What a brutal six months it’s been for EVgo. The stock has dropped 60.3% and now trades at $1.87, rattling many shareholders. This might have investors contemplating their next move.
Is now the time to buy EVgo, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is EVgo Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than EVGO and a stock we'd rather own.
1. Operating Losses Sound the Alarms
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
EVgo’s high expenses have contributed to an average operating margin of negative 72.3% 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
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 86%, meaning it lit $86.05 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 $124.4 million of cash over the last year. With $200.5 million of cash on its balance sheet, the company has around 19 months of runway left (assuming its $96.6 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 isn’t one of our picks. Following the recent decline, the stock trades at 27× forward EV-to-EBITDA (or $1.87 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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