Switchback Energy (NYSE:SBE) plans to close its merger with ChargePoint, the national electric vehicle (EV) charging station company, by the end of December. Although no meeting seems to be scheduled to vote on the closing, investors might want to get in on SBE stock before then.
It is likely to move a good deal higher by the closing of the merger.
One of the main reasons is that ChargePoint is forecast to grow quite significantly. The most important point to focus on about ChargePoint is that its growth will reflect the growth in EVs.
For example, ChargePoint shows on its new Nov. 17 presentation a chart forecasting the “hockey stick” growth rate in EVs.
In fact, on page 47, ChargePoint forecasts revenue to skyrocket from $135 million in 2020 to $2.069 billion in 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.
Moreover, on page 51 of the presentation, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) will hit $360 million by 2026. That would give it a normalized 16% adj. EBITDA margin on sales.
This has very important implications for the SBE stock value (i.e., ChargePoint’s pro forma market cap after merging with Switchback Energy).
A Closer Look at SBE Stock
For example, based on page 33 of ChargePoint’s original Sept. 23 presentation, there will be 304.9 million shares outstanding after the merger closes. Therefore, at today’s price (Dec. 1) with SBE stock at $30.23, the pro forma market capitalization of the combined company is $9.2 billion.
Discounting that to the present at a 15% discount rate, that works out to 43.2% of that number, or $3.985 billion. After deducting $684 million in cash, the pro forma enterprise value is $3.3 billion.
We can use that number to judge whether SBE stock is a bargain.
Valuing Switchback Energy / ChargePoint Stock
Using the same discount rate the 2026 revenue works out to $894 million in today’s dollars. Therefore, the enterprise value-to-sales ratio is just 3.69 times. This is the result of dividing $3.3 billion EV by $894 million in sales.
That is not a very high ratio in today’s market where it is not uncommon for stocks to have EV-to-Sales ratios that are in the high 20’s to low 30’s.
However, calculating the adjusted EV-to-EBITDA ratio results in a ratio of about 21 times. That is about fair value for a high growth stock.
Therefore, I suspect that ChargePoint could rise another 50% to 60% or so and not be overvalued. For example, a 50% higher market cap would put its EV-to-Sales ratio at just 5.9 times (i.e. $5.29 billion EV divided by $894 million in sales). A 60% higher market cap would essentially double its EV-to-sales ratio to 6.37 times (i.e., $5.69 billion EV divided by $894 million in sales).
Moreover, the EV-to-adj. EBITDA multiple rises to about 34 times, which is definitely high, but not out-of-the-question.
Let’s call it an upside of 55%, the midpoint between 50% and 60% higher. Therefore, SBE stock is still worth $46.86 per share, 55% higher than today’s price.
What to Do With SBE Stock
Neither TipRanks.com nor Marketbeat.com report on any analysts’ reports on this stock. Therefore there does not seem to be any sell-side target price.
This is a good thing. It means that once the merger closes, there will likely be a flurry of reports on ChargePoint as it “lists” on the NYSE. This is despite the fact that SBE stock is already listed on the NYSE. The symbol change (no symbol announced yet) and the merger is actually a reverse merger with ChargePoint, the latter taking over control of SBE.
In other words, this will be a major catalyst for the stock to reach its inherent value. I have shown that this is at least 55% higher than today.
And don’t forget the main slide in ChargePoint’s presentation on page 8 (see above). The growth rate in charging stations will reflect the growth rate in EVs. Both are expected to skyrocket over the next six years.
Therefore, that is what investors and sell-side analysts are going to focus on going forward. They are not going to be constrained by notions of fair value. For example, SBE stock could easily double from here after the merger closing and move into more-than-fair value territory.
So, here is the bottom line. Investors will likely do well to buy SBE stock before the deal closes by the end of Q4 or shortly thereafter.
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.
