A colleague of mine at InvestorPlace happened to get an email from a reader suggesting that once the merger between Switchback Energy (NYSE:SBE) and ChargePoint, one of the world’s leading electric vehicle (EV) charging networks is completed, Switchback Energy stock will crumble like a massive piece of blue cheese.
The argument is that the $2.4 billion enterprise value given by the transacting parties in their September press release announcing the deal is extremely ambitious for several reasons, including the fact purchases of charging stations from office business parks have virtually dried up due to a large chunk of office-based employees working from home, some of them permanently.
I must admit, the second-guessing of SBE stock by this particular reader has me revisiting my own opinion on the subject. And that’s tough because I’ve labeled the combination as one of the best SPACs I’ve seen in recent years.
The last time I wrote about Switchback was in early December. My headline read Betting On Switchback Energy Stock Is Like Laying The Field. Essentially, I was suggesting it could move higher post-merger.
In October, I said all the signs pointed to SBE moving higher. It was trading at $15 at the time. As I write this, it’s crossed over $46.
Up 210% in two months, an argument can be made that there are few catalysts to keep SBE moving higher post-merger.
Should you sell? That depends on why you bought it in the first place.
You Bought Switchback Energy Stock to Benefit from SPAC Craze
Regular readers might know that I like to mention Howard Lindzon’s quotes from time to time. Lindzon is a California/Arizona-based fintech investor probably best known for StockTwits.
Lindzon’s blog post today just happened to be about the SPAC craze.
“People of all ages and all backgrounds are handicapping the management teams and the targets of the SPAC’s,” Lindzon wrote.
“Over the last 15 years I have been pitched 100 ‘fantasy stock market’ products and businesses and I am glad I held out for the stock market being the game itself. The market will turn at some point as the supply from all these SPAC’s add a new dimension to the new SPAC Fantasy Stock Market game.”
Not wanting to put words in his mouth, I believe he’s saying we’ve entered “bubble” territory.
The point is it’s okay that you bought SBE because you wanted to get in on the SPAC Fantasy Stock Market game. That’s what makes the markets so interesting. Everybody’s got an opinion–including me.
However, like the movie and real-life story, A Bridge Too Far, sometimes it’s better to take your profits and move on. If you can’t say in a single sentence why you own the stock — other than you want to make money — it’s probably not a good idea to continue holding.
That said, having held for less than a year, you will have to pay tax at a higher rate than long-term capital gains, so keep that in mind.
You Bought Because EVs Are the Future
My InvestorPlace colleague, Josh Enomoto, wrote in mid-December that investors might want to wait for a better economic read before buying into the ChargePoint story.
That’s because the people who are buying electric vehicles at the moment — college graduates with at least a bachelor’s degree — are getting hammered on the employment front.
Josh’s whole argument seems to be that the transition to EVs is the early innings of a nine-inning baseball game. Therefore, to pay 83 times sales [304.9M shares outstanding times $40 share price divided by $147 million in 2019 sales] for a company that’s got several bridges to cross on its journey to EV domination is a hefty price tag for all but the most battle-hardened investors.
While I understand the rationale behind waiting to get a better read on the near-term economic factors influencing electric vehicles’ take-up, I look at the Switchback/Chargepoint merger in the same way investors looked at Tesla (NASDAQ:TSLA) five years ago.
Sometimes, the big picture is so tangible in its future worth that paying a steep price to be a part of it is the right bet.
It will take courage to hold SBE post-merger because there will be plenty of naysayers, whether it be the people who believe EVs will never catch on to those who see the ChargePoint network as second-rate compared to its competitors.
The Bottom Line
In my opinion, ChargePoint’s business model trifecta of hardware sales combined with recurring software and service revenues makes it an eminently scalable business that will be able to pivot with changing technology as the EV industry evolves.
That said, my colleague is correct that SBE stock post-merger will be incredibly volatile.
This is why you ought to take profits if you cannot stand the heat in the kitchen. For aggressive investors, I would take the opportunity to buy more on any steep decline post-merger.
I could be incredibly wrong about ChargePoint, but I don’t think I will be.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.