Transcription
[Music] With the rise of electric vehicles, it provides opportunities not only for manufacturers but also for the companies that make the infrastructure to support an all-electric future.
One of the biggest problems with electric vehicles is their limited range. If you want to go on a long road trip, you have to find somewhere to stop along the way to recharge your battery. One solution for this is to have roadside charging stations with super-fast chargers. EV drivers can stop by and fill their batteries in 20 to 30 minutes and then be on their way.
Building charging stations seems like a pretty good business idea. After paying for the upfront cost of buying and installing chargers, the ongoing cost should be negligible. The customer uses an app to pay for the charging, so there's no need for any staff. As long as you can charge a substantial markup over your own electricity costs, this seems like it should be an extremely profitable business.
In 2020 and 2021, a number of EV charging companies went public by merging with SPACs. Without exception, they've all been disasters, with their share prices falling by 70% to 80%, and every single one of them is losing money. Join us as we take a deep dive into the deceptively unprofitable business of electric vehicle charging.
Let's start off with EVgo, which is currently the largest EV charging company in the US, both by market cap and the number of EV charging stations owned. They currently operate 3,000 chargers and over 900 locations across the US. Retail customers can pay a fee of about 40 cents per kilowatt-hour of charging. This is a roughly two to three times markup over what EVgo pays for the electricity. There is also a fixed fee of $1 per session and a $3 fee if you want to reserve a charging spot ahead of time in the app.
Most electric vehicles have a battery of about 60 kWh, so it would cost about $24 to fill up your battery, although this can vary by time of day. Adding the session and reservation fees gets you to about $28 per charge. EVgo's charging stations work with all brands of electric cars, although for some cars, you need to have an adapter. You can also pay a monthly subscription to get a limited number of free session fees per month, but you still have to pay the cost per kilowatt-hour.
In addition to selling directly to consumers, they have partnerships with fleet operators. For example, they have deals with Uber and Lyft, which give discounted electricity rates to drivers. They also have deals with some automakers. For example, GM pays EVgo to give discounted rates to GM electric cars. They also sell and install charging stations for third parties. For example, the gas station chain Pilot Flying J has purchased EVgo charging stations for some of their locations. Pilot Flying J keeps the revenue from the charging stations, and they pay fees to EVgo for ongoing maintenance. Finally, they make a little bit of money from government subsidies. Subsidies represent about 10% of their revenue.
The good thing about EV charging stations is it doesn't require any staff members present, unlike a traditional gas station. There are no gas tanks that need to be refilled. Once the charger is installed, it pretty much runs itself. Customers pay with the app and plug the charging cable into the car themselves. Most EV charging stations charge a markup of about double their own electricity cost. Given the low operating cost and the large markup, it seems like EV charging stations should be extremely profitable, but there are a few more factors we need to take into account.
You can think of EV charging stations kind of like vending machines. The ongoing cost of operating a vending machine is extremely low, but if you put your vending machine on the side of a road that gets very little traffic, you might only sell two or three bags of chips each month. At this level, it wouldn't even be worth your time to go to the machine and collect the coins. On the other hand, if you put your vending machine in a high-traffic area, you will sell a lot of chips, but you also have to pay rent to whoever owns the real estate, and this might eat up most of your revenue.
For EV charging, it's even worse. Due to their frequent usage, EV chargers wear out pretty quickly. According to EVgo's regulatory filings, they depreciate their EV charging equipment based on an estimated useful life of 3 to 7 years. So, while the contribution margin might be very high, you need to generate enough revenue to cover your rent and maintenance costs and make back the initial investment of the charging equipment before they have to be replaced.
Besides the dip in 2020 due to the pandemic, EVgo's revenue per charging stall has been steadily increasing. This is due to increased adoption of electric vehicles. The more EVs on the road, the greater is the demand for charging. In the first 9 months of 2023, they finally made a positive gross margin of $2,500 per stall, which is still a pitiful 6% of revenue. This is not nearly enough to cover the corporate overhead.
Because the charging stalls are distributed over a wide area and there are no staff present, it can take a long time for the company to identify when a charging stall is out of order and send somebody all the way over to fix it. This drives up cost of goods sold. A 2022 study by the University of California at Berkeley found that at any given time, more than 25% of EV charging stations were not functioning. For EVgo specifically, only 73% of stalls were working. ChargePoint was even worse, with only 61% of stalls working.
This is problematic for two reasons. Obviously, if the charging stall isn't working, it won't be generating any revenue. Additionally, many of the state subsidies they receive are contingent on minimum levels of uptime. Unless they get their act together, they could be at risk of losing the subsidies. This year, EVgo announced a plan to beef up their outage detection and maintenance efforts. This will help with the revenue, but it also adds greater maintenance costs. Because of the high cost of and maintenance, the gross margins for EV chargers are extremely thin, not nearly enough to cover their corporate overhead. So, for now, they're all losing money.
Remember that one of the key theorized advantages of EV charging stations over traditional gas stations is that unlike gas stations, which require staff present at all times, EV charging stations are completely self-served. But how big of a benefit is this? We can compare the financial results of EVgo versus Murphy USA, which is a publicly traded gas station company.
In the first 9 months of 2023, Murphy generated about $420,000 of revenue per gasoline pump. Of that, about 80% came from selling gasoline and 20% came from selling food in the convenience store. Food at the convenience store has much higher profit margins than fuel, so about one-third of gross profit came from the convenience store and two-thirds came from fuel. In total, they made almost $40,000 of gross profit per fuel pump. The fixed cost of operating the store isn't very high. While they always have at least one person on staff, each gas station has about eight gasoline pumps. Even if you have two people in the store, that's only one employee per four gas pumps, and they don't get paid that much. So, the fixed cost of operating the store was only $199,000 per pump, or less than 5% of revenue. Corporate overhead and depreciation were also very low. In total, Murphy made about $188,000 of operating profit per gas pump in the first 9 months of the year.
EVgo made $45,000 of revenue per charging stall in the same period, about one-tenth of what Murphy made per gasoline pump. Gross margins were much lower at about 5% of revenue. To be fair, the gross profit numbers are not comparable because maintenance and depreciation are included within the cost of goods sold for EVgo, while they're included in overhead costs for Murphy. But what's really shocking about EVgo is the $42,000 of selling, general, and administrative costs per charging station. This is almost as much as their revenue.
Due to the complexities of maintaining such a large number of charging stalls over dispersed geography, as well as providing customer support to customers who can't figure out how to use their machines, EVgo's operations are very complex. This necessitates a large number of administrative and customer support employees, and if anything, they probably need to hire even more customer service and administrative staff, as they have an average rating of just 1.4 out of five stars on Yelp. Customers complain about frequent outages, problems reserving their charging stations, and generally incompetent customer support.
The main takeaway is that for any EV charging company to become profitable, they will need to drastically increase their revenue per charging station. Despite the media hype around EVs, they still make up a tiny fraction of cars on the road. In 2023, it is estimated that 8% of new cars in the US will be fully electric. But cars last a long time, 12 years on average, so even if 100% of new cars turned electric overnight, it would still take 12 years for all cars on the road to be EVs. Currently, less than 1% of registered cars in the US are EVs. This number will increase over time, which will drive more demand to charging stations, but there are a few reasons to believe that EV charging stations may never be as profitable as gas stations.
Firstly, if you own an internal combustion engine car, you need to buy gas from a gas station. There's no other way to fill up your tank. This is not the case for electric vehicles. You can charge your car at home. If you're careful about keeping track of your mileage, you may never need to pay to use a charging station. The low cost of home charging is one of the key selling points for EVs. Charging your EV at a charging station actually costs more per mile than the cost of gasoline for an internal combustion engine vehicle. Even if all cars transitioned to electric tomorrow, there would almost certainly be far less aggregate demand for charging stations than there is today for gas stations.
The second problem is that it takes around 30 minutes to charge your electric vehicle. Let's say it costs you $28 to charge your battery, and EVgo makes $18 of contribution profit. Even if the charging stall is operating at maximum capacity, it can only generate $36 of contribution profit per hour. It only takes a couple minutes to fill up your car at a gas station. One pump could potentially fill dozens of cars in an hour, so the revenue and contribution profit per pump per hour is far higher than what EV charging stations could ever hope to achieve.
Electric vehicle adoption will undoubtedly increase in the future. It is likely that within our lifetimes, EVs will make up the majority of cars on the road. There will be a lot of companies that benefit from this transition, but this doesn't mean that every EV-related company or adjacent industry will be a success. It appears that charging stations are shaping up to be one of the less successful EV plays.
All right guys, that wraps it up for this video. What do you think about EV charging? If you want an EV, have you ever used one? Let us know in the comments section below. As always, thank you so much for watching, and we'll see you in the next one. Wall Street Millennial signing out.