Switchback Energy Stock May Be Getting Too Frothy Here

One of the most significant news items of this year occurred far away from us in Norway. There, 56% of all automotive sales were battery electric vehicles, which is a startling ratio. As well, Volkswagen (OTCMKTS:VWAGY) removed Tesla (NASDAQ:TSLA) from the top spot in the Scandinavian country. This suggests robust appetite for EVs, not a particular brand, which bodes well for Switchback Energy Acquisition (NYSE:SBE) and SBE stock.

a chargepoint charging station
Source: Michael Vi / Shutterstock.com

On course to merge with EV charging solutions company ChargePoint, Norway’s successful push to eliminate the international combustion engine theoretically provides shareholders with much-needed confidence.

After all, SBE stock has been tremendously profitable over the past few months yet the ride itself has been wild. Further, a worrying series of negative sessions since late December probably had many questioning their resolve.

Interestingly, according to CNN Business, automakers consider Norway as a testing ground for gauging consumer appetite for their EVs. Since the country is a global leader in replacing combustion cars with electric ones, companies can better understand whether a particular EV will resonate before investing too much money into launching in a big market, like the U.S.

Of course, Tesla fans may not consider the above news encouraging. However, with Volkswagen able to unseat what has been a dominant global brand, it demonstrates that EV demand isn’t based on the cult of personality of Tesla CEO Elon Musk.

In turn, this should encourage other traditional automakers, thus accelerating EV sales. And accelerated EV sales would logically benefit SBE stock.

Further, ChargePoint is making inroads with apartment and condominium complexes, which is a win-win solution.

For landlords and homeowners’ associations, charging stations provide an additional revenue source. On the tenant/owner side that previously didn’t have access to home charging, suddenly, EVs have become a viable solution.

Therefore, expanding the addressable market would make SBE stock even more attractive. This is a no-brainer investment, right? Well, it’s not quite that simple.

For SBE Stock, the EV Equation Needs a Bit More Work

On paper, EV adoption makes sense on multiple levels. Besides their zero emissions, EVs have fewer moving parts, which makes them more reliable, all other things being equal. There’s less BS to deal with, such as routine oil change services. And they can be blisteringly quick, depending on the model, which should appeal to performance enthusiasts.

Despite so many advantages, the integration of EVs broadly has been disappointing, if we’re being intellectually honest.

For instance, Bloomberg New Energy Finance shows that EV battery pack costs have come down nearly 65% between 2015 and 2020. However, EV unit sales have increased globally to 2.3 million from 580,000 in 2015. And the increase in sales between 2018 to 2020 was “only” 10%.

To me, this suggests that EV sales have started to mature, even though they’re incredibly young compared to combustion cars. Obviously, a maturing market wouldn’t be helpful to SBE stock, which is priced like a growth play.

But what about the Norwegian boom in EVs? Doesn’t that indicate huge potential demand for SBE stock?

Looking into the details, Norway “has been using tax breaks to increase sales of electric cars for decades. Oil revenue helped build the country’s $1.3 trillion sovereign wealth fund, which is now embracing renewable energy and dumping oil and gas stocks.”

That, according to the Norwegian Electric Vehicle Association, makes EV “models cheaper to buy than similar petrol models.” In other words, we may want to take Norway’s example with a grain of salt.

Closer to home, the Wall Street Journal reported that “most consumers need coaxing to buy. When Georgia ended its $5,000 state tax credit in 2015, sales of electric vehicles fell 89% in two months. EVs have been on the market since 2010 and are still only about 0.5% of total vehicle sales.”

I wouldn’t dismiss this as an isolated incident as global sales in light of declining battery costs have not been encouraging.

What Will the Government Do?

Part of the incentive in buying EVs is that you don’t have to deal with taxes. Typically, when you pump gasoline into your car, you’re not just paying for the commodity but also for various taxes and fees that the state and federal government wish to impose.

However, being that the government doesn’t let any good deed go unpunished, you know that it will find a way to make life miserable for EV owners sooner or later. Indeed, a Consumer Reports article noted that more states are hitting EVs with higher fees. In some cases, they’re higher than gas taxes, disincentivizing the environmentally friendly platform.

Unfortunately, this brings up a key vulnerability for SBE stock: the underlying business depends on another business, that of convincing average-income folks (the majority of the U.S.) to buy EVs. As ample evidence shows, high EV sales are dependent on government subsidies and incentives.

What happens when that market dries up? Because of the uncertainty of the answer, I believe it’s better to wait for a better price for SBE stock. I like the potential, don’t get me wrong. But the reality of the situation doesn’t favor taking a risk at these elevated valuations.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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