EVgo Incorporated has seen a significant rise in its stock price following news of a conditional government loan from the U.S. Department of Energy (DOE). This financing boosts EVgo’s liquidity and its capability to expand its EV charging infrastructure. However, despite the loan’s positive impact on cash flow, Morningstar advises caution, with an estimated fair value of $3.50 per share, citing EVgo’s high valuation, potential challenges in margin growth, and heightened competition in the EV charging industry.

Stock Valuation and Target Price

Fair Value Estimate: Morningstar analysts set a fair value of $3.50 per share for EVgo Inc., notably below its current trading price of $6.13. The stock’s price-to-fair-value (P/FVE) ratio sits at 1.75, indicating potential overvaluation.
Investment Recommendation: Investors should hold off on new purchases at the current level, as the stock price may not align with its intrinsic value.

Capital Allocation and Financial Health

DOE Loan Impact: EVgo recently secured conditional approval for a $1.05 billion loan from the DOE, a substantial addition to its funding, which stood at $163 million in cash as of mid-2024. This boosts its liquidity for planned network expansions.
Capital Intensity: Despite the new loan, EVgo’s business model requires high capital for DC charging station buildouts. Investors should be aware of the firm’s limited balance sheet relative to competitors like Tesla and GM.

Market Position and Competitive Landscape

Partnership-Driven Growth: EVgo’s strategy includes partnerships with companies like GM and high-traffic retailers to expand charging station sites, creating potentially advantageous locations.
Intensifying Competition: Increased competition, particularly from Tesla’s Supercharger network, threatens to impact EVgo’s market share and revenue growth prospects, especially in urban areas where convenience and pricing drive consumer choices.

Risk Factors and Strategic Challenges

Reliance on External Funding: EVgo’s capital expenditure and operational needs are partially reliant on government subsidies and project financing, exposing it to policy and funding risks.
High Uncertainty Rating: Morningstar rates EVgo’s uncertainty as “Very High,” reflecting the EV charging industry’s early stage and the company’s current operating losses. EVgo’s projected long-term profitability is uncertain, dependent on the EV market's expansion and evolving charging behaviors.

Long-Term Financial Outlook and Profit Drivers

Revenue and Margin Projections: While Morningstar anticipates revenue growth as EV adoption increases, the forecasted decline in revenue per kilowatt-hour and gross margins around 30% are more conservative than EVgo’s goals. Profitability hinges on growth in charging demand, station utilization, and operational efficiency.
Potential EBITDA Breakeven: EVgo aims for EBITDA breakeven by 2025, but significant investment in fleet charging services may be necessary to secure competitive advantage.