EVgo: This Stock Can Electrify Your Returns
Summary
- This article is an analysis and valuation about EVgo, which is the largest pure-play publicly accessible fast charger service provider.
- Fast chargers are an essential part of accomplishing national wide adoption of electric vehicles. But I believe the current price does not reflect the potentials.
- The EV industry is composed of high demand from governments, consumers, and manufacturers, stimulating and promising significant growth, especially in the electric charger sector.
- This article will explain how the current share price is undervalued after going through the DCF method. This valuation will further clarify the asymmetric upside potential with positive yet limited risks.
- The risk in this investment is a few uncertainties on the operating and financing side because the company is young with a short performance history.
Drew Angerer/Getty Images News
1. Investment thesis
EVgo (NASDAQ:EVGO) can be a great choice to benefit from the drastic changes in the automotive industry. The main driver of the change is the adoption of electric vehicles. Despite that, the current market price does not reflect positive outlooks for electric charger services because the industry is still in an early stage of operation. My valuation supports that the stock price looks now undervalued, indicating significant capital appreciation with limited risks. By taking advantage of the current mispricing, I believe we can profit from the fastest growing market for the next ten years.
2. Company overview
Source: Investor Presentation March 26, 2021
EVGO is the largest publicly accessible fast charger service provider. As of 09/30/20, the company operated about 800 DCFC with capacity above 44kW, representing a current market share of about 40%. By 2027, the company expects to have built over 16,000 fast chargers. It is a 20-fold increase compared to 2020 and increasing at a CAGR of more than 50%. Recently, it is one step closer to the target by signing a contract with GM (GM) for 2,750 fast chargers.
It has been publicly traded since July 1, 2021, by entering into a business combination with CRIS, a SPAC. Since the listing, the stock price has been moving downward. I think investors are worried about the uncertainty because it is still in its infancy.
3. Characteristics of a young growth company
Source: Q2 2021 Earnings Presentation
As seen in the recent earnings presentation, the revenue in the second quarter of 2020 was $4.7 million, while the net loss was $18.4 million. In addition, capital expenditures in the first half of 2021 were $23.3 million, three times bigger than 2020. Low revenues from underutilized assets, negative margins, and substantial capital expenditures are typical of young growth companies, providing proactive investors with investment opportunities.
4. Secular tailwinds
The combination of increasing electric vehicles, favorable government policies, and demand for various EV models with better efficient batteries should drive secular growth for the next ten years. That secular growth in the EV market will make electric chargers grow at a compound annual rate of about 50% as well.
Key drivers for the charger growth are the increasing number of electric vehicles and favorable government policies. And the fact that every EV owner cannot afford private chargers at home will also increase demand for publicly accessible chargers.
5. Competitive advantages
So far, EVGO is leading the way in pure-play electric vehicle charging stations. I believe that it will maintain its superior position in the face of high competition over the next ten years.
Source: McKinsey & Company
According to McKinsey & Company, location and charging speed are the most important competitive factors for electric vehicle charging stations. In addition, increasing driver experiences by giving them more benefits is also critical to enhancing utilization rates.
To keep drivers sticky to its services, EVGO should be able to deliver reliable operations. Unlike refueling an internal combustion engine, charging an electric vehicle takes several tens of minutes no matter how fast it is, so there is a situation where drivers have to wait when they arrive. EVGO manages this situation by implementing a reservation system. It enables the company to provide more reliable services to customers and create additional revenues through reservation fees.
Finally, partnerships can increase utilization. For example, partnerships with retailers can add attractive charging station locations with good traffic and easy access. Also, partnerships with OEMs can incentivize drivers to use specific charging stations.
To sum up, EVGO has made several strategic decisions that should differentiate itself from others. As a result, it can be a potentially good investment with tailwinds around the industry and competitive advantages as a first mover.
6. Valuation
6-1. Revenue Growth
Though there are a lot of factors to affect electric charging operators' revenues other than the mere number of electric vehicles on the roads, I assumed the forecasted revenues would be dependent on the expected number of electric vehicles, including cars, buses, vans, and trucks. International Energy Agency estimated 2030 EV stock would be about 33 million in Sustainable Development Scenario and 15 million in Stated Policies Scenario. So I used the estimated numbers as my base.
And then, I tried to estimate the number of publicly accessible chargers required to serve those vehicles using the target ratio of 0.1, which means one public charger per 10 electric vehicles, set by the Alternative Fuel Infrastructure Directive (AFID) in the EU. By applying the ratio to the total estimated EV Stock, I can develop the expected number of public chargers.
Next, IEA estimated 7 to 8 percent of the total public chargers would be fast chargers with power above 22kW. But EVGO operates the chargers with more power capacity, 50 to 350 kW. So, I assumed 5 percent of the total would be the share of fast chargers with power above 50kW.
Last, I assumed EVGO's market share would be 50%. Then, the expected number of fast chargers to be operated by the company would be between 84,925 and 38,865, which means growing at 47.5% to 59.4% annually. Considering the company said it would build 16,000 chargers by 2027, my assumption does not seem aggressive. I assumed that growth rates as revenue growth rates.
[Revenue Growth Rate Forecast Model]
Source: Created by the author using IEA Data
6-2. Analyzing Operating Margin
Source: Investor Presentation March 26, 2021
EVGO defines its business as a 21st-century infrastructure such as data centers and cell towers. The investor presentation from March represents the management's side of analysis and their idea of similar business models to their own business. Utilizing this approach of comparable business models, I created a valuation assumption using similar operating margins as follows.
[Historical EBIT Margins of Comparables]
Source: Seeking Alpha
I assumed the target operating margin would be around the median operating margin of the comparables, and the current negative margin would gradually approach it. The table below shows the historical operating margins of the comparables and indicates the median is about 21%. Therefore, I used the operating margin as the target margin.
6-3. Reinvestment
As a young growth company, a significant amount of capital expenditures are required to support rapidly growing sales volumes. To estimate the capital spendings enough to sustain my revenue growth scenarios, I used sales-to-capital ratios of similar and related sectors, including electrical equipment, green & renewable energy, oil/gas distribution, REITs, retail automotive, utility general. The median sales-to-capital ratio of comparables is about 0.5x. The higher the sales-to-capital ratio, the more efficiently companies use their capital to generate sales. For example, if revenue grows from 50 to 100, the required capital spending is (100-50)/0.5 = 100. I assumed the sales-to-capital ratio would gradually increase to 0.5x from 0.4x initially to reflect the underutilization of the existing assets.
6-4. Cost Of Capital
EVGO's current capital structure consists of 100% equity and no debt. To get the cost of equity, I used the total beta of the related sectors I mentioned above. The total beta is a risk measure that captures not only market risks but also company-specific risks. The reason for using the total beta, not market beta, is that young growth companies that have been just listed like EVGO are often held by less diversified investors who require more than market premiums. The median total beta is 1.75, and the equity risk premium is 4.87%. With a risk-free rate of 1.64%, I calculated the cost of equity at 10.13%. I assumed that the current cost of equity would come nearer to the median cost of capital of comparables of 4.41%
6-5. Valuation Summary
To compute the continuing value after the explicit forecasting periods, I estimated the free cash flow using a risk-free rate of 1.64% as a permanent growth rate and an ROIC of 7.95% of comparables as a stable ROIC. I assumed a 5% probability of failure and adjusted the value of operating assets downward. EVGO currently has public and private warrants outstanding. The public warrants have a market price, and both warrants are economically the same. So I could estimate both warrants' market value and then subtract it from the operating asset value to compute the equity value. My valuation indicates the fair value per share is $12.24, 141% higher than the market price at the time of writing. Therefore, I conclude that there is significant upside potential.
Source: Created by the author
7. Risks
The electric vehicle industry is just expanding with considerable growth opportunities, but there are also significant uncertainties. The uncertainties related to my valuation include the expected number of fast chargers (Market Size), EVGO's competitiveness (Market Share), the assumed business model (Operating and financing performance such as operating margins, ROIC, and the cost of capital). I conducted sensitivity analyses on these factors, and the results are shown below. The worst-case prices range between 8.03 and 10.97, which means even the worst cases have limited downside risks. On the other hand, in the best cases, we can expect the value per share to be up to $13.62.
Source: Created by the author
8. Conclusion
As electric vehicles are rapidly changing the automotive industry, the capital market tries to find investment opportunities. However, I think the electric charger sector is not yet fully recognized by investors, and EVGO is one of the best choices to benefit from the increasing EV adoption. Therefore, my valuation confirms an asymmetric return to risk profiles in this investment but should be careful about the uncertainties around young growth companies. If you are interested in long-term investment in EVGO, monitoring key value drivers will be helpful to understand how the business develops.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EVGO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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