When I think about Switchback Energy Acquisition Corporation (NYSE:SBE) two movies come to mind that support with arguments my investment thesis about SBE stock.
The first movie is “Forrest Gump,” famous for the line, “Life is like a box of chocolates. You never know what you’re gonna get.” The second is “Once Upon a Time in America.”
Investing in a special purpose acquisition company (SPAC) carries a lot of risks as you do not know in advance what type of merger this specific type of investment company will choose to focus on. As Forrest said you never know what business you will get, at least until there is a public announcement.
As with “Once Upon a Time in America,” I estimate that soon this SPAC investment trend may end, and lose favor among sophisticated investors, becoming a memory.
I believe that the SEC has been unjustifiably loose on the financial conditions and requirements that permit SPACs to merge with private companies. It had allowed speculating and increased stock market volatility, and it can’t go on forever.
Switchback Energy Acquisition Corporation is a SPAC that does not have significant operations. The purpose of a SPAC, which gives it the handle “blank check company,” is that it has no specific business plan or purpose. It is a company that plans to engage in a merger or acquisition within 24 months of going public.
So the main question is whether investing in a company without knowing what you’re gonna get, as Forrest said, a good idea?
To me, the answer is a big no. I want to know the business model of the company, the financial performance of the stock, the competition, the products it makes, and, most important, the risks and the valuation of the shares.
SBE Stock and a Brief History of SPACs
SPACs are nothing new in investing but for some reason investing in SPACs gained a lot of popularity in 2020. This investing environment is too loose on the Initial Public Offering (IPO) timeline requirements set by the SEC. I must admit I do not like it at all for two reasons.
The first reason is that SPACs turns private companies into public companies, which under stricter conditions might find it too difficult to raise capital for their IPOs. They are not yet mature, nor do they have profitability in many cases.
The second reason is the false impression that simply investing in a SPAC will be profitable. Stock investing is not easy, has many risks and most of all no certain outcome.
For a stock that was trading near $10 for most of 2020 and rocketed to $46 per share on the news that it has identified a reverse merger targe without any significant operations is too arbitrary. To the best of my knowledge and in my financial analysis, this is a stock bubble waiting to happen.
SBE Stock: Valuation Basics
Looking at the financials for SBE stock doesn’t help. The company has no significant operations, no revenue, and only about $317 million in assets. To value any stock you have to discount future cash flows, either free cash flows or the dividends. SBE stock has none of these.
To highlight the valuation exuberance of the SBE stock my question is this: Would you pay someone $4 million to get back $1 million in cash? I hope the answer is a resounding, unhesitating, “no.”
Still, this has already happened to SBE stock. Its price went from $10 to $46 only upon the release of news related to a target for the reverse merger.
Is this logical? Or is it speculators pushing up stock price on expectations and fear-of-missing-out trading? It looks as if the speculators, and not the valuation, won this time.
The Switchback/ChargePoint Merger
ChargePoint is the company that Switchback is helping to go public. ChargePoint is building an electric vehicle charging network with operations in North America and Europe.
The company claims it is the world’s largest network of electric vehicle (EV) charging stations in North America and Europe. But is this enough to send the SBE stock to a meteoric rise for building an electric vehicle infrastructure?
To me, this valuation is not justified. ChargePoint has until now been a privately-held company, not legally required to publish annual reports. This of course is set to change soon.
So we are completely left in the dark about the financials of ChargePoint. How much revenue is made, what is the profitability if any, what is the debt level, what are the free cash flows, all these things that matter to valuation?
According to the public announcement, ChargePoint has an implied $2.4 billion enterprise value. Once the deal closes ChargePoint will have approximately $683 million in cash, absent redemptions by Switchback stockholders.
This puts the pro forma equity value at about $3.0 billion. The company will use the cash to support growth and operations as well as to repay debt.
The Bottom Line on SBE and ChargePoint
ChargePoint may be a great company, but SBE stock is extremely overvalued.
The choice of ChargePoint may seem a clever choice for a reverse merger as the EV industry is very popular among investors but I estimate that due to the rapid expansion of ChargePoint and the capital expenditures the company may well be unprofitable yet or have little profitability.
I would recommend investors to avoid SBE stock, it is extremely overvalued and we have not any significant financial data yet to analyze the financial performance of ChargePoint.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.