Up until mid-September, Switchback Energy Acquisition Corporation (NYSE:SBE) traded at around $10 per share. At that time, SBE stock shot higher as its trading volume surged. Investors’ interest in the shares grew sharply after Switchback’s reverse merger with ChargePoint, which operates an electric-vehicle charging network.
After Switchback’s stock climbed 31% in the last three months, should investors buy the shares of this special purpose acquisition company (“SPAC”)?
SBE Stock Has Been Rallying
SBE is a SPAC. According to Reuters. a SPAC is “a shell company that uses IPO proceeds, together with debt, to acquire another company, typically within two years. Investors are not notified in advance what the SPAC will buy.” Circumventing the initial public offering process saves time and gets the company’s shares in the hands of the public on a predetermined timeline.
Switchback Energy’s shares have climbed in the last few months as investors have bet that ChargePoint will be more valuable in the future.
EV charging networks are becoming more highly valued by investors. For example, Nio (NYSE:NIO) stock has likely been boosted by the automaker’s Battery-as-a Service which it launched in August. This made its EVs more affordable for consumers.
More importantly, it has enabled Nio’s customers to conveniently swap their used batteries for fully-charged batteries. As a result, the owners of Nio’s vehicles no longer need to wait a long time for their vehicles to recharge.
Tesla’s (NASDAQ:TSLA) nearly seven-fold rise from its 52-week lows indirectly sparked investors’ interest in charging networks. As the company sells more EVs, its national charging network becomes more valuable.
ChargePoint Is Worth Over $2 billion
ChargePoint’s reverse-merger deal is reportedly worth over $2 billion. Since Switchback has a market capitalization of $530 million, the stock has an implied return of nearly four-fold, or 400%. The math looks simple enough. But it also looks too good to be true. Do SPACs, which restructure the stock, create value out of thin air?
The deal between Switchback and ChargePoint may collapse at any time, sending SBE stock back to $10 or lower. Investors who bought the stock at around $16 would instantly lose 66%. Conversely, the reverse merger may go through, quickly raising the value of the shares to over $2 billion.
ChargePoint was founded in 2007. It closed a funding round that raised $127 million and valued ChargePoint at $1.37 billion. After the company goes public, the markets may believe that the company is worth more than that. It would benefit from higher liquidity as a publicly-traded company, and the EV hype that started months ago will attract many investors.
Risks
The hype of EVs and EV charging networks is coming to an end. Nikola (NASDAQ:NKLA), accused by a short-seller of being fraudulent, is a red flag for the sector. Trevor Milton, the prominent ex-CEO of Nikola, abruptly resigned from the company and vanished from Twitter. Its rise and fall is a stark reminder that some bubbles are too good to be true.
InvestorPlace contributor Joel Baglole warned that a glut of fully electric cars and trucks will occur between now and 2025. So investors need to watch out for increasing competition in the sector. ChargePoint will need to raise more cash in the future and increase its capital expenditures to stay ahead of the competition.
And while its revenue could grow sharply as global EV charging infrastructure expands, its costs may increase at a faster rate.
In that scenario, ChargePoint could end up reporting losses for at least several quarters.
Key Challenge
Remaining dominant in software, networking, and services is critical to ChargePoint’s business model. Most of its revenue comes from hardware sales, as Greentech Media reported last month.
It also has some recurring software and services revenue. But only a small percentage of its total sales is recurring, and that proportion will need to grow for the company to become truly successful. ChargePoint needs recurring revenue growth because such sales are more predictable.
Such a development would boost SBE stock.
The Bottom Line on SBE Stock
Switchback is a highly volatile stock that will reward investors as long as markets give EV companies high valuations. If that changes, steer away from this stock.
And if SBE stock rises, keep holding it until its market capitalization nears $1 billion.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
