Switchback Energy Acquisition Corp. (NYSE:SBE) announced on Sept. 24 an electrifying merger with ChargePoint, the electric vehicle (EV) charging company. Since that time SBE stock has been on a tear.
For example, at the time of the announcement the stock was at $12.46 per share, and today it’s at $16.88, up 35.5%. But I suspect it has much further to go, as I wrote in my last article on ChargePoint on Oct. 6.
In fact, since then SBE stock is up 21.4%. I believe that by the time the merger closes the stock will be even higher.
Recent Catalysts
On Oct. 7, 2020, Hayman Capital disclosed a 9.083% stake in SBE stock through a 13-G SEC filing. Hayman Capital is a hedge fund run by renowned Dallas-based investor Kyle Bass.
He is well-known for his shorting subprime mortgages in 2008. In addition, he seems to gravitate to the contrarian style of investing, often going against the trend. For example, at one point he had a huge short trade on the Chinese yuan, according to Bloomberg.
The Bloomberg article also goes at great lengths to point out some of Kyle Bass’s failures as an investor. Therefore, one might assume that just having Kyle Bass as a significant investor in the stock may or may not be a boon.
However, let’s look at the specifics more closely. The 13-G filing indicates that Hayman Capital actually owns 2.853 million shares.
However, if you look on page 33 of ChargePoint’s slide presentation you will see something different. That page shows the total number of shares after the merger closes is 304.9 million. Therefore, Hayman Capital will have just less than 1% of the total post-merger shares (i.e., 2.853 million divided by 304.9 million = 93.6 basis points).
So maybe his stake in the company is not that big a deal after all.
Expected Growth at ChargePoint
ChargePoint expects “hockey stick” growth rates in revenue, according to its own forecasts in the slide presentation. For example, on page 28, the company projects its revenue will climb from $135 million in 2020 to $2.069 billion by the end of 2026.
Therefore, over that six-year period revenue is forecast to spike 15.3 times. That works out to a compounded 57.6% annual rate of growth. That is an incredible spike.
This has very important implications for the SBE stock value (i.e., ChargePoint’s pro forma market cap after merging with Switchback Energy).
Valuing SBE Stock
There simply is no way that the market quite fully realizes this yet. For example, SBE stock has a pro forma market capitalization of $4.9 billion. That is seen by multiplying its pro forma 304.9 million shares by today’s price of $16.11.
However, that means that in six years, assuming SBE stock stays level, the market cap would be less than 1 times sales. There is no way a company experiencing that kind of growth will have a $5.1 billion market value.
So how do we adjust the value and see what SBE stock is worth today?
One way to calculate its value is to use the present value of the 2026 $2.069 billion revenue. Using the present value formula, it works out to 33.5% of the future value using a 20% compound discount rate. Alternatively, the present value is 43.2% of the future using a 15% discount rate.
These discount rates represent the opportunity cost for investors. They can make 15% to 20% on their money if it is not tied up in SBE stock (ChargePoint, post-merger).
Therefore, the present value of ChargePoint’s 2026 revenue is between $693 million (33.5% times $2.069 billion) and $894 million (42.3% times $2.069 billion). Let’s call it $800 million.
That implies that SBE stock, at its $4.9 billion market cap is trading for just 6x revenue. But is this a fair multiple?
Comparing SBE Stock With Its Peers
It turns out that ChargePoint did the peer analysis for us. On page 37 of the slide presentation, it shows that the median EV-revenue multiple of its peers is 6.1x.
In other words, today the stock is fairly valued. However, there are two points of view about this. First, the market does not just stay at fair value. Often it overshoots the value market.
And second, we can forecast the value in one year, and estimate what will happen. For example, using a little math, the present value in one year at 15% is $1.029 billion. That implies that in one year the stock will be at an EV-revenue ratio of just 4.76x.
Therefore, its upside in one year will be 28%. This can be seen by dividing the median multiple of 6.1 times (the median peer multiple) by 4.76 (the present multiple) i.e., 28% higher.
I suspect therefore that SBE stock will continue to rise as the company’s huge spike in revenue plays out over the next several years. This is despite the fact that, at least now, the stock is at fair value.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
