What a brutal six months it’s been for EVgo. The stock has dropped 52.8% and now trades at $1.44, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy EVgo, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is EVgo Not Exciting?
Even though the stock has become cheaper, we’re passing on EVgo for now. Here are three reasons why there are better opportunities than EVGO, plus one stock we’d rather own.
1. Operating Losses Sound the Alarm
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
EVgo’s high expenses have contributed to an average operating margin of negative 66.6% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
EVgo’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 83.8%, meaning it lit $83.79 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
EVgo burned through $165.1 million of cash over the last year. With $137.7 million of cash on its balance sheet, the company has around 10 months of runway left (assuming its $98.52 million of debt isn’t due right away).
Unless the EVgo’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of EVgo until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
EVgo isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 8.8× forward EV-to-EBITDA (or $1.44 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
Stocks We Would Buy Instead of EVgo
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