With its SPAC deal now complete, Switchback Energy stock is now ChargePoint (NYSE:CHPT) stock. But, with investors selling EV (electric vehicle) stocks in general, and many investors cashing out of this following its merger close, shares have continued their slide that started in early February.
Trading for just over $40.50 per share on Feb. 5, as of March 5, the EV charging stock was trading around $23 per share. Some may see the price as the perfect time to buy the dip. Yet, it may be too early to buy.
How so? First, the payoff for companies like ChargePoint remains years away. In the meantime, with EV charging stocks still richly priced (in anticipation of outsized growth), valuations could continue to contract.
Rising interest rates are playing a major role in this story-stock contraction. Higher treasury yields means investors are less willing to buy growth stories like this one at frothy valuations. Unless this trend reverses, it’s going to tough with former high-flyers such as this stock to regain lost ground.
So, what does this mean for this EV charging play? Shares could continue to slide in the near term. But, until they fall to prices making for a more solid long-term entry point, sit on the sidelines.
Why Investors Are Selling CHPT Stock
There’s a lot working in the favor of the electric car industry. Governments around the world are keen on accelerating the shift from gas-powered to electric-powered cars and trucks. The incumbent car industry itself is also taking an proactive role in the transition, as seen from news of General Motors (NYSE:GM) moving to all-electric by 2035.
The long term remains bright. But, it’s the near term that’s starting to matter more with investors when it comes to CHPT stock. What do I mean? Investing in this space may be a bet on the future. But, it’s been near-term developments that have affected this sector the most as of late.
First, of course, is the role rising interest rates have played in putting downward pressure. But, also, consider how actual proposed policy changes compare to the anticipation priced into this sector on the heels of President Joe Biden’s electoral victory in November.
While a Biden administration bodes well for the pivot toward electrification, it’s likely not going to be to the extent priced into shares from November through January. As investors start pricing this and other EV stocks on realities rather than possibilities, this is going to weigh down on shares in the near term.
To top it all off, other red flags for ChargePoint remain on the table as well. These include headwinds from the novel coronavirus, possible hiccups from the mass installation of charging stations, and competition from not only other charging companies, but EV automakers themselves.
In all, these factors make shares unappealing at today’s prices. But, if shares continue to pull back, a more favorable entry point could open up.
A Great Opportunity At Single Digit Prices
If CHPT stock remains overheated at $23 per share, what’s a more reasonable price? Based upon the projections provided in last September’s merger presentation, this company could be generating nearly $2.1 billion in sales, and posting adjusted EBITDA of $340 million, by fiscal year 2027 (year ending January 2027).
But, even assuming its projected annualized growth of around 60% happens without any hiccups, single-digit prices may be the most reasonable valuation for this stock. How so? Let’s run the numbers.
Assuming the company lives up to the projections listed above, a reasonable EBITDA multiple for this stock six years out may be 20x. That’s assuming its high levels of growth do not fade at the end of this decade.
$340 million at a 20x multiple gives us a $6.8 billion enterprise value. We’ll assume the company takes on zero debt. Also, we’ll assume it uses its current cash position for working capital purposes. That gives us a market capitalization equal to this enterprise value. Divided by 304.9 million outstanding shares, that gives us a price estimate of around $22.30 per share.
Bottom line: it doesn’t make sense paying today’s prices for a business that may be worth roughly this amount six years out. But, if discounted heavily back to 2021, it’s a more appealing proposition.
For Now, Take a ‘Wait-and-See’ Approach
Sure, saying this is only a buy at single-digit prices may be short-sided. Some projections call for the EV infrastructure market to be worth a staggering $148 billion by 2030. If this winds up the case, ChargePoint’s worth a lot more than my $22.30 per share price target.
Even so, today’s share price still prices in much of this potential growth as a certainty. Given the chances vehicle electrification takes longer than expected, and the likelihood investors continue to sell EV-related stocks on near-term fears, it’s best to take your time with CHPT stock.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
