This has been a year of record number of listings for shell companies or blank check companies. And there have been plenty of SPAC value creators as well. Switchback Energy (NYSE:SBE) stock, which currently trades at $43.60, is among the value creators that deserves mention.
After a surge of 360% in the last six months, Switchback Energy is starting to move lower. However, the stock is worth keeping in the radar for exposure in the range of $30 to $35.
As an overview, Switchback Energy has announced a business combination agreement with ChargePoint. The latter has an electric vehicle charging network and a wide array of charging software and solutions. It’s the business combination news that has sent Switchback Energy stock surging.
Is the upside justified?
I do believe that the business combination will create value. Let’s discuss the factors.
Industry Tailwinds Support Bullish Thesis
As a seller of charging software, stations and services, ChargePoint has positive industry tailwinds for the next decade. It’s a no-brainer that as the number of electric vehicles increase globally, the demand for charging infrastructure will also grow.
To put things into perspective, passenger EV sales (global) is expected at 1.7 million vehicles for the current year. In the next five years, passenger EV sales will increase to 8.5 million. Furthermore, by 2030, EV sales are expected to increase to 26 million. The growth momentum will continue even beyond this point.
A Bloomberg research study shows that investments in EV charging infrastructure is expected to reach $60 billion in the U.S. and Europe by 2030, and $192 billion by 2040.
Given this growth outlook, I am bullish on ChargePoint as a long-term investment. I would look for correction in Switchback Energy stock for fresh exposure.
ChargePoint Is on a High-Growth Trajectory
ChargePoint has been selling EV charging infrastructure hardware and the company receives upfront payment for the initial purchase. In addition, the company’s software solution provides recurring revenue that is “recognized ratably during contract periods.”
With these major revenue sources, the company’s top-line growth is already robust. For 2019, the company reported 60% top-line growth. Further, the company is expecting revenue growth at a compound annual growth rate of 60% in the next five years. Switchback Energy stock has significant upside potential if this long-term target is achieved.
ChargePoint is already a leading EV infrastructure provider in North America. The company is also expanding aggressively in Europe. I will not be surprised if the company makes inroads in Asia in the next few years. Therefore, the company is tapping a big addressable market and the revenue projections look realistic.
Another interesting point on the company’s business model is that recurring revenues will increase over time. In the next seven years, the company expects almost 50% of the total revenue to be recurring. This will provide a clear cash flow visibility. Additionally, as recurring revenue grows, the company expect margins to increase. Last year, the company reported gross margin of 12%. By 2026, the company expects gross margin to expand to 42%.
Therefore, as revenue increases along with an increase in cash flows, I expect Switchback Energy stock to remain in a long-term uptrend.
The Bottom Line on SBE Stock
From a financial perspective, the merged entity is likely to have a cash position of $648 million. This will provide the company will ample financial flexibility for growth in the next 12 to 24 months. With operating leverage acceleration in the next few years, the company is likely to be internally funded for growth.
Overall, the company has a business model that is already delivering healthy growth. A sound business model coupled with secular industry tailwinds makes Switchback Energy stock an attractive investment option.
I would, however, wait for some correction as the stock has skyrocketed in the last six months.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.