I last wrote about ChargePoint Holdings (NYSE:CHPT) stock in February 2022 ahead of its Q4 results. Given its stock had lost 55% over the past year, it couldn’t afford any bad news. In the 20 months since my article, its shares have lost 82% of their value. That tells me it didn’t meet the three drivers of growth I was looking for.
However, the contrarian in me thinks that now that it’s trading at an all-time low, it might be the perfect time to make a Hail Mary bet on CHPT stock. Here’s why.
Things Were Kind of Better in 2022
In my February 2022 CHPT stock article, I suggested that the company needed to get its SG&A expenses as a percentage of revenue below 70%.
However, as I look back at ChargePoint’s Q3 2023 results, the SG&A expenses weren’t 74% of revenue [Sales and Marketing $62.3 million plus G&A $57.5 million divided by revenue $161.7 million]. They were 53.3% [Sales and Marketing $101.8 million plus G&A $66.3 million divided by revenue $315.3 million].
My bad, for sure.
The SG&A expenses in the first nine months of 2022 as a percentage of revenue were nearly 21 percentage points lower than in 2021. That’s good news. As for the gross margin, it was 16.8% in the first nine months of 2022, 520 basis points worse than a year earlier.
So, the cost of goods was going in one direction, while SG&A expenses were going in another.
As for the operating loss, it wasn’t $186.2 million; it was $263.5 million, much of the increase from a lower gross margin and a 50% increase in research and development. In a new industry like electric vehicles, you want R&D to be high, accelerating innovation.
So, because I got the years backward, it was actually doing a reasonable job controlling operating expenses.
Flash forward to today.
Through the six months ended June 30, 2023, the SG&A expenses were $125.3 million, or 44.8% of $280.5 million in revenue. Those expenses, as a percentage of revenue, have fallen by 850 basis points. As for the gross margin, it was 11.3%, 470 basis points lower than a year earlier.
The problem? Its networked charging systems costs were now higher than its networked charging systems revenue. The costs at its contract manufacturers have gotten out of control.
Capital Raises and CHPT Stock
On Oct. 11, ChargePoint announced it sold $232 million of its stock in a capital raise. The news cut its share price by half in the days following. Besides its $150 million revolving credit facility, it added close to $400 million in liquidity, a much-needed boost for the balance sheet.
The move makes sense.
In September, it announced that it would cut 10% of its workforce, saving the company $30 million in annual operating expenses. While that’s welcome news, I don’t for the life of me know how that helps with its gross margin.
Between Q3 2023 and Q2 2024, its gross margin has been cut in half.
ChargePoint talks about the pathway to profitability but it’s got to figure out how to lower the costs of its contract manufacturers because it’s nowhere near breaking even, with or without the $3o million in operating cost savings.
Subscription Revenues Need to be Higher
In my article from February 2022, I said that it would be good for the business if subscription revenues grew to account for 40% of its overall revenue.
In the first half of 2024, subscriptions were $56.4 million, 49% higher than a year earlier, accounting for 20.1% of revenue, 20 basis points higher than a year ago, but well off my 40% target.
That’s a good news, bad news scenario.
While the subscription revenues come with much higher gross margins, they’re not growing fast enough to make a difference to its overall profitability. That’s especially true if it can’t get its contract manufacturer costs under control.
However, trading at an all-time low, if you see the glass half full, and believe that it can keep growing its subscription revenue over the next 12-24 months, it still has a shot at meeting Wall Street’s projection for being free cash flow positive by the end of calendar 2025.
I wouldn’t make this bet, but if you’re an aggressive investor, the downside is minimal.
On the date of publication, Will Ashworth 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.