Why could Pod Point be a top EV stock?

When it comes to loss-making growth companies like Pod Point I think it pays to focus on revenue growth and the market opportunity, and also the route to profitability. On all three counts, I like what I see.

Pod Point generated revenue of £17.2m in the year ended 31 December 2019 (a 45% increase from the year ended 31 December 2018) and £33.1m in the year ended 31 December 2020 (a 91% increase from the year ended 31 December 2019). Revenue increased £14.6m, or 123.0%, from £11.9m in the six months ended 30 June 2020 to £26.5m in the six months ended 30 June 2021

The EV market is set to grow massively. Electric vehicle sales increased by 160% in the first half of 2021 from a year earlier.

The company has great relationships and is winning new business so I think it can become profitable.

What else is to like?

The company was founded in 2009. I don’t think Pod Point was bought to market just so the owners could make a quick buck. The current CEO founded the business and still retains almost 1.8m shares in the company. He’s entrepreneurial, having previously founded and sold supercar rental club Ecurie25, which I find encouraging.

The company has manufactured and sold over 102,000 charging points across the UK and Norway. Pod Point has also installed a public network of over 5,200 charging bays across key locations including leading supermarkets. What this shows me is that it has scale and a product customers want, which bodes well for the future.

It has developed good relationships with a wide range of customers including automotive OEMs (such as Audi, Jaguar Land Rover, Nissan, Peugeot, Volkswagen, and Hyundai), as well as fleet management companies, property developers, couriers, and leisure operators. Therefore, it has diversified income sources.

What might hold back the shares?

Competition is a risk. However, at 30 June 2021, Pod Point had 102,000 charge points, compared to approximately 58,000 charge points installed by bp pulse. Pod Point’s directors consider bp pulse to be its next largest competitor in the UK.

Evolution in the market could also either render Pod Point’s technology obsolete or reduce demand for EV charging stations, but that seems unlikely. Also, it’s loss-making, which is a risk to be aware of.

Given its desire to grow and take market share I’m not overly concerned that Pod Point is loss-making. It’s a well-worn path in emerging industries for companies to have to invest heavily to get noticed and build up their infrastructure.

I think this market is hotting up and will continue to excite investors, and I think Pod Point could do really well in 2022. Once more results come out, I’ll consider investing in this EV stock if it becomes clearer it’s on the path to future profits and is winning new business.

The share price has nudged up to 250p at time of writing. So, is this new IPO a buy for my portfolio?

Pod Point’s IPO

Pod Point operates in the growing electric vehicle (EV) market. Only here, the company doesn’t design and manufacture EVs, but charging solutions for the EVs themselves. Since 2009, the company has manufactured and sold over 102,000 charging points across the UK and Norway. Pod Point has also installed a public network of over 5,200 charging bays across key locations including leading supermarkets.

When I first discovered Pod Point, I viewed it as a ‘picks and shovels’ business in the EV sector. A quote by the famous investor Peter Lynch summarises this well: “During the gold rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.”

In other words, EV manufacturers will be battling for market share, but everyone is going to need a charging point. Therefore, Pod Point might be a great way to invest in a ‘picks and shovels’ business in the burgeoning EV market.

In the IPO prospectus, the company expected to raise a gross £100m to invest in further installations and product development, and pay down debt.

The bull case

There’s no doubt that the EV market is growing, and I think Pod Point is a potential ‘picks and shovels’ way to gain exposure to this. While Tesla is competing with established car manufacturers, and new start-ups like Rivian, Pod Point’s charging solutions will be needed regardless of what EV is bought.

The company also has a long history dating back to 2009. The current CEO also founded the business and still retains almost 1.8m shares in the company. This says to me he is fully aligned with the interests of shareholders.

Then, just last week, Pod Point announced a new contract win with Mercedes-Benz, making it the preferred supplier of domestic charge points to its UK customers.

The bear case

On review of the financial data published in the prospectus, the company is still loss-making. This does make it a riskier investment. Revenue is growing at an impressive rate, but operating costs more than doubled in 2020.

My biggest concern, though, is the low gross margin. It has been rising over the past three years, from 12.5% in 2018 to 25% in 2020, but this is still quite low. Indeed, Pod Point’s management have warned that its material costs are expected to increase through to 2022 due to supply chain issues related to the pandemic. I’d have to be comfortable with this low-margin business if I was to invest.

Final thoughts

I like the opportunity of this IPO. I view it as great way to gain exposure to the growing EV market. I’m going to watch how its cost base develops this year before I buy the shares. For now, there are other stocks to consider.