I believe there is a very strong case for buying Switchback Energy Acquisition (NYSE:SBE) in the immediate term. SBE stock appears to be worth purchasing due to a few characteristics it possesses.
The company with which it’s merging, ChargePoint, has sound operational principles and goals. Switchback Energy will undergo a reverse merger with ChargePoint in order to provide the latter company with funding for building EV-charging infrastructure.
Fundamentally, ChargePoint’s business should be strong as the U.S. is clearly adopting EVs quickly. The continued growth of EVs will result in strong demand for the company’s chargers.
Given ChargePoint’s strong outlook and the data regarding the performance of SPACs before they merge, it seems likely that SBE stock has a very good chance to rise in the coming weeks.
EVs and SPACS Are Both Hot
Fundamentally, I believe investors will pour a great deal of money into SBE stock and ChargePoint. Simply put, every company in the EV sector is getting a great deal of attention from the market. So when investors find out that they can get in on an EV infrastructure play by investing in a SPAC, many will likely jump at the opportunity.
Leading the way for other EV names, Tesla (NASDAQ:TSLA) is way up this year,. And it’s clear that EV adoption is strong. As a result, investors will clearly be very interested in EV-infrastructure firms.
And SPACs have been just about as hot as EVs. In Q3 of 2020, a record 30 SPACs raised $30.6 billion. However, the track record of SPACs isn’t quite as great as the enthusiasm for them.
SPACS’ Performance Bodes Well for Switchback in the Near-Term
The 93 SPACs that have merged since 2015 have delivered an average return of -9.6%. IPOs on the other hand, have delivered a mean return of 47% in the same period. However, there is a silver lining for Switchback Energy.
Specifically, in the past two years new SPACs have outperformed those that were launched from 2015-2017. And SPACs have performed better before merging than after they combined with a company.
Consequently, the outlook of SBE stock prior to Dec. 15, when it’s supposed to merge with ChargePoint, is strong. So Switchback’s stock is likely to be profitable in the short-term.
Yet in light of the longer-term data, the shares’ ability to make money for investors after Dec. 15 becomes somewhat murkier.
The Earnings Outlook Could Weigh on the Shares
Investors will want to know how ChargePoint’s financial data looks. Based on the projections provided by the company, we can reach a few obvious conclusions. One is that the firm expects its sales to grow rapidly over the next five years In fact, it projects a compound annual growth rate of 60% from 2021 to 2026.
But the company doesn’t expect its EBITDA to become positive until 2024. It is possible that investors will focus on this negative point more intently after the merger.
SPAC Funding Should Keep ChargePoint Healthy
ChargePoint assumes that it will receive $450 million of net proceeds from the merger. The company believes that it will generate a cumulative EBITDA of -$357 million through 2023. It theorizes, therefore, that its overall cash flow will likely be positive, even though its EBITDA won’t turn positive until 2024.
ChargePoint is the EV-charger leader with 73% of networked Level-2 chargers. The company’s growth opportunity is clear, given that EVs look to be here to stay. The SPAC funding should enable ChargePoint to stay fiscally healthy and maintain its leadership position over the next five years
The Bottom Line on SBE Stock
While many SPAC mergers have proven to be value-destroying,, SBE stock looks different. For ChargePoint is dominant in its niche and is leveraging SPAC funding to fortify that position.
Many other firms with less -than-stellar positioning have utilized the funds they raise from SPACs to fund weak business ideas. ChargePoint is clearly not in that camp.
I think SBE stock will almost certainly rise between now and its merger. I also believe that the shares will remain strong after the merger due to ChargePoint’s powerful business model and the funds. it will obtain from the transaction
Switchback is one of the few SPACs I’ve recently covered that really looks very appealing to me. I think investors who want EV-infrastructure stocks in their portfolios should buy the shares.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.