As we enter the new year, I canâ€™t say we will look back fondly at 2020. However, certain trends that have emerged this year will continue for the foreseeable future. The trend of debuting on the markets through a special purpose acquisition company (SPAC) is one example. Also known as a â€œblank checkâ€ shell corporation, itâ€™s designed to take companies public without going through the traditional IPO process. Itâ€™s against this backdrop; you will begin to understand why Switchback Energyâ€™s (NYSE:SBE) stock is up 347.56% in six months.
Switchback is a shell corporation designed to list ChargePoint, an electric vehicle infrastructure company that has operations spread out in 14 countries. I can sense you rolling your eyes. We have seen several companies debut this year on the exchanges with an EV background through the SPAC route.
However, unlike several other debutantes, SBE stock is a much more enticing proposition than the typical EV startup going public. Ace investment guru Louis Navellier took the words out of my mouth, referring to it as a â€œpicks and shovelsâ€ investment. No matter what you think about the EV SPAC space, SBE stock is a defensive investment you should get your hands on.
If you havenâ€™t jumped in but want to, this is the company for you.
SBE Stock Is a Sustainable Investment
One of the major criticisms EV SPACs are facing is that they lack long term value. And can you blame investors? Wall Street has launched an electric car SPAC craze in the hopes of finding the next Tesla (NASDAQ:TSLA). Itâ€™s leading to some mind-numbing premiums for several EV startups that have no revenues and vague outlooks.
The worst part is that itâ€™s easy to get lost amid the headlines, as one SPAC after the other is touted as the multi-bagger you must add to your portfolio. And then, a couple of months down the line, you see the same stock dropping precipitously.
This year, at least seven EV startups have gone public through mergers with SPACs, with an eighth one on the way. Only one of those companies has delivered a car so far. And several donâ€™t have any plans to begin deliveries until 2022. In many ways, it reminds you of the late 1990s dot-com bubble.
But before you write off Chargepoint as another also-ran, itâ€™s important to note that the company has one of the best business models in the EV space that will help grow revenues at a rapid rate from hereon in. It operates the single largest EV charging station network globally, with over 114,000 stations across 14 countries. It has a 73% of the EV charging market share â€” 7x its next closest competitor.
Looking ahead,Â ChargePoint projects compounded annual growth rates of 60% over the next seven years, exceeding $2 billion in revenue by 2027. This compares favorably to a CAGR of 32.0% the overall sector is forecasted to experience from 2020 to 2027, according to a note published by Grand View Research.
Valuations Are Quite Attractive
At this point, there arenâ€™t a lot of companies out there with a business model like ChargePoint, which makes valuing the stock a little bit hard. The closest competitors are Blink (NASDAQ:BLNK) and Tesla. However, for all intents and purposes, you should only count Blink as true competition since Tesla is a major diversified conglomerate at this point.
On the other hand, Blink is a much better point of comparison since itâ€™s a charging station pureplay. Shares are trading at a whopping 227.89 times forward price-to-sales, despite weak third-quarter earnings.
Particularly worrying was a 47% rise in operating expenses, driven by a 151% increase in G&A expenses. Regardless, this is not an article focused on BLNK stock. Instead, we want to know if SBE stock is a better proposition from a pure valuation perspective.
On that end, it checks all the boxes. If we use the revenue projections, we come to a P/S ratio of 33.75 times. That compares very favorably with Blink. And is even below 38.7 times at which the industry is trading. Amidst the EV SPAC frenzy, here you have a fairly valued stock.
So Youâ€™re Telling Me Thereâ€™s a Chance
The auto industry has long been a notoriously difficult environment for startups. However, a new generation of EV startups bets that a global transition from internal-combustion engines to electric motors will create a conducive environment for tech-focused firms to upend the market. These companies have seized the momentum created by EV makers Tesla and NIO (NYSE:NIO).
SPACs have allowed these startups to amass large sums of capital to finance their growth plans. ChargePoint will get $683 million in cash due to the merger. However, investors are more interested in what theyâ€™ll get in exchange for their hard-earned capital.
In that respect, I believe SBE stock is a safe, long-term investment. Whether you believe in a particular EV startup or not, as more EVs hit the streets, the need for charging stations will continue to increase exponentially. Plus, as more non-Tesla EVs hit the road, the demand for non-Tesla chargers will continue to increase.
The company expects recurring software and services to account for nearly half of its revenue within six years. The subscription-based model provides another incentive to invest in SBE stock.
Bottom line: ChargePoint is in a monopoly position, possesses an attractive business model, and is reasonably valued on a relative basis. Parking your capital in this one is a fairly easy and straightforward decision.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.Â
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.Â