Switchback Energy Is a Great Investment Caught in a Crosswind

This post was originally published on this site

© Source: Michael Vi / Shutterstock.com a chargepoint charging station

With the terrible impact of the novel coronavirus pandemic, you wouldn’t immediately assume that a consumer market like electric vehicles would skyrocket. While EVs over time save drivers money via fuel costs, they tend to be more expensive than their combustion-engine counterparts. However, combustion cars are also exposed to the global automotive supply chain, which saw substantial disruption, thus benefitting EVs. But for the sector to go mainstream requires charging, which is where Switchback Energy Acquisition (NYSE:SBE) comes into play.

© Provided by InvestorPlace a chargepoint charging station

Another example of a special purpose acquisition company (SPAC), Switchback Energy will become ChargePoint via a reverse merger. But unlike so many speculative SPACs with questionable business models, ChargePoint has a real pathway toward long-term success.

Obviously, the company feeds off the EV craze with its charging network. In order to effectively combat range anxiety, automakers must convince would-be customers that the EV infrastructure is adequately robust.

Load Error

Here, the business strategy for ChargePoint should theoretically be easier than the automakers’ roadway. In the latter industry’s case, they must compete for consumer dollars, which could become limited in the months ahead if we suffer a prolonged recession. As well, with EVs requiring fewer moving parts than combustion cars, the ability for automakers to distinguish themselves diminishes.

For ChargePoint, management doesn’t have to worry about that business risk. Whether you buy from one automaker or another, as long as you go electric, the company should be able to serve your vehicle. Therefore, ChargePoint has among the widest consumer nets in the broader industry.

Additionally, what is appealing about SBE is its initiatives for condominium and apartment complexes. Last month, I stated the following:

Essentially, ChargePoint offers a win-win solution for these types of housing units. For instance, apartment owners can install EV charging stations, attracting a growing number of green-conscious tenants. From there, landlords can extract charging revenue. Plus, the at-home charging stations may incentivize not only new EV purchases but convince tenants to stay longer term.

In other words, ChargePoint is about bringing the EV infrastructure closer to home and work, facilitating a holistic benefit for the entire electric industry. So, why are shares so volatile?

Nearer-Term Pressures Weigh on SBE Stock

About a week-and-a-half ago, InvestorPlace contributor Chris Tyler stated that he’d be hesitant to enter a long position in SBE shares. Specifically, Tyler noted that “shares are in the process of forming a head-and-shoulders topping pattern after bursting onto the scene in September. It’s potentially bearish if the right shoulder continues to develop, then breaks beneath neckline support.”

Now, I understand that many people regard technical analysis as gobbledygook. However, the wildness is something that I observed in my research for the company. Specifically, I mentioned that millennials were moving out of crowded urban centers to the suburbs or quieter areas away from their state of residence. This is significant for two reasons:

  • Moving out is a drain on cash flow. If you buy a house, you must fork over a large amount for a down payment. Even if you’re moving into a rental, moving costs aren’t exactly cheap right now since so many have done it during this crisis.
  • Areas outside of major urban centers may not have robust charging networks, thereby limiting the appeal for EVs.

Also, the pandemic has created headwinds that directly affect EV sales. First, with the sharp demand loss due to the pandemic, oil prices plunged to unprecedented lows. Therefore, that takes away the incentive to buy EVs, which puts pressure on SBE. Second, many people who never considered a car because they used public transportation have sought to buy their own personal vehicles.

But here’s the thing: the folks that have been forced to buy cars because of the health crisis? Primarily, they’re looking at low-cost combustion cars, not high-priced EVs. Sure, combustion cars are worse for the environment and all that jazz. But right now they’re the most convenient option.

For instance, consider someone who lives in New York City. The parking situation in that part of the country is horrible. An EV just wouldn’t be practical. Therefore, nearer-term events are unfavorable for SBE.

Waiting for Sanity

Finally, the other factor that makes me hesitant on SBE in the immediate framework is rising novel coronavirus cases. On Nov. 12, the Centers for Disease Control and Prevention reported nearly 195,000 new infections. That is simply a startling one-day total, which puts state governments in a quandary: do they save lives or save the economy (which is the equivalent of saving lives over the long run)?

Whatever happens, the situation is likely going to be negative for SBE. That’s because a massive surge of cases like this implies more lockdowns, more restrictions and more people continuing to work from home. As well, we could see reduced gasoline prices, which adds more pressure to the overall EV narrative.

Again, let me be clear – the longer-term picture seems very favorable for ChargePoint. Further, I like management’s focus on bringing EV charging networks closer to the source of demand. But for now, I got to go with the numbers. And they’re telling me that we have a long, dark winter ahead.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Continue Reading