I understand bulls’ theories on Switchback Energy (NYSE:SBE) stock. But the problem is the stock’s valuation.

Indeed, ChargePoint, with which Switchback is merging (likely next month),has  huge potential. It seems likely that electric-vehicle adoption is going to accelerate (pardon the pun) in coming years. Certainly, the equity market is pricing in that growth, and ChargePoint should benefit from it.

As I wrote last year, what makes ChargePoint and SBE stock attractive is that ChargePoint is a “non-denominational” play on the EV trend. It doesn’t really matter to ChargePoint whether it’s Tesla (NASDAQ:TSLA) that wins the EV battle or General Motors (NYSE:GM), or some other manufacturer that doesn’t even exist yet. More electric vehicles will result in more charging stations.

More charging stations will generate more revenue for ChargePoint. And given ChargePoint’s “capital-light” model, more revenue will result in higher profit margins.

That’s all well and good. But at some point, valuation matters. And I continue to believe we’ve long since reached that point with SBE stock.

SBE Stock Has Rallied

We’ll get to Switchback’s current valuation in a bit, but it’s worth looking at how SBE stock got to its current level. In mid-morning trading today, the shares were changing hands for around $40.

Investors initially liked the choice of ChargePoint as a merger target. Switchback’s shares gained 27% when the deal was announced in late September and another 7% on the following day.

But those two days of gains only moved the stock to $13. By Oct. 30, the stock had traded flat for about five weeks even as the market digested the merger and ChargePoint’s prospects.

At the time, a massive rally of  small-cap stocks had begun. EV stocks have been particularly strong (as seen by the parabolic gains of  battery developer QuantumScape (NYSE:QS)). And Switchback joined the rally: it soared 225% in less than six weeks.

The question is why the EV stocks rallied. The obvious catalyst was the November elections. Joe Biden’s victory in the presidential election, along with Democratic gains in the Senate, seems to have been extremely positive for the future adoption of EVs. And, again, ChargePoint is a direct beneficiary of that adoption.

But that catalyst seems somewhat weak. Biden’s victory was expected, if not necessarily guaranteed. An evenly divided Senate actually is somewhat disappointing for the Democrats.

There really hasn’t been much news about ChargePoint. Rather, small-cap stocks. EV stocks. and SPACs, (special purpose acquisition companies), including Switchback Energy, rallied. SBE stock simply rode the rising tide of its sector and its market.

Politics Again

But it’s fair to wonder whether Switchback’s move was justified. It bears repeating: the political news was not unexpected. It wasn’t even that good for ChargePoint. And yet ChargePoint’s valuation, based on a projection of its post-merger value,  jumped from about $4 billion in late October, peaked at over $13 billion and is now around $11.5 billion.

The shares embarked on yet another politically-driven rally late last month. On Jan. 25, President Joe Biden signed an executive order that aimed to replace the government’s fleet with electric vehicles. At one point that day, SBE stock gained 14%.

But that rally faded quickly: Switchback closed up less than 7%, and gave back its gains for the day in the following three sessions. From a near- to mid-term standpoint, that suggests the market is starting to figure out that the political news is largely priced into the stock.

If that’s the case, then Switchback’s shares are likely to drop further. There simply isn’t much else to keep the stock’s valuation above $10 billion, as the company, using what look like aggressive projections, expects its  2020 top line to come in at $135 million and predicts that its 2024 revenue will be less than $1 billion.

The Case for ChargePoint

But SBE stock is not worth shorting, and ChargePoint is not going to be a bust. Again, I understand why investors are bullish on ChargePoint, and I think its business has value.

But it’s simply increasingly difficult to recommend the stock at this valuation, especially after its recent rally that doesn’t make a ton of sense. And while ChargePoint has potential, it’s also facing risks.

Competition is its most obvious risk. In the recent Form F-4 that Switchback Energy filed with the SEC, Switchback Energy highlighted its competition in Europe, while arguing that many of its rivals have “limited funding.” But the latter situation is going to change.

Notably, EVbox, a leading charging-station operator in Europe, is going public via another SPAC, TPG Pace Beneficial Finance (NYSE:TPGY). Once that merger closes, EVbox will have an estimated $425 million of cash to fund its expansion on both sides of the Atlantic. U.S.-based EVgo is raising almost $600 million through its planned merger with Climate Change Crisis Real Impact I Acquisition (NYSE:CLII).

ChargePoint is likely to carve out a niche. But a niche alone is not going to keep investors paying 12 times the company’s estimated 2024 revenue for its stock.

However investors looks at the situation, it’s tough to make a solid fundamental case for SBE stock at its current level. Even bulls may calculate that, at some point, the stock is likely to get cheaper.

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