EV boom: is this new IPO a ‘no brainer’ buy?

I think this IPO could be an excellent way to gain exposure to the growing EV market. Are the shares an obvious buy for my portfolio?

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I wrote about an IPO (initial public offering) just last week, which I thought looked promising. Another IPO that came up on my screen is Pod Point (LSE: PODP). It was admitted to trading on the main market of the London Stock Exchange at an offer price of 225p. This resulted in in a market value of £352m.

The share price has nudged up to 250p at time of writing. So, is this new IPO a buy for my portfolio?

Pod Point’s IPO

Pod Point operates in the growing electric vehicle (EV) market. Only here, the company doesn’t design and manufacture EVs, but charging solutions for the EVs themselves. Since 2009, the company has manufactured and sold over 102,000 charging points across the UK and Norway. Pod Point has also installed a public network of over 5,200 charging bays across key locations including leading supermarkets.

When I first discovered Pod Point, I viewed it as a ‘picks and shovels’ business in the EV sector. A quote by the famous investor Peter Lynch summarises this well: “During the gold rush, most would-be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.”

In other words, EV manufacturers will be battling for market share, but everyone is going to need a charging point. Therefore, Pod Point might be a great way to invest in a ‘picks and shovels’ business in the burgeoning EV market.

In the IPO prospectus, the company expected to raise a gross £100m to invest in further installations and product development, and pay down debt.

The bull case

There’s no doubt that the EV market is growing, and I think Pod Point is a potential ‘picks and shovels’ way to gain exposure to this. While Tesla is competing with established car manufacturers, and new start-ups like Rivian, Pod Point’s charging solutions will be needed regardless of what EV is bought.

The company also has a long history dating back to 2009. The current CEO also founded the business and still retains almost 1.8m shares in the company. This says to me he is fully aligned with the interests of shareholders.

Then, just last week, Pod Point announced a new contract win with Mercedes-Benz, making it the preferred supplier of domestic charge points to its UK customers.

The bear case

On review of the financial data published in the prospectus, the company is still loss-making. This does make it a riskier investment. Revenue is growing at an impressive rate, but operating costs more than doubled in 2020.

My biggest concern, though, is the low gross margin. It has been rising over the past three years, from 12.5% in 2018 to 25% in 2020, but this is still quite low. Indeed, Pod Point’s management have warned that its material costs are expected to increase through to 2022 due to supply chain issues related to the pandemic. I’d have to be comfortable with this low-margin business if I was to invest.

Final thoughts

I like the opportunity of this IPO. I view it as great way to gain exposure to the growing EV market. I’m going to watch how its cost base develops this year before I buy the shares. For now, there are other stocks to consider.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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