It’s good news and bad news for Switchback Energy Acquisition (NYSE:SBE) that investors are looking desperately for the next Tesla (NASDAQ:TSLA) and looking toward SBE stock.
The good news is that ChargePoint, with which SPAC (special purpose acquisition company) Switchback is merging, isn’t competing with Tesla. As a provider of electric vehicle charging stations, ChargePoint in fact should benefit from the growth of Tesla and other EV manufacturers.
And as a derivative play on EV growth, ChargePoint should have not only better profit margins but a clear (if far from guaranteed) path to industry leadership. As a result, I’d rather own SBE stock than an unproven company like Fisker (NYSE:FSR), or the downright questionable Electrameccanica Vehicles (NASDAQ:SOLO).
The bad news is that the rush into EV stocks of all kinds has led SBE stock to a potentially unsustainable valuation. ChargePoint this year expects gross margins of just 24%. Losses will be significant, even on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis. Yet, with SBE stock above $32, the company now is valued at roughly $9 billion.
By the standards of the sector, that valuation isn’t that out of line. In fact, there is a path for ChargePoint to grow into that number. But it’s not a simple path — and that’s still a really big number.
What Makes SBE Stock Intriguing
The presentation released when the merger was announced in September contains 49 slides. One stands out.
That’s slide 11, which is titled “ChargePoint Growth Directly Proportional to EV Penetration.” It highlights a key point in the bull case for SBE stock: it’s a play on the broader EV trend. Investors in Tesla or Fisker or even General Motors (NYSE:GM) don’t necessarily profit simply because electric vehicle growth continues. They need to correctly pick the winner.
That problem is mitigated for ChargePoint. As long as manufacturers sell more EVs — and it doesn’t really matter which manufacturers — demand for charging stations will rise. And ChargePoint is off to a strong early lead in the space. 2020 revenue is guided to roughly $135 million; Blink Charging (NASDAQ:BLNK) has year-to-date sales under $4 million.
And, over time, the business should be nicely profitable. ChargePoint isn’t owning and operating the units. It’s selling the units to third parties like businesses and apartment building owners, known as “site hosts.” From there, it generates high-margin recurring revenue from software and support.
So while gross margins now are unimpressive — forecast at 24% this year — they should get notably better over time. ChargePoint sees a path to 40%-plus by 2024. As that margin expansion continues, operating expenses as a percentage of revenue should come down. EBITDA losses will become net profits, and eventually this should be a very attractive business.
What Goes Wrong
One key problem, however, is that the bull case comes from ChargePoint itself, hardly an unbiased source. And since the company is going public through the SPAC route rather than executing a traditional initial public offering, its disclosure requirements are far lower. As we’ve seen with Nikola (NASDAQ:NKLA), what investors don’t know can seriously hurt them.
So ChargePoint might say, as it did, that it expects $1 billion in revenue once EVs reach just 3% of the cars of the road. It’s difficult for investors, and analysts, to double-check that claim. And, as always in the business world, growth is easier said than done.
Valuation remains a concern as well. Again, ChargePoint has an enterprise value of roughly $9 billion pro forma for the merger. It’s not expecting to hit that $1 billion mark until 2025.
9-times out-year revenue isn’t a bad multiple for a software company. Given that ChargePoint expects gross margins of barely 40%, that’s a simply enormous multiple. And it raises the question of just how much success already is priced in.
After all, operating margins here probably top out at the mid-teens level. Assuming $1 billion in revenue, operating income of $150 million would lead to after-tax earnings per share in the range of 40 cents at most. (ChargePoint should have 305 million shares outstanding after the merger, according to the presentation.)
In other words, SBE stock trades at about 80x 2025 EPS right now, using its own, potentially aggressive, forecasts.
Too Many ‘Ifs’
Again, ChargePoint could grow into that multiple. 25% EV penetration and $8-$10 billion in revenue could lead to over a billion dollars in annual net profit, and a market capitalization in the range of $40 billion to $50 billion. Even if that scenario takes a couple of decades to play out, returns still look attractive from here.
But even that back-of-the-envelope math shows just how much success already is priced in. If the EV industry continues as expected, and if ChargePoint is the unquestioned leader (worldwide, not just in the U.S.) and if profit margins meet its expectations, SBE stock will be a winner.
That’s an awful lot of “ifs.” And so while the case is intriguing, and stronger than other, weaker, EV plays with minimal prospects, after a 200%-plus rally that case is not attractive enough.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.