Is ChargePoint Stock a Buy Now?

ChargePoint Holdings (NYSE: CHPT) has a huge opportunity ahead of it, which is good. But the company's ability to actually take advantage of that opportunity is what investors really need to assess. Here's what you should know about ChargePoint before you rush out and buy it now.

What does ChargePoint do?

ChargePoint is working to create the infrastructure needed to charge electric vehicles (EVs). It makes charging systems for the home. It makes charging systems used by fleet operators. It makes charging systems used at on-the-road charging stations, such as gas stations. It also offers subscription services, allowing consumers and businesses to easily fill up their electronic tanks.

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This is vital infrastructure in the EV transition. And the transition is expected to be huge. The National Electrical Manufacturers Association expects electricity demand from EVs to increase by 9,000% between 2020 and 2050 in the U.S. alone. A huge amount of infrastructure will be needed to support that demand growth, and a material portion of that infrastructure will be charging stations.

When considering the opportunity ahead of ChargePoint, think about how many gas stations there are. As more EVs hit the road, more and more charging stations will be needed, and ChargePoint is hoping to be a key player in supplying the necessary technology. That's the glass-half-full view, and an investor might want to buy ChargePoint now to get in early on this opportunity.

There's a big problem with ChargePoint

Unfortunately, it isn't going to be smooth sailing for ChargePoint, which has to deal with some very real financial headwinds. For example, it is bleeding red ink due to the high costs of research and development and selling into a rapidly developing market. While management has been focused on cutting costs, it is hard for any company to cut its way to a sustainable profit. And if the cost-cutting goes too far, ChargePoint could find itself unable to keep up with the competition.

In other words, the red ink is likely to keep flowing. Investors have noticed and taken a keen interest in ChargePoint's balance sheet, which has a swiftly dwindling cash balance. With the stock price in penny stock land -- trading for less than $1 per share -- raising additional capital from Wall Street is likely to be difficult and expensive.

And that brings us to something known as the Merton Model, which attempts to predict bankruptcy risk. One of the key indicators used is the price of a company's stock. There's a lot more involved, but the key takeaway is that a deep decline in a company's stock price is a warning that bankruptcy risk is high. ChargePoint's stock price, currently below $1 and having fallen by more than 98% from its peak, suggests that Wall Street is worried that the company may not survive without a trip through bankruptcy court.

If ChargePoint manages to avoid bankruptcy, buying now could set investors up for potentially huge gains, given the low stock price. But if there is a bankruptcy, well, stockholders are likely to be wiped out. The business may continue to operate through a bankruptcy, and the company could still end up becoming a major player in the EV space despite bankruptcy.

However, investors buying the stock now probably won't see any benefit from that success since equity investors are the last in line during a bankruptcy. Debt holders would most likely gain control of the company, with their debt turned into equity in the recapitalized business.

ChargePoint is not for the faint of heart

At the end of the day, most investors should refrain from buying ChargePoint now. Even if you are a more aggressive investor who is willing to take on elevated levels of risk for potentially elevated rewards, the risk of a total loss here should cause you to pause. Unless you feel very strongly about ChargePoint's ability to weather what appears to be pretty material financial headwinds, this stock is probably best kept on the watchlist.

After all, if it manages to muddle through, there's still likely to be a long runway for growth ahead. You may miss out on some early stock gains by waiting until the business is on a stronger financial footing, but you'll also avoid the very real risk that ChargePoint's financial position is so weak that it won't be able to survive in its current form.

Should you invest $1,000 in ChargePoint right now?

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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.