Steer Clear Of This Electric Vehicle Play

To an old timer like me, one of the most striking and quite frankly frightening things about the stock market over the last few years is how stock prices in some cases have become completely detached from reality, or at least from any conventional measure of value. With so much freely available analysis and information, certain narratives gain traction quickly and tend to maintain momentum way beyond their logical endpoint, particularly when the story and investment thesis are obvious in nature.

After they released earnings on Wednesday and the stock powered higher once more, the charging company EVgo (EVGO) is starting to look like one of those narratives, but at this point, the facts don’t match with the current valuation.

There is no doubt about the potential of EVgo. As you may imagine based on their name, they are an EV charging company, a business with massive, and obvious, growth prospects. I have pointed out before that while the growth of EV sales in general has been spectacular, they still only account for a tiny percentage of vehicles on the road globally. As I said, massive and obvious growth potential, but that means nothing if a company can’t harness it and make money while doing so. So far, EVgo hasn’t been able to do that.

They are growing, for sure. Wednesday’s numbers showed beats on both top and bottom lines with 52% year-on-year revenue growth. The problem is that they have become one of those companies who seem to be buying revenue growth at the expense of profitability and cash flow. I am sure supporters would say there is nothing wrong with that and point to Tesla (TSLA) as an example of a company that invested heavily early but is now poised to reap the benefits. The two, however, are not the same.

Tesla’s success was that despite being in what quickly became a highly competitive business, they established a brand synonymous in people’s minds with innovation and affordable luxury. EVgo is also in a business with massive competition, but it is one where it is almost possible to differentiate one “brand” from another. When they went public by way of a SPAC in July of last year, they identified around a dozen competitors in the DC fast-charging market and you can be sure that, given how obvious the potential is, there are even more than that now.

The logical thing going forward is for utilities and electricity suppliers to open their own charging stations, just as oil producers did with gasoline, but with one big difference. Electricity generation is fragmented and localized, where oil is not. The “big four” among oil companies is more like the “big forty” when it comes to electricity.

So, while it may be that EVgo can grow as U.S. EV market penetration increases from its base of 0.5%, it is far from certain to grow as much as they and others are assuming. Even if they do hit the 5% target in that metric, though, their projections assume growth in their business that looks, shall we say optimistic. They claim that if that 5% level is hit, their revenue will grow from $22 million to $2.2 billion. That is a one-hundred-fold increase in revenue on a ten-fold increase in market size.

I guess they aren’t the first company to make optimistic, or even unrealistic assumptions about growth, but they are doing so with several other disadvantages in place. They are attempting to establish a brand in what is, by nature, a generic market. I mean. not even the most gullible consumer can really believe that one company’s flow of electrons can be better than another’s. In the attempt to do what looks unlikely or even impossible in that regard, they are spending huge amounts of money, with losses and cash flow burn increasing along with sales.

None of that would matter if it were all priced into the stock to even some degree, but at a valuation north of $3 billion and a book value per share of negative $14 that is far from true. What is priced in at those levels is the obvious, oft-quoted story, and that is more of a worry than a reassurance.

The one possible positive I can see in buying EVGO right now is that the short interest is quite high, leaving the stock vulnerable to a squeeze such as we saw around the last earnings report, when the stock hit its high of $19.59. That could come I suppose, but the fundamentals of the company mean that if it does, I would see it as an opportunity to short the stock or buy puts at a good level, rather than as a move with which to get on board. Meanwhile, though, I will be leaving EVgo well alone, no matter how many times the narrative is repeated or, actually, because of the number of times it is repeated.