases) of $48 million.
Cash and short-term investments amounted to $164 million at the end of the first quarter; this will be supplemented by the $120 million raised through the issue of 29.4 million Class A common shares on May 22, 2023. Note that these shares were issued at $4.25 per share, well in excess of the current share price, and that they increased the class A share count by 41%. As a sign of confidence, the controlling shareholder contributed $5 million to the capital raise.
EVgo has a heavy cash burn rate running at about $19 million per quarter at the operational level and a further $65 million absorbed by capital expenditures. This implies that at the current rate of operating losses and capital expenditures, the company has enough cash to sustain the business for about one year.
Raising capital in the industry, including for ChargePoint, have also become less attractive as interest rates have moved up. EVgo’s depressed stock price also makes equity issues expensive and dilutive.
Final analysis: EVgo stock is not a risk worth taking
EVgo is growing fast, but so are the accumulated losses. Competition is intense and will continue to ramp up under the incentive and subsidy schemes offered by various levels of government. EVgo is a credible competitor in the fast-charging market but is not a market leader. There is the chance of a takeover bid from a deep-pocketed entity wishing to gain access to the U.S. EV charger market — but while that adds appeal, it’s not enough alone for us to recommend the stock.
We don’t recommend the shares of EVgo.
Are you investing in EVgo or ChargePoint? Why or why not?