When I last wrote about Switchback Energy (NYSE:SBE) stock, I discussed how a “wait and see approach” may be best with this SPAC (special purpose acquisition company). Sure, it’s upcoming merger with EV infrastructure play ChargePoint could be a game changer. But, after a nearly four-fold increase from its offering price, it’s debatable whether shares can head higher after the deal closes Dec 15.
How’s that the case? With its acquistion target projected to grow 60% per year until 2027, and strong business model, it seems like a no-brainer to buy this stock. However, with its rapid rise since election day, these factors may already be priced-into shares. Additional near-term gains may not be in the cards.
So, what’s the play now, as shares head towards $40 per share? While the long-term case for Switchback (soon to be ChargePoint) remains strong, in the near-term shares aren’t as appealing of an opportunity. But, if this stock, or EV stocks in general, sell-off from here, consider it the perfect time to enter a long-term position.
Why SBE Stock May Stall Out Ahead of the ChargePoint Merger
Just like with other EV stocks, there’s a big risk of buying now, while the sector-at-large remains in the midst of a bubble. Sure, with catalysts like Pro-EV candidate Joe Biden winning the White House, there’s plenty to keep the “EV bubble” in motion. Yet, all bubbles, no matter how strong the underlying fundamentals, come to an end. If you don’t believe me, just ask those who bought near the top during the “Dotcom bubble.”
But, with this particular name, there’s another factor at play. That would be investors buying it now, out of fear they’ll miss out on a post-merger pop in SBE stock. Given how well EV plays like Lordstown (NASDAQ:RIDE) stock have performed after their SPAC mergers, it’s easy why others want a chance to profit from this trend.
Yet, what if it was an overall bull market in EV stocks, not the merger close itself, that produced the strong short-term gains? For example, you can argue that Lordstown’s post-deal rally had more to do with “EV Mania’s” second wind post-election. With its deal completed in October, great timing hid the fact it was outside factors that drove its November gains.
With SBE stock, shares have already rallied significantly since election day. But, in recent days, shares have held steady just under $40 per share. With investors fully pricing-in the merger, we may not see additional gains going forward.
So, what does that mean? At today’s prices, not a great opportunity. But, that doesn’t mean its not a great buy at the right price.
A Great Long-Term Opportunity on A Pullback
I may be cautious about buying SBE stock in the near-term. But, if it falls back from here, consider it a great long-term opportunity. Why? While the jury’s still out on the many electric vehicle makers aspiring to be the next Tesla (NASDAQ:TSLA), ChargePoint has a much clearer growth story.
What do I mean? It’s a bit like that old adage, “when everyone’s prospecting for gold, sell shovels.”
In other words, it doesn’t matter whether Tesla, upstarts like Fisker (NYSE:FSR) or Lordstown, or even legacy auto makers like Ford (NYSE:F) or General Motors (NYSE:GM) dominate the EV scene a decade out. As long as electric vehicle adoption comes in line with projections, skyrocketing demand for charging stations will mean good times for this EV charging supplier.
But, it’s not just blockbuster demand that makes this an attractive long-term opportunity. As our own Matt McCall put it last month, the path is clear for ChargePoint “to grow into a nicely profitable business.”
How so? Instead of operating charging stations, the company sells them to “site hosts,” who pay an upfront fee for installation. But, after that? They pay recurring software and support fees. In essence, it’s a capital-light subscription business.
Bottom Line: Don’t Chase Switchback Ahead of December 15 Deal Close
The problem with Switchback stock today isn’t its soon-to-be underlying business. What do you get when you couple strong demand, with a solid business model? All the ingredients to make this stock a potential long-term winner.
The problem? Shares have moved up too far, too fast. With much of its prospects already priced-in, there’s isn’t much value in buying now. Sure, some can make the case this stock will take off post-merger, just like Lordstown did after it’s SPAC deal.
However, investing trends that worked in 2020 may not work again in 2021. So, what’s the call with SBE stock? Don’t chase it ahead of the ChargePoint deal close on Dec 15. Instead, take your time. If EV stocks sell-off in the coming months, this strong opportunity may fall back to a more reasonable entry point.
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 since 2016.
