In a year filled with amazing revelations, Wall Street managed to steal some of the spotlight. Specifically, 2020 saw the rise in popularity of special-purpose acquisition companies (SPACs). These corporations look for budding opportunities. In the process, they bring private companies to Wall Street without the hassle of an IPO (more on that later). This year we have had a slew of them and they almost all are in the electric vehicle (EV) space. Today we examine the opportunity that Switchback Energy (NYSE:SBE) stock to see if it’s too late to chase it.
Source: Michael Vi / Shutterstock.com
I say “chasing” because you need one of Tesla’s (NASDAQ:TSLA) cars in ludicrous mode to catch up to SBE stock. It rallied 340% since September, sharply accelerating last month. Investors loved the earnings report and added $30 to its share price in under a week.
Just yesterday, it made a new high on a mixed market day. Clearly, the appetite for this stock and others like it is still insatiable. This is truly the evidence that the so-called fear gauge — the VIX — is broken. Scared markets do not rally behind frothy stocks.
Switchback Energy Stock Is Frothy
Source: Charts by TradingView
The label might upset fans of SBE, but the shoe fits.
It’s totally appropriate to call Switchback Energy stock frothy when it has no revenues yet and a $1.8 billion market cap. This means that the current stock price is made up of pure hope of things to come. So the discussion of the fundamentals today won’t center around the metrics because there are none. Usually I would refer to it as a growth stock and use the price-to-sales ratio. I can’t do that there because it is still pre-revenue.
Unlike other companies like Nikola (NASDAQ:NKLA) or Workhorse (NASDAQ:WKHS), SBE is not chasing EV productions like Tesla (NASDAQ:TSLA) or Nio (NYSE:NIO). They are seeking the opportunity in the refueling stations to borrow from the internal combustion engine (ICE) vocabulary. They will be partnering with ChargePoint, which already has its foot in the charging station industry. This sounds like a great idea because it won’t be in the rat-race of vehicles sales stats. Switchback Energy stock will then depend entirely on EV ubiquity.
On that front, the market is still leaning extremely to ICE and fossil fuels. This makes the idea even more attractive because of the potential to come. Imagine what will happen to charging demand if the current 80 million vehicle ICE production flips to EVs. That is all great news, but they are not even close to reality. Meaning that this migration to electric will take years.
Let the Stock Rest to Build More Momentum
There is so much time that it’s hard to give Switchback Energy stock too much more love without a correction. I am not calling for a collapse or a perpetual short on the stock. What is appropriate is to have dips to build a better ramp. Rallies need relief to transfer stock ownership into stronger hands. When a stock rises as fast as this one did it becomes susceptible to sharp and painful surprise crashes. The higher it goes without a rest, the more painful the whipsaw.
SPACs are exciting, but investors should study them closely if the bets are big. The IPO process is tough but that’s by design. It uncovers hidden potholes like what happened with Nikola and WeWork. Coming public through a SPAC assumes that the investor company is smart and honest. I am sure that SoftBank’s (OTCMKTS:SFTBY) CEO Masayoshi Son did his best when he valued WeWork at $45 billion. It turned out that it was too frothy and failed to come through an IPO. NKLA, on the other hand, sneaked through the back door and cost investors millions down 80%.
In closing, I would like to offer another sobering notion to help cool investor enthusiasm. It doesn’t come from a mean perspective because I am a realist. The EV field is getting crowded with upstarts like these, but the bulk will come from the giants. The legacy car makers will be the ones filling most of the EV demand in the future. Most, if not all, new EV upstarts will likely remain niche companies albeit perhaps successful ones. Tesla has Elon Musk, and Nio has the Chinese government powering them ahead. These are two exceptions, not the rule.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
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