Investors Charge Up XCHG Stock In Scaled-Back IPO

Key Takeaways:

• Shares of XCHG nearly tripled in their first week of trading after the company raised $20.7 million in its Nasdaq IPO
• The company’s revenue jumped 52% and its profit nearly quadrupled in this year’s first quarter, but it warned of a slowdown in the second quarter

By Edith Terry

Sept. 10 was a special day for Tesla veteran Hou Yifei as he rang the opening bell on the Nasdaq to mark the trading debut for his electric vehicle (EV) charging company XCHG Ltd. XCH, which also uses the XCharge name. An earlier attempt to list in February got a chillier reception, causing Deutsche Bank and Huatai Securities to jump ship as underwriters. That left the smaller U.S. Tiger Securities as sole underwriter of a deal that raised $20.7 million – less than half the previous $50 million target.

Despite the IPO’s smaller scale – or perhaps because of it – XCHG’s shares nearly tripled in their first trading week before settling down somewhat. At Wednesday’s close of $11.56, they were still up by a healthy 86% over the offer price of $6.20, valuing the company at nearly $700 million two weeks after the IPO.

But it’s still early days, and the stock has some distinctively meme-like qualities. Its price to sales (P/S) ratio stands at an eye-popping 16.5, which looks wildly expensive compared to smaller peer NaaS Technology NAASwith a ratio of just 0.67, and ChargePoint CHPT at 1.77. All three companies lost money in 2023, although XCHG moved into the black this year.

The downsizing of XCHG’s IPO came after the U.S. jacked up tariffs on China-made EVs in May, though chargers weren’t part of that move. XCHG is also looking to avoid potential future conflicts with the U.S. by building a 3,500-square-foot factory outside San Marco, Texas, to manufacture chargers in the country.

XCHG currently sources its chargers from China, but most of its business is in Europe. It hopes to someday get significant revenue from software upgrades and maintenance services for the chargers it sells. But for now, at least, the big majority of its revenue comes from product sales, which totaled $38 million, or 98.8% of its total last year.

In 2023, XCHG reported a net loss of $8 million on revenue of $38.5 million, due in part to a $7.5 million expense for share-based compensation. It moved into the black in the first quarter of this year with net income of $733,000 on revenue of $11.1 million, up 51% year-on-year. But it warned that its revenue dropped 19.2% to 33.9% year-on-year to between $8.1 million and $9.9 million in the second quarter, with gross profit down 18.7% to 33.5%. It blamed the declines on a “transition period” caused by falling sales for its older products as customers traded up to newer ones.

Another concern is its reliance on individual customers. In the first quarter of 2024, its largest customer accounted for 47% of its revenue, up from 42% for all of 2023.

Small Player In China

Despite sourcing its products from China, sales from the country still make up a relatively small portion of XCHG’s total. Its China sales totaled just $4.75 million, or 12.2% of its total revenue, last year, and the figure dropped to just 6.7% in this year’s first quarter.

Next Move Strategy Consulting estimates China’s EV charging market was worth nearly $10 billion in 2022, with prospects of reaching $61.4 billion by 2030 as Beijing aggressively promotes the new energy vehicle (NEV) sector. The country had 8.1 million EVs registered in 2023, accounting for more than one-third of the car market, according to the International Energy Agency.

But the market’s huge size means XCHG faces crushing competition there, including from EV manufacturers that supply their own chargers. Europe is XCHG’s largest market and seems less cutthroat, which may possibly explain why investors seem to like the company.

XCHG has two things giving it a modest edge over its competitors. It was a relatively early arrival to the European market in 2018, and Europe accounted for 78% of its revenue in 2023 and grew to an even larger 85% in this year’s first quarter. According to independent research in the company’s prospectus, XCHG was a leading supplier of high-power chargers in Europe in 2023.

The company has a testing laboratory in Madrid, which is a joint venture with Swiss inspection company SGS, and it’s setting up another testing facility and R&D center at its global headquarters in Hamburg, Germany. Javier Lázaro, the company’s European sales head, pointed out the EU’s target of reducing its net greenhouse emissions by at least 55% by 2030 encourages carmakers to shift from internal combustion engine models to EVs.

But the EU hasn’t been completely welcoming to China’s EV industry. In July, like the U.S., the EU imposed punitive duties on Chinese EVs, ranging from 9% for Tesla’s China-made EVs to 37.6% for models from SAIC. While XCHG chargers work for both European and Chinese-made cars, the extra duties may restrict the overall market’s growth.

XCHG’s second selling point is its Net Zero Series, which could open markets beyond charging vehicles. The series consists of integrated lithium battery and direct current (DC) fast chargers that can buy and store power during off-peak hours and sell it back to the grid at higher prices to earn profits during peak hours, in addition to charging EVs. Global sales of such chargers are expected to increase exponentially from 9,000 units in 2024 to approximately 290,000 by 2028, according to third-party data in the prospectus.

According to Grand View Research, the global EV charging infrastructure market was worth $26 billion in 2023 and is projected to grow at an annual rate of 25.4% from 2024 to 2030. The fast charger segment led the market in 2023 with 72.4% of global revenue. But the market for energy storage solutions like XCHG’s Net Zero Series is even more robust, estimated to reach $170 billion by 2028.

XCHG’s European focus could also benefit the company due to the relatively low penetration of chargers outside China. Chargers have been deployed more slowly than EVs, with a ratio of 13 EVs for each charger in Europe and 25 for every charger in the U.S., according to independent research. Such math may be a factor that lured investors to XCHG’s IPO. By comparison, the EV-to-charger ratio in China is less than 10 to one.

Relative to the size of the market, XCHG is still a minnow among whales. In unit terms, it sold 1,688 DC fast chargers in 2023 and another 351 in the first quarter of 2024, with both figures down by more than 10% year-on-year. Revenues still rose over the same periods, with XCHG crediting the sale of higher-priced chargers. That could point to a new higher-growth future if sales for the newer Net Zero Series start to take off with growing popularity for this more versatile new type of product.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.