When it comes to Switchback Energy (NYSE:SBE), it may be best to take a “bird-in-one-hand-is-worth-two-in-the- bush” approach. In other words, now’s the time for the owners of SBE stock to take their profits. Switchback’s shares have soared in anticipation of this SPAC’s (special purpose acquisition company) merger with electric-vehicle (EV) charging company ChargePoint.
Some may think, once the deal is complete, that the shares of the newly-named ChargePoint stock will continue to soar higher. But the past performances of similar EV SPACs isn’t indicative how ChargePoint will perform in the wake of the merger.
Simply put, Switchback has more of a chance of pulling back than rallying further in the near-term. That’s not to say that the shares will quickly fall towards their $10 per share offering price.
But those buying SBE stock at today’s prices will face substantial downside risk. If you bought the shares well below the level at which they’re currently trading, it’s time to take some risk off the table. And those who haven’t bought the shares yet should stay away from them.
Not All That Glitters Is Gold
As I discussed previously, this stock can deliver great returns over the long-term. In today’s EV gold rush, ChargePoint is selling shovels. In other words, it doesn’t matter whether the EV market winds up being dominated by legacy automakers like Ford (NYSE:F) or General Motors (NYSE:GM) or whether established EV names like Tesla (NASDAQ:TSLA), or upstarts like Fisker (NYSE:FSR) or Lordstown (NASDAQ:RIDE) leave them in the dust. No matter who becomes the king of EVs, someone needs to provide the infrastructure that will keep millions of vehicles powered.
And that “someone” could be ChargePoint. At least, that’s the bull case for this company on paper. In actuality, it remains to be seen whether its billion-dollar idea will become a multi-billion-dollar business. With its capital-light subscription-based business model, it’s true that its road to profitability is much clearer than that of other EV plays.
But, as InvestorPlace contributor Will Ashworth discussed in his Dec. 28 column, one of our readers pointed out that the company’s near-term prospects aren’t as bright as they seem. That’s because demand from one of its largest customer segments (office parks) is dropping significantly due to Covid-19.
Sure, if vaccines wind up being the silver bullet that brings us back to the “old normal,” that may be a near-term hiccup for the company. But if, even after the outbreak, the “new normal” of working from home part-time or full-time becomes permanent, ChargePoint’s long-term growth potential could be severely limited.
And that isn’t the only reason to be concerned about the company. Given much of the stock’s gains have to do with the “EV bubble,” rather than ChargePoint’s fundamentals, the fortunes of SBE stock could reverse if this investing trend runs out of steam in 2021.
A Continued “EV Bubble” May Not Be Enough
It’s tough to predict when this year’s “EV Bubble” is going to pop. Even as the sector’s valuations appear to be stretched, investors have been able to find reasons to make the sector go parabolic yet again.
For example, the U.S. Presidential election results made the sector’s stocks climb. But it remains to be seen whether President-elect Biden’s pro-EV policies will accelerate the shift to EVs.
This continued speculative frenzy, not the underlying fundamentals of Switchback stock, has been the shares’ primary driver in 2020. It’s far from guaranteed that the EV bubble will finally pop in 2021. But if it does, expect the shares to fall below today’s prices.
If the aforementioned decrease in office park demand negatively impacts the company’s results going forward, expect even greater declines by the shares. And if ChargePoint’s growth takes a hit, it won’t matter if the EV bubble continues. As seen with Nikola (NASDAQ:NKLA), even during a bubble, a particular stock in the popping sector can nonetheless head lower on bad news.
Sure, with the closing date of ChargePoint’s merger with Switchback set for Jan 27, there’s still time for speculators to bid up the shares ahead of the closing. But the additional gains will be minimal compared to investors’ potential losses if enthusiasm for this stock reverses course in the coming months.
The Bottom Line on SBE Stock
Investors who have ignored the Switchback bears and let their bets ride have won big with Switchback stock. But, as discussed above, there’s no clear path to success with this company and its merger partner, ChargePoint.
Given the aforementioned red flag regarding ChargePoint’s revenue from office parks, coupled with the stock’s dependency on the EV bubble, the risk of the shares heading lower vastly exceeds their potential for further big gains in 2021.
So, if you own Switchback Energy’s shares today, take profits, pronto. Otherwise, steer clear of the name for now.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single-stock analysis columns since 2016.