2020 is the year of the special purpose acquisition companies (SPACs). And another new entrant to the field, SwitchBack Energy Acquisition (NYSE:SBE), is garnering attention. It makes perfect sense why. Unlike so many SPACs, SwitchBack is buying a company, ChargePoint, which has an already-proven product and more than $100 million in annual revenues.
ChargePoint seeks to revolutionize the electric vehicle (EV) industry by making vehicle charging a painless, hassle-free experience. So far, its plan seems to be working.
Traders are buying into the story as well; SwitchBack’s shares have surged 32% over the past month. However, it’s worth looking at the fine print before placing a buy order.
A Nifty Business Model
What is ChargePoint’s value proposition? Simply put, the company wants to build the hardware that can replace gas stations. Large dedicated charging stations for electric vehicles haven’t necessarily been a great market fit.
So ChargePoint is trying things a different way. It sells little charging units that you can set up next to each parking space (like parking meters, only for energy). ChargePoint doesn’t buy or sell electricity or deal with grid management or that stuff. It simply provides the charging unit and the software to operate it. The host — such as an employer who puts these units in their parking lot for employees — is then responsible for the electricity and choosing whether end users pay for it or not.
ChargePoint intends to build a large recurring revenue business. By getting its units installed in parking lots and side streets around the nation, it can get a big base. Then it gets to charge a monthly fee for keeping them operating. Needless to say, this could be a huge business if EV adoption is anywhere close to projections.
I Read the Fine Print, It’s Not Good
It’s easy to make a breezy bull case for this sort of stock. Electric vehicles are the wave of the future. Thus, isn’t charging technology an inevitable way to play the trend? A stock like this practically sells itself just listening to the story.
Once you dig in deeper, however, there are a number of glaring issues that emerge. For one, the company is barely getting started. It shipped 32,000 units last year, and generated $147 million of revenues in 2019. Both figures are actually set to decline in 2020 because of the pandemic. The company projects 60% growth annually indefinitely after this bump, but based on the company’s past modest results, this seems excessive.
The valuation, in light of the above figures, is shocking. At the $10 SPAC deal price, SBE was trading for a $3 billion valuation once the deal closes. With shares at $15, this figure has gone up even more. I know we’re in a market where valuation doesn’t matter, but $3 billion+ for $147 million of annual revenues at fairly modest gross margins is still something else.
Counting Chickens Before They Hatch
That’s far from the only issue. In fact, if you turn to page 37 of their Sept. 23 slide deck, you find a true stunner.
ChargePoint lays out a comparable analysis deck of companies it perceives as similar to itself. Some of these comparables, like solar power companies, make sense. Some are a stretch — Tesla (NASDAQ:TSLA) is quite a different beast than ChargePoint, and it’s pretty bold to claim Musk’s empire as a peer business.
However, the real shocker is Peloton (NASDAQ:PTON). In what universe is ChargePoint a comparable company to Peloton? How can you possibly say a fitness company and a car-charging start-up are peers? Needless to say, if you use that much latitude to select your comparable companies, you can flatter yourself in the ensuing analysis.
Even after those carefully-selected peers, there’s more. That’s because — get this — ChargePoint uses 2021 earnings for Tesla, Peloton and other peers and compares them to 2026 project results for Chargepoint. 2026! Of course your stock is going to look cheap if you pencil in five years of incredible growth for yourself while your peers are busy using today’s numbers while fending off a pandemic.
SBE Stock Verdict
A company running a traditional initial public offering (IPO) would not use this brazen of marketing tactics. The Securities and Exchange Commission regulates forward guidance on IPOs pretty heavily, and besides, investment banks don’t want to be the butt of jokes if their underwritten companies fail to perform.
SPACs, however, are the wild west. Regulation hardly exists, and the companies going public can use just about any old trick to make the numbers sparkle. If that includes a nonsensical line-up of “peers” and imagined numbers from the year 2026, why not? With SPACs, it’s all fine.
As such, it’s caveat emptor; buyer beware with all SPACs, especially this one. I don’t hate the business model, but the valuation is stretched and the marketing is overly aggressive. There are also competitive risks. ChargePoint is far from the only charging company out there. And future innovations, such as wireless charging, could make this line of business obsolete in the years to come.
This is a promising company. However, the valuation now is totally detached from anything realistic. Furthermore, management is really putting the best possible spin on its numbers and competitive market position. Once the shine wears off, expect share to trade at a more reasonable price.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.