A month ago, I wrote that Switchback Energy (NYSE:SBE) stock, while expensive, had a shot to provide solid long-term returns. Since then, Switchback Energy rallied more than 11%.
And at this point, the valuation is getting close to ridiculous. Electric vehicle charging station provider ChargePoint, with which SPAC (special purpose acquisition company) Switchback is merging, now has a pro forma market capitalization over $13 billion. (Switchback has estimated that once the merger closes, there will be 305 million shares outstanding.)
It is exceedingly difficult to justify that kind of valuation. The question is if, and when, that will matter.
A 200%-Plus Rally
On Oct. 30, Switchback Energy stock closed at $13.23. The stock had seen a reasonably swift pullback, dropping 18% in seven sessions, but that aside the price didn’t see notably out of line. After all, ChargePoint had agreed to merge with Switchback in September at a price of $10 per share.
Since then, in less than three months, SBE has gained 210%. The question is why.
It’s hard to pin down, truthfully. ChargePoint hasn’t disclosed any news that’s particularly noteworthy. Switchback itself is just a shell company.
An SBE bull could point to the elections in early November as a catalyst. The win by Democrat Joe Biden ostensibly is bullish for EVs in the U.S. But that case seems thin.
A Biden win was widely expected (by the betting markets as well as the again-unreliable polls). In fact, it was believed that Democrats were likely to sweep all three branches of government. After the run-offs in Georgia, the more pro-environment party will have narrow control of the U.S. Senate, with a single defection able to block any major legislation.
The answer seems to be that the rest of the market has gone nuts. EV stocks of all kinds, and particularly EV-related SPACs like SBE, have soared. Small-cap stocks have been on a tear. Anything with growth potential seemingly has gone parabolic or close, no matter the valuation. Switchback Energy stock has not been an exception.
Another Bubble?
As I’ve written before, I saw the peak of the dot-com bubble first-hand through 1999 and early 2000. And since then, I’ve bristled at comparisons to that time.
Honestly, I’m not bristling anymore, and Switchback Energy stock is an example why. A 200% rally in three months on no news (at least, no unexpected news) is not normal. It’s not healthy. And it’s not sustainable.
To be clear, this is not to say that ChargePoint is a fad, or akin to Pets.com and the other dot-com names of the late 1990s. But the late 1990s bubble wasn’t built solely, or even mostly, on weak companies.
Indeed, the telecom bubble was broader and larger. Meanwhile, at the peak, the most expensive and most valuable names in the market included Cisco Systems (NASDAQ:CSCO), Oracle (NYSE:ORCL) and EMC, which is now part of Dell Technologies (NYSE:DELL). Qualcomm (NASDAQ:QCOM) was the 30th-most valuable company in the world.
Those are some of the best tech companies of the past two decades. Cisco and Oracle still have market capitalizations well below their March 2000 levels. As recently as April, Qualcomm sat below its peak.
Simply put, those companies delivered on their potential. Their stocks did not, because the valuations had run too far.
Switchback Energy Stock Goes Parabolic
At $40, SBE stock is running into a similar problem. This is a company that, in its merger presentation, estimated revenue of $1 billion once EV penetration reaches 3% of cars on the road. The industry is a long way from that goal, given that EVs represented less than 3% of new car sales last year, leaving tens of millions of ICE (internal combustion engines)
That estimate is precisely that: an estimate. And since ChargePoint is going public via the SPAC route instead of via a traditional initial public offering, it can make such a claim with less verification and lighter disclosure. EV investors should have learned from Nikola (NASDAQ:NKLA) the dangers posed by such thin disclosures.
Even assuming the estimate is correct, SBE stock is trading at more than 13x a revenue level that’s likely five to seven years in the future. Given gross margin targets in the range of 40% to 45%, it’s valued at something like 30x gross profit on the same basis.
Those are massive multiples, even in a market that’s soared to new highs this year.
And they’re even more massive than they were two months ago, due to a rally that seems to have little justification beyond widespread investor optimism. In that context, the rally looks questionable at best. ChargePoint might succeed, but that no longer makes SBE stock a buy.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
