ChargePoint Stock: Ignore Lower Gross Margins at Your Peril (NYSE: CHPT)
ChargePoint Holdings, Inc. (NYSE: CHPT) announced its FQ4 earnings early last month. Although it easily exceeded its revenue forecast, it missed its adjusted EPS estimates. Nevertheless, CHPT investors focused on his comment on revenue growth. Therefore, it was still a solid performance for the leader in electric vehicle charging.
Additionally, the company offered a confident FY23 revenue forecast that demonstrated its leadership in adoption. It is still in its infancy of market penetration, so a robust orientation is very constructive.
However, we thought his lower-than-expected gross margin forecast was a red flag that investors should take note of. Last January, we presented our buy rating (up 38% to the editors), given the sharp drop in its valuation and the improvement in gross margins.
Therefore, we are concerned whether the ongoing dispute could further impact its gross margins and exacerbate supply chain issues. Additionally, the CHPT stock has also reversed sharply from its January low, heading towards a critical resistance zone.
As such, we believe there are enough confluence factors for us to revise CHPT action from Buy to Hold.
What has been the blow to its gross margins?
ChargePoint saw broad-based growth across its revenue segments, as shown above. As a result, consolidated revenue increased by 90.3% year-on-year. However, the force was dominated by its low-margin hardware segment, with revenue growing 94.4%. Subscription revenue, on the other hand, “only” increased by 37.8%.
However, investors should note that subscription revenue is accounted for on a pro rata basis. Additionally, ChargePoint added that its billing growth is robust, up 95% year-over-year and 20% quarter-on-quarter. Therefore, we are reassured by its strong billing growth. Given the street’s aggressive growth estimates for ChargePoint, it’s imperative that the business continues to perform well.
Nevertheless, we must draw investors’ attention to its gross margins. Notably, its adjusted and GAAP gross margins fell sharply from third-quarter performance. ChargePoint recorded an adjusted gross margin of 24% (FQ3: 27%) at FQ4. Its GAAP metric was 21.7% (FQ3: 24.7%).
Therefore, it was quite a blow to its already relatively low gross margins. Since ChargePoint is still a very unprofitable company, we didn’t really appreciate its inability to pass costs on to its customers without affecting its growth. Such a dilemma was evident in management’s commentary. CFO Rex Jackson explained (edited):
As Pasquale (CEO of ChargePoint) mentioned, we are focused on supply assurance to attract new customers and to grow with existing customers.
Although this puts pressure on our gross margin, we believe this is the right and necessary strategy. Once we find a customer, they tend to grow with us over time and generate ongoing subscription revenue.
It is therefore very important to stay focused on delivering products and retaining customers. We estimate that purchase price variances and higher logistics costs represent approximately 4 net margin points from our efforts to pass on costs where we can through higher prices and higher logistics costs. (Call on ChargePoint FQ4’22 results)
Therefore, we believe that management has taken advantage of the strong pace of adoption of electric vehicles, given the currently high oil prices. Tesla’s strong delivery rate (TSLA) for the first quarter of 2022 has profoundly demonstrated the momentum driving the adoption of electric vehicles. Prices for the range of electric vehicles have increased. But, consumers have certainly made progress in adopting EVs, given improved supply and demand dynamics and a renewed focus on total costs of ownership.
What is the outlook for FY23?
ChargePoint is still very much in the red given its relatively low gross margins and high OpEx spend. Therefore, a declining gross margin profile is not helpful to its outlook, especially in an inflationary environment.
Additionally, ChargePoint guided adjusted gross margins of 24% in FY23. Management stressed that it had taken into account the impact emanating from challenges in its supply chain. In addition, he indicated that he remains confident in improving operating leverage in the future.
However, we implore investors to be more wary of very unprofitable businesses in a highly uncertain supply chain environment. If the challenges are greater than ChargePoint anticipated, investors should be prepared for a sharp squeeze in value.
Is the CHPT stock a buy, sell or hold?
The NTM earnings multiple of CHPT stock is broadly in line with our January analysis. However, the stock has also rallied significantly from its January low, as previously highlighted.
But, the headwinds have also intensified, as explained above. In addition, its gross margin profile has also been revised downwards. Furthermore, the stock has also significantly exceeded its more conservative consensus price targets (PT). In January, it was trading below its most conservative PTs. Therefore, investors are reminded to disregard average PTs as they have been highly inaccurate over the past year.
In addition, we have also observed that CHPT stock is moving into a trendline resistance zone, which could lead to strong selling pressure.
Therefore, we believe there are enough headwinds to revise our rating on CHPT shares from Buy to Hold.