Special purpose acquisition companies (SPACs), especially those that have merged with privately held electric vehicle (EV) companies, have been some of the top-performing stocks in 2020. Will that be the case here with Switchback Energy (NYSE:SBE)?
It depends on how things play out in the near-term. Last month, Switchback announced its merger with ChargePoint. ChargePoint doesn’t make EVs, but stands to win big as this megatrend plays out in the coming years.
How so? This company supplies the charging stations and related infrastructure for electric cars and trucks. Already a leader in its space, its sales could skyrocket over the next decade.
Once the deal wraps up, it’s possible the stock (soon to re-named CharePoint Holding) takes off, much like the other SPAC names have done post-merger. Yet, while the prospects for this EV play look promising, there’s some risk shares head lower in the near-term.
Namely, with investors wanting to “get in on the ground floor,” shares have soared above their $10 per share offering price, to prices as high as $16.45 per share. Sure, in recent days, shares have pulled back, and now change hands just under $14 per share.
But, an additional pullback could be in the cards. The “EV bubble” hasn’t exactly popped just yet. But, with the risk interest in this sector cooling off in the short-term, a more favorable entry point could be just around the corner.
That’s not to say this isn’t a solid opportunity today, but treading carefully may be the best move.
Big Potential for SBE Stock After the ChargePoint Merger
Valued at $2.4 billion, ChargePoint will have $493 million in dry powder post-merger to execute its growth strategy. Right out of the gate, the EV charging infrastructure provider is already crushing the competition.
With 4,000 customers, and over 115,000 charging locations, ChargePoint is getting off to a great start. And, based on estimates, it’s possible we’ll see blockbuster growth in the coming years.
What am I talking about? Based on company projections, the EV infrastructure provider could see its revenue soar from around $135 million this year, to over $2 billion by 2027. Sure, there’s no guarantee things will play out as predicted. But, these numbers are reasonable given how fast electric vehicles are gaining critical mass.
As InvestorPlace’s Louis Navellier wrote Oct. 6, EV passenger car sales are expected to grow from 2.1 million in 2019, to 8.5 million in 2025.
With this rapid proliferation of electric vehicles, it’s clear demand for charging solutions matches up with ChargePoint’s aggressive revenue projections. But, while the bull case for this stock seems like a “no-brainer,” the risk of this year’s “EV bubble” cooling may mean it’s wise to practice near-term caution before diving into this potential long-term winner.
Risks to Consider as ‘EV Mania’ Starts to Wane
The bull case for this EV play is a lot clearer than with other EV companies that have recently completed SPAC mergers. But, that doesn’t guarantee Switchback shares will go parabolic after the ChargePoint deal closes.
Why? Sure, the “EV bubble” hasn’t popped just yet. Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) have sold off a bit, but still are up massively from their 52-week lows. Nikola (NASDAQ:NKLA) stock has cratered. But that has more to do with issues directly related to the company, rather than decreased interest in EV stocks. Yet, we may be getting close.
Since the spring, “growth at any price” has been the name of the game for electric vehicle plays. As a result, EV stock valuations have gotten way ahead of themselves. It’s impossible to estimate when it will happen, but it’s only a matter of time before this bubble bursts.
The result? While EV megatrends will remain in motion, today’s frothy multiples could contract. That is to say, even if major EV names keep on “crushing it” in the growth department, their respective share prices could still trend lower from here.
What does that mean for Switchback’s shares? By the time the merger wraps up, “EV mania” could be over. That doesn’t mean shares are heading to single-digits. But, the stock may not see the same parabolic moves with this stock like we have with many SPAC/EV names in 2020.
There’s Opportunity Here, But Tread Carefully
The issue here is not that this hot stock is “all sizzle, no steak.” Far from it. Unlike some of the other EV stocks out there, it’s not trying to be the next Tesla. Instead, it’s honing in on what could be a lucrative segment of the EV economy.
Yet, with the risk the “EV bubble” fueling the sector higher starts to cool, waiting for pullbacks may be the best way to buy Switchback.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.