EVgo Has 1 Big Problem to Solve

EVgo (NASDAQ: EVGO) is at the forefront of a burgeoning industry. That is a good thing in some ways, but also a bad thing in others. As investors try to assess the growth opportunity offered by EVgo's efforts to build out an electric vehicle (EV) charging network, it's important to keep the cost of that effort in mind, too. Here's the big problem that EVgo has to solve if it wants to become a consistently profitable business.

What does EVgo do?

EVgo builds and operates electric vehicle charging stations. This is vital infrastructure that is needed to support the transition from combustion engines to electric vehicles. While there are different dynamics in how each type of vehicle gets fueled (you can't realistically fill your gas tank up at home, but you can realistically charge an EV at home), widespread adoption of EVs will require a lot of charging infrastructure. Just think about how many gas stations there are in the world. Even if just half as many EV charging stations are needed, it will still be a huge infrastructure investment.

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That is, basically, the opportunity that EVgo is trying to exploit. So far it has built out around 1,100 charging stations, with over 3,600 charging stalls. That's an impressive portfolio, but still very small if you compare it to the gasoline ecosystem that is in place today. But don't underestimate the progress that's being made. Year over year, in the third quarter of 2024, EVgo increased the number of stalls it operates by more than 33%! That's the kind of growth that can be achieved when you are working from a small base.

The flow through to the business is just as impressive. EVgo's customer accounts expanded by 57% year over year, and its revenue grew by more than 90%. These are the types of numbers that can get investors on Wall Street excited.

There's one small problem with EVgo

That said, EVgo's growth comes with material costs. That's why it lost money, again, in Q3 2024. In fact, the loss per share increased more than 20%. That sounds really bad, but it amounted to a two-cent-per-share decline in earnings. Even though this is an issue of pennies, the big picture is still the same. EVgo is spilling red ink all over the income statement.

The interesting thing is that EVgo generates a gross profit. This means that the costs associated with operating its installed charging network are smaller than the revenues those assets bring in. It is an important first step toward profitability. After you layer in the other costs associated with operating the business, however, that gross profit is more than offset, and the company's bottom line sinks into the red.

EVGO data by YCharts.

One of the biggest expenses EVgo faces is building out its network. Management is actively working on ways to keep that cost down, but there's no way to avoid these expenses. In this case, it definitely takes money to make money. Notably, the cash that EVgo had on its balance sheet fell by around 25% through the first nine months of 2024. This is not a small issue, and investors need to pay close attention to the material capital spending needed to build out EVgo's infrastructure.

EVgo has a huge opportunity, but it comes with sizable risks

Shares of EVgo have declined materially from the high-water mark achieved in 2021. There was more excitement around electric vehicles then. Wall Street has moved on to new stories. But the long-term opportunity for EVgo hasn't changed and may, in fact, have improved given the ongoing, though slow, shift toward EVs.

There are good reasons to like the stock. But you have to go in with your eyes open to the risks, which are material. It costs a lot of money to build the charging infrastructure EVgo owns, and it will take more money to keep building out the network. EVgo is likely to remain a money-losing company for a while, perhaps a long while, longer. This is a stock that's really only appropriate for more aggressive investors.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.