EV Do-Not-Pass Go (part 1)

The pick-and-shovel play for electric vehicles is massive, but already saturated

EVgo (the “Company”) is undoubtedly the best positioned, independent direct-current fast charging (DCFC) provider in the United States. As of Q1 2021, EVgo was the industry leader with 1400 DC units, in 800 locations, across 34 states, serving 220,000 EV customers. It is also the only charging firm that, through renewable energy certificates (REC), offers power from entirely renewable sources. EVgo’s stations are compatible with nearly every type of EV of the road- offering both Combined Charging System (CCS) and CHAdeMO plug options. The Company has also begun adding Tesla-specific fast charging plugs to select stations- a first among independent charging networks. Several OEMs and fleet operators, including GM, Nissan, and Lyft, have inked partnerships with EVgo that provide the Company financing in exchange for hitting expansion targets and supplying charging credits to mutual customers. Finally, EVgo is run by an experienced management and advisory team with ample capital backing- bolstered by its recent de-SPAC merger with Climate Real Impact Solutions I (NYSE: CLII).  

However, for a company that is currently trading with an enterprise value of 182x 2021 revenue, 4.0x 2026 revenue, 11.0x 2026 EBITDA, and does not expect to be free cash flow positive until 2026, the market is pricing EVgo as a revolutionary business with impenetrable barriers to entry and an unassailable growth trajectory. EVgo, though distinguished amongst its peers, is a highly speculative, negative cashflow company that sells a hard to differentiate, commodity product in a nascent, but already crowded market. The risks and unknowns do not justify paying a premium for a firm that, in a best-case scenario, may eventually become a low growth, stable, dividend-yielding, defensive, “boring” stock. 

Competition

              EVgo is fully vertically integrated and builds, owns (the land is usually leased), maintains, and operates its stations. These stations are often partnerships with “site hosts”- office complexes, airports, shopping malls, hotels etc.- that cater to retail customers, or commercial fleet operators such as ride sharing, logistics and shipping, and car rental firms. Electrify America and Blink are regarded as the closest direct competitors, using the same integrated model. Recently, a similar end to end charging company, Terawatt Infrastructure, has exited its self-described “stealth mode” and announced impressive financial backing and ex-Google talent. While EVgo currently has more locations and chargers than any of these firms, it is worth noting that Electrify America (EA) presents a unique threat as it is a subsidiary of deep pocketed Volkswagen.

EA was formed as part of the German auto manufacturer’s consent decree with the EPA over the 2015 emissions scandal. The terms of the consent decree dictate that EA spend $2B between 2017 and 2027 on electrification, with the company on track to have 800 locations and 3500 DCFC connections by December 2021. Due to both EA’s VW financial backing and the underlying motivation to comply with the legal resolution, there is a possibility the firm ignores economic return and expands, in the short term, at a considerable loss. This rapid growth could (inadvertently) give EA first mover advantage to the detriment of EVgo.

Outside of the integrated charging space, several other competitive business models have appeared- any of which could render EVgo’s owner-operator approach inferior and undesirable. ChargePoint and EVBox provide site hosts and commercial partners with electrical vehicle supply equipment (EVSE). This includes hardware, software, and servicing to allow customers to run their own charging networks. The EVSE companies tend to be less capital intense as they do not need to finance and build stations prior to generating cashflows. Their highly service dependent business also allows for a recurring revenue stream and wider margins than selling hardware alone. Whether and which types of customers choose to buy from EVSEs and operate their own charging units versus completely outsource to third parties like EVgo remains a significant unknown and risk.

Some OEMs, notably Tesla and, more recently, Rivian, manage their own DCFC networks and restrict access to users of their vehicles. If either were to open their stations to all drivers (likely on the CCS standard), Tesla’s Superchargers alone would add 1,150 units across the U.S. and Canada- greatly expanding the supply and diluting EVgo’s market position. If OEMs were to allow universal access to their networks, EVgo might be competing with businesses that operate their charging stations as loss leaders for their core auto sales. Between massive OEM run grids and piecemeal EVSE sales to site partners, is there capacity or demand for a third-party owner-operator EV charging system?

Fleet operators- logistics services, rental car firms, ride hailing companies- and Medium and Heavy Duty (MHD) represent the fastest growth opportunity and 86% of total estimated GWh demand for DCFC by 2040. Fast and seamless charging is especially crucial for these operators as each minute spent plugged in is an opportunity cost in lost revenue. Given charging quality and reliability is integral to these companies’ ability to do business, there is a possibility some of the larger players choose to buy from an EVSE and bring charging in house. Revel, an electric moped service in New York City that is also launching an all-Tesla ride sharing service, is building the first of many planned “Superhub” DCFC stations for use by Revel drivers and the general public. To the extent Amazon, FedEx, XPO, Uber, Hertz etc. opt for the same self-managed approach, EVgo’s third party offering may face a much smaller TAM.  

Finally, utilities may enter and offer DCFC stations supplied by their own electricity. The utility would likely be able to compete on price by charging a rate above wholesale and below that of third-party competitors. However, given utilities’ state-granted natural monopoly status, any attempts to undercut prices would undoubtedly be met by severe regulatory scrutiny. That said, a group of utilities, including Duke Energy and the Tennessee Valley Authority (TVA), have launched the “Electric Highway Coalition” which has begun building out a network of DCFC and level 2 charging stations across much of the Gulf, South, and Midwest regions. The geographical hegemony, control of electricity supply, and a cashflow rich business model with capacity for large capital expenditures makes utilities a particularly pertinent challenger if they can avoid regulatory intervention.

              Even if the company were to dominate in the fully integrated charging segment, there is a very real possibility that OEMs, fleet operators, site hosts etc. opt for the EVSE approach and run their stations themselves. In their business risks disclosures, EVgo lists less obvious competitors such as municipalities that operate level 2 chargers from converted streetlights- allowing for more public “passive” charging while parked for an extended period and lowering the need for a quick DCFC “fill up.” This is all to say that EVgo faces an immensely crowded, tough, and diverse competitive landscape that can be delicately characterized as an absolute gauntlet.

Part 2 coming… eventually

Bonus: A (very) Simplified Guide to EV Charging

There are three basic levels of charging. Level 1 is through a standard 120V outlet. This is prohibitively slow, affording only four to five miles of charging per hour. Level 2 is a 240V or 208V source (commonly seen with washer/dryer outlets) and allows for acceptable overnight charging rates of 12 to 60 miles added per hour. Level 3, or DCFC, offers up to 1000V and 50 to 350KW. The 350KW DCFC units can provide a staggering 100 miles of range in as little as five to nine minutes. DCFC has three hardware plug types- Combined Charging System (CCS), CHAdeMO, and Tesla’s network. Outside of Tesla vehicles, CCS is quickly becoming the U.S. and European standard. Certain European Tesla Superchargers and OEM Rivian use the CCS standard but, for now, have installed software to limit use to only their vehicles.