While we continue to wait for the recovery, the dreaded business cycle has hit once again, but this time it hit an industry so obscure that almost nobody has paid any attention. That industry is the electric vehicle charging market.
Business cycles happen when government money is injected into an industry on a massive scale, causing overexpansion. If one firm makes the mistake of overexpanding in the free market, it goes bankrupt and another firm takes over its capital. But if the government subsidizes an entire industry causing it to overexpand all together, that whole industry can go bankrupt save a few survivors.
While firms go bankrupt, the capital they have accumulated does not simply disappear. In other words, tangible wealth is not erased, only the monetary valuation of that wealth. It simply changes hands at a much lower price than the cost of accumulating it, hence the bankruptcies. It also means that whoever gets to buy that wealth at lower prices wins big.
The EV charging market has been totally reorganized over the last year, due to overexpansion catalyzed by government subsidies in proportion to the size of the industry. 350Green, EVPass, Beam Charging, and most notably the Blink Network formerly run by Ecotality (ECTYQ) have all been absorbed by one firm - Car Charging Group (CCGI).
A Recent History of Industry-Specific Business Cycles
The EV charging market is not the first industry to get hit with an industry-specific business cycle by far. Between 1996 and 2001 for example, it hit telecom. Telecom companies increased the total number of fiber kilometres in the United States by over seven fold. The increase saw more than 330,000 kilometer trenches and close to 30,000,000 km of fiber installed over a five-year period on the assumption that alongside the concurrent boom in internet usage, growth potential in the fiber industry was unlimited.
During 2001 and 2002, there were more bankruptcies of large telecom companies than during the entire prior decade. Stock prices of fiber network companies crashed, with many losing most or all of their total value, the most infamous being Worldcom. The problem was that the companies involved were laying the infrastructure for a technology that it would take the average consumer close to a decade to adopt. This translated to a serious lack of cash flow, which made operating in the industry almost impossible after the government subsidies that had driven unsustainable expansion ceased to become available.
10 years on, the industry is flourishing, and small telecom companies that were not part of the boom at the time, like Shenandoah (SHEN), have performed the best. On the whole, worldwide fibre-optic broadband service revenue totalled $46 billion in 2013, and analysts forecast this to grow to $100 billion during 2019. The foundations laid by now bankrupt companies such as Global Crossing were acquired at a discount by, in this instance, ST Telemedia; companies that now reap the benefit of these foundations.
This cycle is repeated numerous times throughout history in specific industries as well; the telegraph bubble of the late 1800s for example, the railroad bubble a little earlier also fueled by government subsidies and incentives, or even the South Sea bubble of the early 1700s.
Where EV Charging Fits In
Fast forward to modern day, and it is obvious that the electric vehicle industry just got ravaged by a government-induced business cycle. Sticking to a conservative strategy where not much government money was taken, Car Charging Group (CCGI) has survived.
Despite its survival, it has lost more than 50% of its market value over the past six months and now trades over the counter just shy of $1.00, at a market capitalization of $66M. During the last 12 months, Car Charging has acquired all of its major competitors, the majority of which were heavily subsidized by government grants and loans. This has allowed the company to rapidly expand its operational infrastructure (and in turn its revenues) at a highly discounted cost.
In October last year for example, Car Charging announced it had acquired the Blink Network and all Blink related assets from bankrupt competitor Ecotality. Over the course of three years, Ecotality had spent nearly $115M worth of federal stimulus funds alongside matching private investment on the installation of 12,450 EV level II charging stations, 110 DC fast charging stations, and the Blink Network, which is the turnkey operating system for EV drivers. Car Charging Group acquired this $230M worth of assets at auction for just $3.3M in cash.
During 2013 Car Charging Group acquired three of its major competitors: 350Green, Beam Charging, and EVPass. A look at the key metrics between the end of 2012 and the end of 2013 highlights the huge impact of these acquisitions on Car Charging's operations. During the period, total installed charging stations increased from 157 to approximately 14,500. Concurrently monthly kilowatt hour charging output rose from 2,492 to more than 374,000 and inventory increased more than 3,745%, from 63 charges to 2,423.
As company CEO Michael Farkas points out, this level of expansion would generally require a large amount of equity financing or taking on of significant debt. Car Charging however completed these acquisitions with just $15M in equity financing, $7M of which remained as cash on the company's balance sheet at the end of 2013 and $5M of which remains as cash on the company's most recent quarterly balance sheet (page 2).
The question now becomes, can Car Charging maintain and operate its newly-expanded network for the length of time required for mainstream adoption? Car Charging generates approximately $100,000 each month in charging revenues (see first link in previous paragraph), and Farkas expects this figure to continue to increase as the company introduces and tests various models for its charging fees. Central to the company's monetization plans are partnerships with manufacturers that relate to what often amounts to free charging for consumer deals.
For example, Car Charging Group entered last year into a joint marketing agreement with Nissan, which sees the company build, own, operate, and maintain a network of 48 charging stations throughout the US and facilitate sales of the Nissan Leaf to potential consumers through an affiliate-type referral program. The initial agreement sees Nissan pay close to $800,000 to Car Charging Group, which the company lists as deferred in its most recent 10-Q, set to be recognized relatively over the life of the chargers once installed.
The company also has an additional contract with the New York State Energy and Resource Development Authority for the installation of 30 EV charging stations in New York State. Though this is government, it is a comparatively small deal and could give the company a foothold in New York. As of March 31, 2014 all of the stations had been installed, and the company recognized $12,000 as revenue during the first three months of this year.
It is looking likely that these sorts of contracts will form the core of the company's revenue model for the near future. The reason for this is that in order to expand and reach mainstream adoption of EVs, manufacturers are willing to offer free charging to consumers. Longer-term it is likely that this will shift towards a page charging system, and with this shift, Car Charging's revenue model will alter.
As far as sustainability is concerned, nothing is guaranteed, but Car Charging looks to be in the best position of any EV infrastructure company yet. It is focusing on avoiding overspending and overextending, and recent institutional investment from Wolverine in Chicago, Horton in Philadelphia, and Eventide in Boston provide the company with an added level of credibility. In addition, while financing will undoubtedly be required in the future if the company is to remain the largest EV network provider in the world, near-term, Car Charging Group has the capital required to sustain operations through Q1 2015 (page 6).
The Risk is in the Time Until Mass Adoption
It is important to mention that there remains considerable risk in the EV industry. This time last year, it was not hard to find articles suggesting that the beginning of a rapid increase in demand for electric vehicles was just around the corner. This proved wrong, and likely damaged the capital of any investors who believed it to be true and bought into the companies associated with the industry at the time. Investors looking to take advantage of Car Charging Group's current price should bear in mind that mainstream adoption may well be a number of years away, and that Car Charging's biggest risk lay in its ability to sustain operations throughout this period. Car Charging may be the largest charging provider now, but the profitability of that industry depends on electric cars being widely adopted within the next 4-5 years, conservatively.
Conclusion
All said, Car Charging Group looks to be in a unique position that comes as a result of overarching industry cycles. The company has been able to acquire a huge amount of assets from its competitors at a discounted rate, and has grown to become an industry-leading organization. Nissan is developing a new LEAF, Chevrolet a new Volt, and many manufacturers are introducing a plug-in vehicle within the next two years. If the next few years bring with them multiple electric vehicles with a price tag of around $40,000 and a range of between 200 and 300 miles, both factors that will help to allay consumer concern. Considering this, Car Charging Group looks like it could be considerably undervalued at its current market price. Like the telecom survivors before it who did not participate in the boom, 10 years from now who knows what CCGI's market cap could be.
Disclosure: The author is long CCGI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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