EVgo (NASDAQ:EVGO) is a major player in the electric vehicle/EV charging industry in the United States, operating a network of more than 2,700 fast charging stations with more than 785,000 customer accounts as of September 2023.. They focus on DC fast charging, which can significantly reduce charging time compared with ordinary sockets.
The company went public on the NASDAQ in 2020 at $9.8 on its debut day. However, partly due to the difficult post-pandemic macroeconomic situation, the historical performance of stocks has been volatile and disappointing. The historical return measured today stands at -78%, with the stock most recently trading at a price level of $2. Since last year alone, EVGO is down 67% due to negative market sentiment.
I'm initiating my coverage with a Buy rating. My modeled target price of $3.8 has a projected upside of over 75%. My view is that at $2.16, EVGO can also be close to the low point, which would lead to a potential rebound opportunity.
Despite continued improving fundamentals and a potential slowdown in electric vehicle demand growth in fiscal 2024, I believe EVGO remains the market leader and is well positioned to capture the most value in the American electric vehicle charging market. Today, EVGO has a robust network of more than 2,700 fast charging stations and a proven track record in project execution, demonstrated by partnerships with major electric vehicle players GM, Toyota and Honda to build new stations .
I believe there are several catalysts that could help EVGO maintain its strong growth momentum and improve its fundamentals, such as cash flow and profitability outlook through fiscal 2024.
To start, I believe EVGO could be trading near the low at this point, creating a potential buying opportunity. With its shares trading at an all-time low of $2.16 today, EVGO appears significantly undervalued. This sharp decline suggests the market may be overreacting to future EV demand headwinds and currently weak but improving fundamentals.
In 2024, I would expect margin expansion to continue due to higher utilization rates, which have been on an upward trend since the third quarter of 2023. In the third quarter, EVGO was pulling over 37%. of its revenues from its retail business, where it sells electricity directly to complete. clients. Increasing network utilization and throughput will generate economies of scale and should help EVGO increase its gross margins.
For example, EVGO experienced a massive turnaround with a more than 119% increase in gross margin as network throughput tripled in capacity in the third quarter, where utilization rate was between 15% and 20% in average.
Given recent investments in charging stations in fast-growing electric vehicle markets, such as Texas, Florida and Arizona, I expect the usage rate to maintain its upward trend until 'in 2024.
Furthermore, I also believe that EVGO's expansion into eXtend, which is based on a different model than its existing core businesses, should provide EVGO with attractive growth opportunities with higher margins and no capital investment. CAPEX, since its customers, instead of EVGO, will own the charging network. . In my opinion, this is an attractive, lower-risk growth opportunity that EVGO should continue to pursue:
Through EVgo eXtend, EVgo provides hardware, design and construction services for charging sites, as well as ongoing operations, maintenance, networking and software integration solutions, while customers of EVgo purchase and retain ownership of the charging assets. For some eXtend customers, EVgo also provides grant application assistance and related services.
In the third quarter, eXtend saw exceptional growth and I believe its recent successful project with GM could continue to drive increased demand from major players in the electric vehicle sector, who are keen to contract EVGO to build more stations. eXtend has now become EVGO's second-largest revenue source, and I'm even open to the possibility that it will surpass retail revenue in fiscal 2024.
The final catalyst would be the new amount of $150 million US Government Awards for the replacement and repair of charging stations. While there is no guarantee that EVGO will win the projects, EVGO remains in a strong position to apply and win, given its proven track record:
Remember that NEVI has the potential to finance up to 80% of the project's CapEx. And to date, EVgo leads the rankings of NEVI grant recipients, winning about 20% of the announced funds. Please remember that we only apply for grants when projects would meet our financial hurdles. Some jurisdictions or state program designs do not meet our criteria. Among the NEVIs that remain a focal point, this is not the only source of public funding available to accelerate the expansion of the EVgo network. For over a decade, EVgo has partnered with public agencies at the state and local levels through funding programs that have propelled our growth and we continue to leverage that experience not only for NEVI, but also for d other subsidy programs.
Source: Q3 earnings call.
I think EVGO remains a high-risk, high-reward opportunity for investors considering an electric vehicle-focused growth play.
Sentiment towards the electric vehicle sector has weakened of late due to the perception that the market has been oversupplied amid a global slowdown. Worst case scenario, I expect a very slow rebound in market interest in 2024, potentially leaving EVGO trading sideways or minimal price appreciation.
Additionally, aside from accelerating triple-digit revenue growth from the third quarter, I believe EVGO will need to significantly improve its fundamentals in fiscal 2024 to bolster market confidence. This means demonstrating more sustainable business operations through stronger operating cash flow generation and margin expansion.
Looking back at the nine months to the third quarter of 2023, despite a significant improvement in operating cash flow, the net loss further widened by over 11% while equity/SBC compensation remained quite high . Operating cash flow was also still negative and, in my opinion, it will likely take another 9 months of consistent margin expansion to have any hope of reaching breakeven.
Until then, EVGO may remain operationally unsustainable due to its significant use of cash, primarily for CAPEX. To support its operations, EVGO has had to rely on cash flow from financing. In fiscal 2023, it raised more than $130 million through a stock offering and market purchase of its common stock to support its operations. However, given their dilutive effect, these activities are costly for investors because they involve the expectation of a return on equity investment through rising stock prices. Prolonged low sentiment in the electric vehicle market would therefore, as noted in my previous point, create uncertainty for investors holding EVGO.
My target price for EVGO is determined by the following assumptions for the bull or bear scenarios of the FY 2023 projection:
Bullish Scenario Assumptions (50% probability): EVGO will hit the high end of analysts' estimate for fiscal 2024 of $305 million in revenue, representing 91.8% growth over a year. I assign a P/S of 3x, which is relatively conservative, given the high growth expectations. Nonetheless, I expect the weak sentiment in the EV market to also influence the valuation multiple, even in the most bullish projection.
Downside Scenario Assumptions (50% probability): EVGO is expected to generate revenue of $213 million in fiscal 2024, representing a growth of 41.06%. I would expect growth to slow in fiscal 2024 due to weakening demand for electric vehicles and falling utilization rate, following the potential closure of several charging stations under -used. I give EVGO a P/S of 1.2x, slightly lower than where it currently trades.
Consolidating all of the above information into my model, I arrived at a weighted price target of $3.8 per share for fiscal 2024, which suggests an upside of over 75% from the current price level . I consider EVGO a buy at this level.
Despite an 80% drop since its IPO, EVGO's stock price of $2.16 presents a GARP (Growth at a Reasonable Price) opportunity. The stock could also be close to a bottom, in my opinion. My 1-year price target of $3.8 suggests a 75% upside. EVGO remains well-positioned for success in the growing electric vehicle market, despite looming market sentiment.