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Switchback Energy Isn’t Cheap, But It’s Still Intriguing

Ian Bezek
·5 min read

Switchback Energy (NYSE:SBE) is in the right place at the right time. Traders love special purpose acquisition companies (SPACs) at the moment, and they absolutely adore electric vehicle (EV) firms. Thus Switchback, which sits at the intersection of these two trends, is an ideal stock for the current moment. You saw that on Thursday in particular, as Switchback’s stock soared 25% in a single session.

a chargepoint charging station
a chargepoint charging station

Source: Michael Vi / Shutterstock.com

Does Switchback live up to the hype? By and large, yes it does. It certainly has more going for it than many of its rivals in the EV space. And it starts at the business model itself.

Switchback will soon be merging with ChargePoint, which is the undisputed leader in charging stations for EVs. ChargePoint already has an extensive network set up and is generating some serious revenues. How, in turn does that make Switchback look as an investment?

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Gas Stations of the Future? Think Bigger.

I’ve seen folks describe ChargePoint as a way to invest in the gas stations of the future. And that’s not a bad analogy. However, I’d point out though that gas stations aren’t that great of a business historically. Traditionally, gas stations generate almost no profit on the gas sales, and instead rely on selling beverages, cigarettes, and snack foods to drivers as they fuel up.

There’s nothing wrong with that, to be clear. However, ChargePoint actually has a much more attractive business model than the traditional fueling station. ChargePoint doesn’t have to deal with the often-tricky matter of managing crude oil and gas prices.

In fact, ChargePoint makes it clear in its presentation: The company doesn’t sell energy or get paid off of the rate of driver utilization whatsoever. The revenue comes from selling its charging hardware and the related software that makes it work.

Not surprisingly, it’s the software part of the business that is particularly compelling. For example, ChargePoint can set up units in the parking lot of a Fortune 500 company and then get paid a recurring monthly fee for running the software that makes the magic happen. It’s the employer that ends up worrying about the cost of electricity and any related issues on that end.

Already Demonstrated Success

A problem with many of the electric vehicle-related SPACs is that there is no proof of concept yet. You have companies with little more than some cool product sketches selling for billions of dollars. It’s hard to invest confidently when there is so little tangible evidence with which to evaluate the business.

ChargePoint, thankfully, is better than its peers in this regard. ChargePoint has already built out a large network of functioning and revenue-generating charging locations around the country. As of March 2019, ChargePoint already had 15,694 Level 2 charging locations. That was way ahead of nearest competitors Tesla (NASDAQ:TSLA) at 3,567 and Blink Charging (NASDAQ:BLNK) at 1,426 locations.

Obviously, given how fast the industry is expanding, those numbers have grown since then. Still, this data gives you a look at just how substantial ChargePoint’s lead already is.

These charging locations are leading to real revenues as well. ChargePoint pulled in $147 million in revenues in 2019, and anticipates a similar figure for 2020. And once Covid-19 has passed, the company anticipates revenue growth resuming at a 60% or so annual rate going forward.

SBE Stock Verdict

ChargePoint will be a fascinating company to watch in future years. The company has already generated a considerable amount of business. And based on current growth rates, it seems like the sky is the limit.

That said, there’s a broader fundamental debate around the company. Is ChargePoint going to have huge market share, a large competitive moat, and the ability to run sustainable high profit margins going forward? Or will it end up being a commodity product, like gasoline at gas stations, where there is a ton of revenue but only a marginal profit in each transaction? To be honest, I think it’s too early to tell.

That uncertainty, in turn, makes ChargePoint a risky investment. There’s no question that the company can continue to generate huge revenue growth in coming years. However, the valuation case at some point has to assume that profits will follow. Right now, bulls are pinning their hopes to projections ranging out to the late 2020s. That’s practically to infinity in an industry evolving as quickly as electric vehicles are.

ChargePoint will have 305 million pro forma shares outstanding once the merger is complete. At a $25 share price, that implies a more than $7.5 billion valuation for a company with $150 million in annual revenues at the moment. That’s 50x sales, which is not cheap, even by the market’s current optimistic standards.

ChargePoint does have an excellent story, there’s no denying that. However, just be mindful of the valuation when considering any trades in the stock.

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

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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