Switchback Seems Fully Valued Ahead of Its ChargePoint Merger

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Switchback Energy Acquisition Corp (NYSE:SBE) stock seems fully valued as its merger with ChargePoint, the electric vehicle charging company, closes this month.

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

It is possible the stock could rise another 10% to 20%, based on higher multiples and growth prospects. But so far SBE stock looks as it is at fair value.

Keep in mind that the market believes the merger with ChargePoint is going to be an electrifying winner. However, by my calculations, SBE stock seems to fully incorporate most of the growth prospects.

That is, unless the market decides that the company’s revenue projections are too conservative. In addition, it’s possible the market could decide to give SBE stock a higher multiple.

For example, this could occur once ChargePoint releases its fourth quarter and 2020 revenue numbers showing higher than forecast growth. Or, it could revise its future revenue forecasts.

Let’s investigate this further.

ChargePoint’s Hockey Stick Growth

ChargePoint expects massive growth in revenue from its charging stations in its near future. This “hockey stick” growth can be clearly seen on Page 11 of the ChargePoint slide presentation.

It shows that ChargePoint’s stations will scale up very quickly over the next six years to 2026. It will clearly follow the pattern of EV adoption by the driving public. For example, some estimate that by the year 2035, over half of all car sales will be EVs.

ChargePoint says that its growth will be “directly proportional to EV penetration.” Page 27 of the presentation shows that revenue is forecast to rise over 15-fold from $135 million in 2020 to $2.069 billion in 2069. That works out to an amazing 57.6% average annual growth rate compounded each of the next six years.

But the problem is that ChargePoint/SBE stock has a pro forma $12.9 billion market capitalization at its current share price. That valuation seems to take in much of this growth.

Here is why.

Valuing the Deal

Let‘s assume that we discount the future revenue by 15% annually, and then put a 10x revenue multiple on that present value.

Therefore, using a 15% discount factor, the present value over six years will be 43.2% of the 2026 revenue number. This means the present value of $2.069 billion in revenue from 2026 is worth $894.5 million today.

Typically, the market will use a 10x multiple for a fast-growing company. For example, that seems to be the average of a number of EV stocks.

Therefore, the market value for ChargePoint should be $8.945 billion (10x $894.5 million in 2026 revenue at its present value). Since there will be 304.9 million shares outstanding (see Page 33 of the presentation), ChargePoint / SBE stock should be worth $29.34 ($8.95 billion divided by 304.9 million shares).

On Page 35 of the presentation, SBE estimates that ChargePoint, compared to its peers, is worth between $4.115 billion and $9.258 billion in enterprise value. So, our valuation of $8.95 billion is near the top end of that range.

Even if we use ChargePoint’s $9.258 billion peak valuation from the presentation that works out to $30.36 per share. However, that is still $13 below the stock price today of $43 per share.

So, what is going on here? Is SBE stock too high or does the market believe that a higher valuation is more appropriate? This might be the case, as I mentioned above, if the market believes that EV adoption will occur at even a faster annual growth rate than ChargePoint’s forecast of a 57% average annual growth rate.

What To Do With SBE Stock

Remember earlier I wrote that revenue is forecast to grow 15.3x over the next six years. So maybe we should use a price-sales multiple of 15x, not 10x to value ChargePoint/SBE stock.

Therefore, 15x $894.5 million equals a pro forma market cap of $13.684 billion. With 304.9 million shares outstanding, that works out to a target price of $44.89 per share.

In other words, the high point value for SBE stock is $44.89 assuming a 15x multiple. This is close to today’s price.

Moreover, if the market believes that revenue growth will be greater than 15x over the next six years, it might also increase the multiple on ChargePoint/SBE stock. For example, at 16.5x or 18x revenue, this could add in another 10% to 20% to the valuation for SBE stock.

In other words, there is some room to believe that SBE could be worth 10% to 20% more. But keep in mind the stock still seems to be fairly valued here.

On the date of publication, Mark R. Hake has a long position in Switchback Energy Acquisition Corp (SBE).

Mark Hake runs the Total Yield Value Guide which you can review here.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.


Article printed from InvestorPlace Media, https://investorplace.com/2021/01/sbe-stock-might-be-fully-valued-chargepoint-merger/.

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