What a fantastic six months it’s been for EVgo. Shares of the company have skyrocketed 69.7%, hitting $4.31. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in EVgo, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.Despite the momentum, we're cautious about EVgo. Here are three reasons why there are better opportunities than EVGO and a stock we'd rather own.
Why Is EVgo Not Exciting?
Created through a settlement between NRG Energy and the California Public Utilities Commission, EVgo (NASDAQ:EVGO) is a provider of electric vehicle charging solutions, operating fast charging stations across the United States.
1. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
For EVgo, its two-year annual EPS declines of 47% mark a reversal from its (seemingly) healthy three-year trend. These shorter-term results weren’t ideal, but given it was successful in other measures of financial health, we’re hopeful EVgo can return to earnings growth in the future.
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 150%, meaning it lit $149.60 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 $107.6 million of cash over the last year. With $153.4 million of cash on its balance sheet, the company has around 17 months of runway left (assuming its $73.6 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 doesn’t pass our bar. After the recent rally, the stock trades at $4.31 per share (or 1.4× forward price-to-sales). The market typically values companies like EVgo based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at Yum! Brands, an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of EVgo
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market to cap off the year - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like United Rentals (+550% five-year return). Find your next big winner with StockStory today for free.