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As Shares Go Parabolic, Tread Carefully With Switchback Stock

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·4 min read
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After ripping past $25 per share without skipping a beat, could Switchback Energy (NYSE:SBE) stock soar up to $50 per share? Given the extreme enthusiasm behind this name, it’s possible in the near-term.

SBE stock
SBE stock

Source: Michael Vi / Shutterstock.com

This SPAC (blank-check company) is just weeks away from completing its merger with EV infrastructure company ChargePoint. Investors may be bidding it up now in anticipation of the shares continuing to climb once the deal closes before year’s end.

Yet that’s not the only factor sending shares to the moon. Joe Biden’s victory in this month’s U.S. presidential election is a tremendous boost for the EV industry. That’s especially true for Switchback, given its focus on the infrastructure side of this industry.

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But while there’s reason to be excited, watch out! The current winds are clearly blowing in ChargePoint’s favor right now. However, that does not completely justify its current, rich valuation. Much of the recent gains have more to do with speculation than a material change in its outlook.

Sure, the shares could keep climbing in the coming weeks. But buying them today is a bet that the “EV bubble” can continue indefinitely. While this industry’s growth is set to accelerate this decade, that doesn’t mean we won’t see an epic correction of the sector, like the one that occurred 20 years back when the “dotcom bubble” burst.

So, with this in mind, what’s the call? Keep this EV play on your radar, but wait for it to drop further before buying its shares.

Why is SBE Stock Skyrocketing?

As mentioned above, there are two clear reasons why Switchback’s stock has soared this month. First is the upcoming closing of its acquisition of ChargePoint. Given how strongly EV SPAC stocks like Nikola (NASDAQ:NKLA) and Lordstown (NASDAQ:RIDE) performed after their deals were completed, it’s clear that investors want to get into SPACs before their mergers are completed.

Secondly, the election of Joe Biden is a big deal for Switchback, soon to be ChargePoint, stock.

As InvestorPlace’s Joel Baglole discussed in his Nov. 10 column, the President-elect wants to invest heavily in building America’s EV-charging infrastructure. But, while this could be seen as an indirect boost for EV makers like Tesla (NASDAQ:TSLA) and Lordstown, it would be a direct game-changer for ChargePoint.

However, these recent positive developments are just icing on the cake. The prospects for ChargePoint were very strong long before Election Day. Prior projections called for 60% compound annual revenue growth through 2027. With the latest electoral development, this company looks poised to not only meet, but beat its ambitious revenue-growth goals.

Yet, while SBE stock isn’t hurting in the catalyst department, it may not be wise to chase it at today’s prices. That’s because we could be near a correction of stocks in this “too-hot-to-touch” sector.

How There’s Still a Risk of a Pullback in Switchback

Given the risk of the “EV bubble” bursting or at least correcting, buying Switchback today may not be the best move.

Granted, ChargePoint remains in the catbird’s seat. With soaring demand for EV infrastructure, and the U.S. government looking poised to shower this sector with trillions in capital, no one should bet against it.

And, given its estimated $493 million in cash following the merger, chances are it has enough funds to get over any “growing pains” as it scales into a massive enterprise. Simply put, the risk isn’t posed by the company itself. Rather, there’s a risk that the winning EV sector will suddenly stop winning and start to head lower.

As I discussed in a column about SBE stock published in October, there’s a massive risk of the valuation of EV stocks contracting. In other words, even as the underlying industry grows, the shares of EV companies could decline, as investors realize they are overvalued.

That doesn’t mean Switchback’s shares will give up all of their impressive 2020 gains. But why buy its shares now for around $36 each when you could enter a long-term position at a much more favorable price?

With Shares Fully in ‘Bubble Mode,’ Be Careful

While there’s a big risk of overpaying for Switchback at today’s prices, don’t avoid it completely or short it. The underlying trends and unpredictable investor excitement about EVs make SBE stock too dangerous to bet against.

However, it’s not a screaming buy at any price, either. With the risk that the “EV Bubble” will finally burst in 2021, the risk/return ratio of SBE stock doesn’t look favorable now.

So what should investors do with Switchback? Consider any further selloff a good opportunity to enter a long-term position in the name. But right now, stay on the sidelines.

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.

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