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As electric vehicle (EV) adoption continues at a rapid pace, there is an unprecedented demand for charging infrastructure to support both consumer and commercial vehicles. Electric vehicle chargers provide charging to battery-operated vehicles and more specifically, to the electrical source used to charge the battery. As of 2019, the market for electric vehicle chargers was valued at $3.8 billion. It is expected to grow at a CAGR of 26.8% to $25.5 billion by 2027. All of this potential has thrust EV charging stocks into the spotlight as an alternative way to play the inevitable rise of vehicle electrification around the world.

With that in mind, here's an overview of the investment opportunity in electric vehicle infrastructure stocks. 

EV Charging Stocks: Key Market Drivers

The largest driver for electric vehicle charging infrastructure is demand for electric vehicles (see our EV stocks overview). Government initiatives to limit environmental pollution, coupled with consumers' interest in reducing greenhouse gas emissions, have led to increased adoption of electric vehicles. 

Fleet electrification is another significant demand driver for EV charging infrastructure. In fact, medium and heavy duty class vehicles are expected to electrify faster than passenger vehicles owing to a much lower per-mile cost, or TCO (Total Cost of Ownership). These favorable economics are the motivation behind the aggressive electrification plans at Amazon (NASDAQ:AMZN), Fedex (NYSE:FDX) and UPS (NYSE:UPS). 

In the U.S, a key industry catalyst was the signing of the U.S. Infrastructure Bill. President Joe Biden has allocated $7.5 billion to the development of 500,000 public electric vehicle charging stations. The U.S. Department of Energy estimates that it will need to install 11,407 public EV charging stations each quarter in order to achieve the government's target by 2030. The investment is expected to create more manufacturing jobs in the U.S. over the next few years. It is also expected to accelerate EV clean energy projects and allow the U.S. to capture a larger portion of the global EV market.

Finally, another catalyst fueling the growth of EV charging stocks is government tax incentives. Rebates and incentives are credited to new EV buyers under the second component of the bipartisan infrastructure law known as the "Build Back Better Framework." Following Tesla's (NASDAQ:TSLA) lead, other EV manufacturers like General Motors (NYSE:GM), Ford (NYSE:F) and Nio (NYSE:NIO) are developing and installing public charging stations nationwide.

Evaluating the EV Charging Landscape 

Because most battery-electric cars have a limited driving range (between 300 and 400 miles), the availability and efficiency of charging stations is critical for further adoption.

There are three different levels of charging: Level 1, 2 and 3. Level 1 represents 120-volt charging using ubiquitous household outlets. Level 1, known as trickle charging, provides an EV or plug-in hybrid electric vehicle 3-5 miles of range per hour. These chargers require, on average, about 30 hours to replenish 150 miles of range, depending on the vehicle's efficiency. As cars.com notes, "a less efficient vehicle gets less range from the same amount of electricity as a more efficient one." Because of these, most EV makers include a small Level 1 charger with their plug-in vehicles. A grounded household plug terminates at a connector that plugs into the car on the other end.

Level 2 charging is the fastest means of charging at home. Level 2 operates at 240 volts, which is the same voltage many household appliances use. According to cars.com, "[T]he amount of current supported by Level 2 extends from 12 to 80 amps." As a result, Level 2 extends a vehicle's charging range. But, again, the amount depends on the efficiency of the battery. 

Level 3 Charging

Level 3 charging, also called DC fast charging, is the gold standard in EV charging. It is available at specific charging stations.

Whereas level 1 and 2 chargers must rely on a process called rectification where they convert from alternating current (AC) to DC before they can charge the battery, Level 3 chargers start with higher AC voltage than level 1 and 2 chargers. DC fast chargers rectify it to high-voltage DC outside the car using dedicated equipment separate from the charging point hook up, and then feed that DC voltage directly to the car's battery.

The largest EV charging network is operated by the world's largest EV manufacturer, Tesla. Tesla began as a proprietary charging network; however, in November 2021, the company started opening its Supercharger network to other EV manufacturers. Most competing charging operators rely on roaming agreements with each other and carmakers to ensure network continuity. 

Key Players in EV Infrastructure

A large number of EV charging infrastructure companies have recently gone public through business combinations involving SPACs (Special Purpose Acquisition Companies). 

The space consists of three main subcategories. The largest category, which includes companies such as Blink Charging (NASDAQ:BLNK), Volta (NYSE:VLTA) and EVGo (NASDAQ:EVGO) build and operate their own charging networks. 

Others, like Beam Global (NASDAQ:BEEM) and Chargepoint (NYSE:CHPT), provide stations and software to third-party operators. Also in this category is EVBox, which is expected to complete its merger with TPG Pace Beneficial Finance (NYSE:TPGY) by Q1 2022. 

Finally, companies such as Wallbox NV (NYSE:WBX), which is part-owned by Spanish energy company Iberdrola SA (OTCMKTS:IBDRY), primarily makes chargers for homes and businesses.

Industry Challenges, Competition and Consolidation 

Despite being a relatively nascent market, the EV charging infrastructure market is already very crowded. Major utilities and oil companies are already getting into this space. At the same time, most pure-play EV charging companies have generated very little in the way of predictable revenue. They're also generating gross margins below 30% and are largely unprofitable. Still, EV charging stocks commanded premium valuations throughout 2021.

The sector has already undergone heavy consolidation. Large diversified energy and utility companies have already acquired dozens of infrastructure installers and software providers in recent years.

These include gas companies like Royal Dutch Shell (NYSE:RSD.A, NYSE:RSD.B) and BP (NYSE:BP) and utility players like Enel (OTCMKTS:ENLAY) and Electricite de France SA — each of which have acquired charging station companies and related solutions providers. As a result, startups in the sector are now under growing pressure to carve out a dominant market position. 

Most of the largest players in the EV charging infrastructure sector focus on serving large company fleets. Charging network suppliers typically install high-speed chargers along highways, as well as "destination charging" at shopping malls, restaurants and other public sites. This strategy has fueled a land grab for the best locations. Accordingly, one of the main advantages of the large oil companies and utilities and fuel retailers is their vast customer base and roadside real estate. Power companies getting into this space also point to their expertise in managing the grid.

EV charging is a capital-intensive business. Companies in this space are mostly not expected to break even on an adjusted EBITDA basis in 2023 and 2024 timeframe. Many of the independent entrants have tapped public markets to raise money and bolster balance sheets. Yet, many observers question both the capitalization and the long-term profitability of the EV charging infrastructure business.

At the same time, large utility players can recoup grid-related investments from their ratepayers. Oil companies also generate healthy profit margins on their retail stations. These represent considerable economies of scale and a competitive threat to pure-play charging infrastructure suppliers. 

The Bottom Line on Investing in EV Infrastructure

Interest in more affordable electric vehicles (EVs) and alternative energy sources is clearly rising and gaining support from governments globally. Strong secular drivers, coupled with accelerating manufacture of consumer EVs, should allow EV charging suppliers to sustain double digit-percentage growth over the next decade. Given the capital-intensive nature of the business, coupled with an uncertain long-term earnings profile, most observers expect continued consolidation in the coming 12-18 months.  

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

Click here to follow her Behind the Wall series, where she provides the insider scoop on the hottest technologies and trends from today's business leaders, industry experts and money managers.

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