Switchback Energy Will Rise Even Though Valuation Lends Caution

Switchback Energy Acquisition (NYSE:SBE) stock is still one to buy. Looking at the price charts, we can see that SBE shares have been vacillating between high $30s to mid-$40s since the beginning of December. It does look like markets may be settling on a price in that range for shares.

a chargepoint charging station

Source: Michael Vi / Shutterstock.com

And this makes a lot of sense when the numbers are followed to their logical conclusion. However, I believe that in 2021 and 2022, the same market forces that bid up all things EV will shift.

This isn’t to imply that all things EV are going to pop. I don’t think that will be the case. Rather, I think capital is going to realign with certain EV subsectors. Not only do I think that SBE stock will be spared from the negative implications thereof, I actually believe it is going to benefit.

Valuation of SBE Stock

Judging an individual stock’s merit is part objectivity, part subjectivity. One of the more common methods for established stocks is judging them using price-to-earnings (P/E) ratio measured against a set of accepted peers. This is very reasonable and relatively reliable when done using firms with established track records. 

Likewise, valuations for single stocks can be undertaken using internal metrics and accepted methods. The resultant number is called fair value. This is the objective value of a stock. 

InvestorPlace’s Mark Hake recently ran a set of numbers based on accepted assumptions regarding SBE stock. His conclusion was that in the best case scenario, one in which SBE stock is afforded a price-to-sales (P/S) multiple of 15x, it has a fair value of $44.89 per share. 

So, it makes sense that SBE shares have been trading between $38 to $45 in the past month. Objectively speaking, there’s little reason to assume anything else should occur. 

The EV Market Isn’t Objective

2020 will be remembered as a watershed year for EVs. Tesla (NASDAQ:TSLA) really and truly assumed its position as a dominant force. Basically, shares went from around $100 in early 2020 to well over $800. In a sense it is warranted: Tesla is a revolutionary force and now has established a dominant market position. It wouldn’t be a stretch to assume that Tesla will be to the twenty-first century what Ford (NYSE:F) was to the twentieth. Even with its current P/E ratio of 1,677 it’s clear that Tesla is still a stock to own. 

Nio (NYSE:NIO) made similar waves and could easily become the Tesla of China. These two companies are not going anywhere. I keep saying this when I talk about the EV market. They are actually selling vehicles and have dominant positions. Buy them. 

I believe these are logical choices. However, I believe that all of the capital that rushed into SPAC-funded EV after SPAC-funded EV in 2020 was far from logical. I see it moving toward a few key areas in 2021. And SBE — yes, this is still an article about SBE, despite my tangent — will benefit. 

Realignment of Capital

There is lots and lots of capital in EVs. I don’t think that’s going to change. The aggregate funding is simply going to direct itself to more logical areas this year and next. 

That capital is currently going toward Tesla and Nio. They are real EV companies with tangible results. EV capital will realign toward legacy manufacturers as they start to deliver EVs. Only a few of the SPAC-funded EVs will succeed. There will be a capital flight from them. 

That means suppliers to the EV industry will gain traction as investors look for other EV plays. And it also means the infrastructure EVs will heat up. Specifically SBE, because it actually has a business and not simply the promise of a business. 

I believe SBE stock is going to trade above that 15X price to sales multiple mentioned earlier. Will it trade at the 31x price to sales multiple afforded to Tesla? No, that seems highly unlikely. But let’s say it reaches a 20x P/S ratio. That would mean that shares appreciate by 33%.

ChargePoint has the lead in market share, capital is going to flow toward it and it will receive a premium in price. There’s good reason to believe markets will reward SBE shares with such a premium moving forward. 

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

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.” 

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/switchback-energy-will-rise-even-though-valuation-lends-caution/.

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