ChargePoint Stock Is Not a Good Bet at This Time

EV charging company ChargePoint’s (NASDAQ:CHPT)  revenue grew rapidly again last quarter. However, the market hasn’t paid much attention to that, and CHPT stock has lost over 28% of its value in the past month.

The company wants investors to believe that it’s a software-as-a-service (SaaS) company, but the margins and revenues from its subscription business have not been impressive. ChargePoint will continue to lose money and compromise its financial flexibility if it fails to improve its margins significantly.

ChargePoint Holdings is currently the leading EV charging infrastructure network provider in the United States. However, its management has frequently contended that it is primarily a software company. CEO Pasquale Romano states that “We do not sell hardware without subscriptions to our cloud-management software. We are a SaaS company through and through“.

However, is results don’t justify its lofty valuation. Its numbers pale compared to other SaaS stocks, yet it trades at over 26 times analysts’ average 2022 sales estimate . Consequently, the risk-reward ratio of CHPT stock is negative.

Lackluster Subscription Growth

Unlike its peers, ChargePoint offers a wide range of software solutions to its customers. By doing that, it’s seeking to become a high-margin SaaS company. However, the results of its efforts have been far from ideal.

Its Q3 subscription sales increased just 24% year-over-year to $13.4 million. Moreover, they accounted for only about 20.6% of its revenues for the quarter. The sales of its subscription business have been on a downward spiral since the beginning of its fiscal 2022.

ChargePoint blamed changes in revenue mix for its unimpressive subscription numbers. The company generated the lion’s share of its sales not from subscriptions, but from its DC network and home charging systems.

Its Q3  non-GAAP gross margins came in at just 27%, while its GAAP gross margins were even lower at 24.7%. Though its margins improved sequentially, they are not nearly as high as they should be for a SaaS company.

In the first nine months of its fiscal year, the company’s hardware gross margins were just 15.1%, while its subscription margins were  41.9%. Those margins are much lower than those of some of the top SaaS companies.

A Dwindling Cash Balance

Despite its lackluster bottom line, ChargePoint has developed aggressive expansion plans. Consequently, it has severely compromised its cash reserves. The company burnt through more than $100 million in just the past nine months.

At the end of Q3, its cash balance was $366 million, representing roughly a 49% drop from the same quarter a year earlier. So the company is burning its cash quickly.

ChargePoint closed out a couple of major deals during Q3. It acquired Has-To-Be, an e-mobility technology company, and ViriCiti, a commercial vehicle management enterprise. ChargePoint  spent a combined $210 million on the two acquisitions, leaving its cash flows firmly in the red.

On top of that, ChargePoint has been highly inefficient when it comes to managing its expenses. Consequently, the company reported a deplorable Q3 free cash flow margin of roughly -130%. For the first nine months of its fiscal year, its levered FCF margin came in at a worrisome -31.6%.

The Bottom Line on CHPT Stock

ChargePoint wants to be called a SaaS company, but its fundamentals paint a completely different picture. It doesn’t deserve its premium valuation, and it’s far from establishing itself firmly in the EV sector.

Moreover, the company continues to burn through its cash reserves at an accelerated pace which could cripple its liquidity position. As a result, it’s best to avoid CHPT stock at this time.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines