When electric vehicle charger firm ChargePoint said it would go public through a $2.4 billion reverse merger with Switchback Energy Acquisition (NYSE:SBE) on Sept. 24, markets did not react at first. By last month and ahead of its public listing, the buying frenzy intensified. The SBE stock price almost quadrupled.
More recently, Citron’s bearish tweet slowed the bullish momentum on Blink Charging (NASDAQ:BLNK).
Although Citron shared an optimistic view on SEB stock, should investors buy the shell company at this time?
SBE’s ChargePoint has the ambition to advance its EV charging network reach across North America and Europe. Similar to Xpeng (NYSE:XPEV) and Nio (NYSE:NIO) having a public charging infrastructure, SPE’s increasing scale will lift its revenue. Still, the two Chinese EV firms have cooperated to share the EV charging network. This will lower operating costs.
SBE is in the early phases of investing the $493 million in net proceeds to develop its commercial, fleet, and residential businesses.
Pasquale Romano, ChargePoint’s CEO, said, “We’ve pioneered networked charging and are resolute in our aim to usher in the transition to mass EV adoption by electrifying one parking spot at a time.”
The company is not a start-up. It is a 13-year-old company that is mature.
Since the firm uses contract manufacturers, it is light on capital. And because it does not own the chargers in its network, markets may view the company as a software firm in the EV business.
The firm earns its revenue from selling hardware and software needed to charge EVs. As subscriptions grow, the recurring revenue increases, too.
Wall Street Coverage and SBE Stock
On Wall Street, only one unrated analyst issued a “buy” rating and a $50 price target, according to Tipranks. Unfortunately, as a newly listed merge firm, investors do not have any data to base a fair value on the stock. For example, the stock has a weak quality score due to its low return on assets and return on equity:
| Profitability | |||
| Stock | Industry | S&P 500 | |
| Quality Score | 29 | 19 | 79 |
| Gross Margin | – | -5.30% | 28.80% |
| Operating Margin | – | -17.90% | 12.30% |
| Net Margin | – | -21.20% | 7.40% |
| Return on Assets | -0.20% | -3.60% | 5.90% |
| Return on Equity | 0.20% | -4.30% | 24.20% |
| ROIC | 0.20% | -503.20% | 14.90% |
Investors may only speculate on future revenue growth for SBE stock in the coming quarters. The investment community is highly bullish on electric vehicle and battery charging infrastructure stocks. Until that sentiment shifts dramatically, Switchback will probably outperform the market.
Just as companies in the biotechnology, technology, or EV space take advantage of its high stock price, Switchback may do the same next. A stock sale would dilute shareholders while increasing its cash on hand.
The company may want to build up its cash levels in case the market crashes. If speculators become cautious, Switchback may not tap the stock market for cash.
The company has low capital expenditures for hardware and infrastructure but will need to spend on software development. Engineers and staff talent will not come cheap. As demand intensifies for growing its team with qualified workers, costs will rise.
Risk
The short float against Switchback is very high at almost 20%. Bears are betting that the over $1 billion market capitalization is unjustified.
Conversely, any buying momentum-based only on sentiment or hyped news would send the stock higher. Short-covering would intensify that buying activity, lifting the stock further.
Since volatility will increase because of a strong interest in EV network stocks, having an overly bullish or bearish bet on Switchback is highly risky.
Sell the stock if the stock reverses, realizing the paper gains. And consider buying the stock on a sharp dip, betting on a near-term rebound.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
