EVgo (NASDAQ:EVGO) shares are slipping towards record low levels, despite consistent improvements to its fundamentals as EV adoption as well as charging utilization expands. The company grew revenues by more than two-fold y/y, and more than doubled its network throughput y/y during the first quarter, capitalizing on improved utilization rates across its rapidly expanding network of more than 3,100 operating/under construction DC fast chargers across the U.S. to accommodate accelerating EV adoption in the region.
However, Tesla’s (TSLA) recent start of realizing its plans to open up the North American Supercharger Network is posing as a substantial competitive threat to EVgo’s go-to-market strategy – particularly after the GM (GM), a key EVgo partner, announced plans to adapt its EVs to the Supercharger network starting next year. The development has dealt an immediate hit to the performance of EVgo’s share, exacerbating the loss of investors’ confidence after the company issued additional equity in mid-May that further stifled the stock’s upside potential.
Tesla’s plans to further expand the availability of Supercharger access to non-Teslas across North America highlights a real threat to one of EVgo’s key pillars of success – namely, to leverage its key OEM and commercial partnerships to drive sustained market share gains in the transition to electric. Looking ahead, the continued expansion of Supercharger access to non-Tesla vehicles will likely risk diluting EVgo’s market share growth prospects, becoming a new multiple compression headwind to the stock, in addition to the ongoing impact of risk-off market sentiment on unprofitable names.
Implications of Expanded Non-Tesla Supercharger Access in North America
Tesla took a step forward on its earlier plans to ultimately open up access to the Supercharger network for non-Teslas in recent weeks by inking partnerships with key rivals Ford (F) and GM. Both of North America’s largest automakers will adapt their EVs with charging access to 12,000 Tesla Supercharger plugs across the region beginning next year and will be fitting Tesla’s Supercharger ports into their new EV models starting 2025.
Tesla’s Supercharger network is currently the largest provider of DC fast charging in North America, with more than 17,000 plugs and growing. This compares to about 3,100 EVgo DC fast charging stalls currently in operations/under construction across the U.S. as of the end of March 31st. By expanding access to the Supercharger network for non-Tesla vehicles, EVgo faces a significant competitive threat that risks derailing its go-to-market strategy and DC fast charging competitive advantage.
Recall that EVgo’s management had outlined three pillars to the company’s success going forward: 1) leverage EV adoption to expand its growth prospects; 2) reinforce its market position through commercial partnerships with automakers, government agencies, fleet operators, and site hosts; and 3) hone its technology leadership, particularly in DC fast charging, to improve EV adoption and, inadvertently, its longer-term demand environment. All of which are now under threat with Tesla gradually removing the exclusivity of its Supercharger network.
Leveraging EV Adoption to Sustain Growth
Historically, EVgo has been the only DC fast charging network built to accommodate all connecting ports – including Tesla’s – to comprehensively address EV drivers’ charging needs.
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This has allowed the company to optimize its business model’s leverage of ongoing EV adoption, representing a key technological advantage to rival operators of public charging infrastructure. Yet, expanded access to the dominant Supercharger network will inevitably cannibalize EVgo’s growth prospects, and diminish its competitive advantage in the public charging industry.
Specifically, EVgo has only recently demonstrated signs that its reliance on mainstream EV adoption is starting to pay off. With revenue growing by more than two-fold and network throughput doubling during the first quarter, EVgo’s utilization rates have benefitted from accelerating EV adoption in the U.S. EV sales in the region grew by more than 50% y/y to represent 8% of total new passenger car sales in 2022, and is on track to expanding further by another 50% y/y this year despite deceleration across the broader auto market due to a range of headwinds spanning macroeconomic deterioration and lingering supply chain constraints. Continued momentum in EV adoption will be primarily driven by the increasing number of EV models available in the market across different pricing and vehicle segments to address wide-ranging consumer preferences, as well as improved battery technologies and availability of public EV charging access in recent years. More than 200 EV models available in the market today boats “at least 249 miles of range” on a single charge, with at least 50 of them now being sold across North America.
This continues to highlight the importance of EV adoption for EVgo’s DC fast charging environment. While the gradual expansion of Supercharger access will inevitably dull EVgo’s growth prospects as EV adoption reaches an inflection point in North America, the accelerating transition to electric would still be a growth driver for EVgo, nonetheless. However, the key risk remains on the pace of utilization expansion at EVgo. At current levels, EVgo’s network utilization in the 20% range represents a substantial lag to the Supercharger network. Meanwhile, with 98% uptime at only some of its stations, particularly the newer ones, EVgo also trails the close-to-100% uptime boasted across Tesla’s global Supercharger network.
Even worse is stations that are out-of-service or won’t communicate with the car I’m driving, via a digital handshake through the plug cable. To Tesla’s credit, I’ve never failed to hook up successfully to a Supercharger, in America or Europe.
Source: IEEE Spectrum
Admittedly, the Supercharger’s leading uptime and utilization rates are likely the result of only having to cater Tesla’s Model S/3/X/Ys right now, which also happen to be the best-selling EVs across North America. The Supercharger network’s close-to-perfect performance metrics are likely to deteriorate once access expands further to the growing non-Tesla population, leaving room for EVgo to stay competitive in the arena. In order to alleviate the impending rise of a competitive threat ahead and co-exist sustainably with the Supercharger network’s predominant presence, EVgo’s pace of expanding its footprint and uptime will be key, especially given the rapidly growing charging needs of a ballooning electric fleet beyond Teslas across the U.S. and broader North America.
In the United States, the [Electric Power Research Institute’s] report cites a need for roughly 1 million public or semi-public charging ports by 2030, to support nearly 19 million EVs. Today, there are fewer than 100,000, many limited in access and use…If the U.S. is to have 19 million EVs by 2030, there will need to be 1 million public or semi-public charging ports.
Source: IEEE Spectrum and EPRI
This is in line with the critical role of increased public charging access in improving EV adoption, which China – the largest and fastest-growing EV market – has proven in recent years. The ratio of available public chargers to EVs in China is at 7-to-1 today, which is almost triple the efficiency of the U.S.’ 18-to-1 (or lower when counting only the availability of DC fast chargers like those provided by EVgo and the Supercharger network).
Bloomberg News
This implies a significant TAM for public charging operators across North America to capitalize on as the transition to electric in the region gains pace, representing significant growth headroom for EVgo to co-exist with the Supercharger network. But this remains largely dependent on EVgo’s ability to keep posting consistent progress in the ongoing build-out of its footprint and improvements to the uptime of its network via programs such as “EVgo ReNew” to adequately address the growing demand environment.
Creating Value with “Blue-Ribbon” Partnerships
EVgo’s partnerships with automakers, government agencies, fleet operators, and site hosts have been key to propping its utilization rates, and more importantly, funding the build-out of its network. For instance, key OEM partner GM currently contributes approximately $33,000 for each EVgo stall installed as part of its multi-year collaboration to bring 3,250 DC fast charging stalls online by mid-decade across 52 metropolitan markets in the U.S. This effectively alleviates about a quarter of the $130,000 to $150,000 in estimated capex per stall at EVgo, highlighting the critical role of partnerships for its business model.
Essentially, as automakers face the reality of gaining access to Tesla’s expansive Supercharger network, the need for partnerships and joint ventures with external public charging infrastructure operators, like EVgo, effectively diminishes, albeit still necessary. This might draw liquidity risks to EVgo’s capital-intensive business, especially as it remains unprofitable, with the realization of scale still pinned on mass market EV adoption prospects further out in the future. Specific to EVgo’s case, management has reaffirmed its guidance that the company’s cash balance ending March 31 of about $164 million will be sufficient to sustain its business through 2024. And the cash plan takes into consideration its joint venture collaboration with GM.
…we do not include ATM as part of our cash plan, and that is, kind of cherry on the cake. It’s on top…And also, let me remind you that we have an agreement with General Motors where for every store we put in operation, they pay roughly $33,000 to us, which they already did in both Q4 and Q1 and continue to do it as well. That’s another cash inflow, which is available to us, and it’s part of our cash plans.
Source: EVgo 1Q23 Earnings Call Transcript
This underscores the risk posed to EVgo’s longer-term funding pipeline as OEM resources potentially get partially reallocated to enable Supercharger access as Tesla expands the network’s availability to more non-Tesla vehicles. Although EVgo remains a key beneficiary of government policy and financial support as well, its long ways to scale and profitability means externing resources from OEM partners remains just as important. And risks of diminishing funding from the latter could imply greater requirements for capital raising through public markets over the longer term, adding incremental weight to the stock’s prospects.
Honing its Technological Expertise
While GM’s partnership with Tesla appears complementary to the legacy automaker’s existing collaborations with public charging infrastructure operators, it does increase investors’ angst over whether the development would put EVgo’s technological expertise at risk of obsolescence as well. Specifically, the recent expansion of Tesla’s collaboration with rival automakers is nurturing a narrative that the Supercharger port might become the industry standard.
The move by GM effectively ends any indecision among automakers and their charging network partners over which standard to use. With the three largest US-based companies joining forces, it will put pressure on other companies to ditch the industry’s previous standard, called CCS, and build out their networks using Tesla’s system.
Source: Bloomberg News
And GM CEO Mary Barra has endorsed this narrative:
This collaboration [with Tesla] is a key part of our strategy and an important next step in quickly expanding access to fast chargers for our customers…Not only will it help make the transition to electric vehicles more seamless for our customers, but it could help move the industry toward a single North American charging standard.
Source: news.gm.com
The development effectively puts EVgo’s years of R&D in providing an all-in-one charging capability for EVs across all brands, including Tesla, at risk of obsolescence.
Practically speaking, EVgo charges close to 50 different models of EVs on our network today, each with its own unique charging behaviour governed by battery performance and software. A technology marriage has to work not just between EVgo’s charging hardware and full software stack, but also between our EV chargers and the hardware and software of the EV itself, and between EV chargers and driver’s cell phone, and between EV chargers and utilities delivering the electricity to the chargers and between EV chargers and site host retailers and between the EV charging networks with whom we interoperate.
Source: EVgo 1Q23 Earnings Call Transcript
As mentioned in the earlier section, EVgo’s DC fast charging only network, and compatibility with Tesla vehicles marks its differentiated go-to-market strategy versus rival public charging infrastructure operators currently available in the market. The strategy has bolstered its appeal to fleet operators in particular, which boasts a far greater charge requirement that “relies much more on DC charging”. Its technological expertise has also reinforced partnerships with automakers looking for a reliable, and easy-to-integrate charging partner to facilitate their respective EV transitions.
Yet, with Tesla opening up access to its Supercharger network, and potentially turning it into the industry standard, the continued development of related plans and aspirations could effectively deem EVgo’s all-compatible technology onerous, which risks severing the company’s ROIC prospects. Although GM has expressed willingness to work with its existing charging partners in the transition to adapting Tesla’s Supercharger network, related efforts are likely to do little in ameliorating the immediate challenge of diminishing relevance of EVgo’s technological expertise going forward. In the meantime, with Tesla opening up its Supercharger network, EVgo also risks losing more business from non-Tesla vehicles than gaining incremental demand from Tesla vehicles despite its all-compatible strategy over the longer term.
The Bottom Line
With Tesla’s Supercharger network having already forged partnerships with two of North America’s largest automakers in its early stages of opening access to the broader EV market, we cannot rule out additional expansion to other automakers, including some of EVgo’s key partners such as Toyota (TM) and Subaru (OTCPK:FUJHY/OTCPK:FUJHF). While the improved availability of public charging infrastructure access would in turn boost EV adoption and, inadvertently, the demand environment for public charging – which is essentially a fly-wheel effect – and benefit all existing players in the industry, the opening of the Supercharger network would dim the bullish thesis over EVgo’s market leadership prospects in DC charging, nonetheless. In addition to macroeconomic headwinds such as persistent inflationary pressures on the company’s capital spend, and the rising rate environment that has dulled the lustre of its unprofitable yet capital-intensive business, the ensuing threat of open access to the Supercharger network poses as another multiple compression risk for the EVgo stock ahead.
On a relative basis, EVgo remains slightly overvalued compared to its peers with a similar growth profile, though the premium likely reflects the technological advantage it holds as growing EV adoption would further the demand environment for DC fast chargers – especially from fleet operators and shared home charging. Yet, this valuation premium, paired with the latest development pertaining to the expanded availability of Supercharger access for non-Teslas, alongside the risk-off market climate, likely emboldens the stock’s exposure to greater volatility ahead.
Until there is greater clarity on how Tesla’s recent plans for the Supercharger network would impact EVgo’s underlying business prospects, particularly on the state of its partnership with key OEM partner GM and its profitability roadmap, risks facing the stock will likely remain skewed to the downside in the meantime. That said though, with EVgo’s recent fundamental performance implying budding market prominence in operating one of the largest public fast charging networks in the U.S. second to Tesla’s Superchargers, expectations for near-term volatility in the stock could provide an opportune risk-reward entry set-up to partake in longer-term upside potential ensuing from mainstream EV adoption.
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