Switchback Energy Acquisition (NYSE:SBE) announced on January 11 that it would hold a special meeting in mid–February to approve its combination with ChargePoint, operators of one of the world’s largest electric vehicle (EV) charging networks. Owners of SBE stock have been waiting for this day.
As Switchback Energy’s big day fast approaches, the question for existing shareholders is whether they should sell SBE stock before the February 11 vote or let it ride well into 2021?
Trading at $42.51, more than four times its July 2019 IPO price, there’s no question an argument can be made that SBE is an example of “buy on rumor, sell on the news.”
Those who haven’t bought into the SBE/ChargePoint story just yet, but believe in the whole EV trend, might be wondering if its stock has any gas left in the tank.
In less than a month, we’ll find out. In the meantime, let’s look at who should buy and who should sell, and why.
Sell SBE Stock
As I said in the intro, SBE is up 325% as I write this, an annualized return of almost 220% over almost 18 months as a public company. If you bought shares at the IPO, I don’t think anyone would hold it against you if you cashed in your chips now, given the short-term capital gains tax is not in the picture.
So yes, regardless of valuation, taking profits at this point in the proceedings would be considered a rational act.
The valuation argument is a second compelling reason why you might want to sell at this point.
Several of my InvestorPlace colleagues have made arguments in recent days and weeks why SBE is overvalued. Our own Vince Martin put it quite persuasively.
“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,” Martin wrote on January 8.
“The industry is a long way from that goal, given that EVs represented less than 3% of new car sales last year. . . 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.”
As I stated in my most recent article about the SPAC at the end of December, SBE isn’t cheap at 83 times ChargePoint’s 2019 sales. In the weeks since, that’s only gotten worse.
If you’re a value investor, there’s no possible way you can justify owning this stock, and I’m pro-Switchback/ChargePoint.
It’s Time to Buy
InvestorPlace’s Joel Baglole recently discussed how the uncertainty surrounding the actual voting date for SBE shareholders approving the ChargePoint merger took a massive bite out of its share price leading up to Christmas.
Trading at $50, it lost 25% of its value to close out the year, bottoming at $36 on January 5. It has since regained about 50% of those losses through January 12.
As I do, my colleague believes the potential opportunity is so great for ChargePoint that patient investors, despite the obvious volatility — which isn’t going away anytime soon — will be rewarded down the road.
“With ChargePoint set to make its market debut in a few weeks, current shareholders of SBE stock would be well-advised to hold onto it until the SPAC deal is concluded,” Joel wrote on January 4.
“At a minimum, shares of ChargePoint can be expected to pop when they begin trading in New York. Investors who want exposure to the electric vehicle market, and who have a long time horizon, should view SBE shares as an attractive buying opportunity at their current price ahead of the merger with ChargePoint.”
When Joel said this, SBE stock was trading near its short-term bottom. Now into the low to mid-$40s, the value proposition isn’t quite as attractive.
While I think SBE stock could revisit the $30s post-merger, if you haven’t bought yet and are an aggressive investor, I would buy a half position now and hope, like Warren Buffett does, that it corrects in March, April or sooner.
Long-term I think SBE/ChargePoint will be a winner, but we all know there are no guarantees in life, so govern yourself accordingly. And definitely don’t bet money you can’t afford to lose.
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.