There exists a notable concern that could potentially trouble ChargePoint's shareholders.
ChargePoint (CHPT dropping by 3.60%)** is a significant player in the electric vehicle (EV) sector, yet it doesn't manufacture EVs. Instead, it focuses on producing charging stations, acting as a crucial component in the EV industry's construction process. Unfortunately, ChargePoint hasn't discovered a profitable model for selling its essential products and services thus far. Here's an analysis of why its capital-light business strategy isn't yielding the desired results yet.
ChargePoint Doesn't Own the Infrastructure Essentials
With electricity necessary for charging EVs, this aspect forms a substantial opportunity for businesses to serve. ChargePoint is one of the prominent entities trying to capitalize on this section in the EV business ecosystem. It manufactures and sells charging systems and offers subscription services for charging networks.
However, ChargePoint is not a company with a substantial physical presence. Management states that due to its practice of investing scarcely in owning and operating charging infrastructure, it can efficiently direct its financial resources towards initiatives like research and development, marketing, and public policy enforcement. To put it in simpler terms, ChargePoint operates under an asset-light structure.
While this is favorable, as cash is not being tied up in tangible assets and instead invested in expanding the business, this advantage necessitates considering the financial statements' data more critically.
Examining ChargePoint's Financial Landscape
For instance, in fiscal 2024, ChargePoint spent around $221 million on research and development (R&D). Approximately $150 million was allocated for sales and marketing. The company does not disclose regulatory costs explicitly, as this information is not essential for this context. However, it is worth remarking that if these expenditures were factored in, the company's fiscal 2024 gross profit of just over $30 million would have been entirely insufficient to cover both the R&D and sales and marketing costs.
Although ChargePoint rakes in considerable revenue, totaling nearly $507 million in fiscal 2024, its cost of sales is just as substantial at approximately $477 million. This leaves minimal room for covering other business expenses, such as R&D, sales and marketing, and general and administrative expenses. It is noteworthy that general and administrative expenses in fiscal 2024 amounted to $109 million, which was significantly larger than the gross profit.
While being an asset-light enterprise may appear advantageous at first glance, its impact on the company's current financial situation is minimal. Moreover, a question arises: How is ChargePoint capable of generating such substantial expenditures if its revenue is not sufficient to meet its financial requirements?
One substantial explanation is that the company is continuously issuing new shares, which ultimately weakens the value of existing shareholders' investments. Observe the chart above, showing how the stock price has continued to decline as the number of shares has increased. This trend signifies potential trouble, given that selling shares at lower prices means that greater shares must be sold to raise the same amount of money.
ChargePoint's Strategy fall Short of Expectations
Although ChargePoint is still expanding its business, it is still far from reaching the stage where revenue surpasses its expenses. This is an attainable goal for every company, but ChargePoint is particularly distanced from achieving it currently. Only highly risk-tolerant investors should consider investing in this stock at this time.
Despite ChargePoint's focus on investing in research and development and marketing to stay competitive in the EV sector, the company's financial statements reveal challenges in covering these expenses with its current revenue. The company's gross profit in fiscal 2024 was barely sufficient to cover R&D and marketing costs, and its general and administrative expenses were significantly higher than the gross profit.
To sustain its operations, ChargePoint has been issuing new shares, which has weakened the value of existing shareholders' investments and contributed to the stock's decline. This financial strategy may not be sustainable in the long term unless ChargePoint can significantly increase its revenue or reduce its expenses, making it a risky investment opportunity for those with a lower risk tolerance.
