Workhorse Group Inc (NASDAQ:WKHS) is a small American manufacturer that creates a range of electric delivery vans powered by drone technology. These are built on a proven chassis the company created for its Workhorse commercial vehicles, like step vans and buses.
The stock was steadily heading downward until renewed interest in 2020 on the heels of companies like Tesla Inc (NASDAQ:TSLA) and Nikola Corporation (NASDAQ:NKLA) pushing for electric commercial trucks.
With stock prices increasing over 10x since the start of 2020, some analysts wonder – is Workhorse stock overvalued?
The company fueled speculation that it may not be when it reached the final bidding stage for a $6.3 billion contract with the USPS. It then secured $200 million in funding through four-year senior secured convertible notes.
It’s spending the money on increasing production volume consolidate debt, and provide working capital. Meanwhile, it exchanged $70 million in debt for shares of the company’s stock. This gave it a $270 million runway and put investors in a flurry, as it was upgraded to Buy from most analysts.
The question now is whether the company can justify its inflated market cap.
Why Workhorse Stock Went Up
Workhorse had three events in 2020 that pushed its stock price up.
First, it benefitted from the buzz around electric vehicles in general. Tesla finally met minimum qualifications for the S&P 500 (although it wasn’t yet admitted into the index) and is the most valuable car company in the world, overtaking Toyota Motor Corp (NYSE:TM) in July.
The company then benefitted from a spike in value due to it advancing to the final stage for a possible contract with the U.S. Postal Service to supply automated electric delivery vans. Still, the contract isn’t guaranteed, and it’ll likely need to partner with another company to fulfill it.
That didn’t stop the company from securing the $200 million in funding, which some analysts took as a positive sign it’ll enter into an agreement by year end. Even a small slice of that contract will prove to be a major boost to the company’s financials though.
And the company isn’t alone – it has help in the form of strategic partner Lordstown Motors.
Workhorse Financials Saddled With High Expenses
Sales in the second quarter of 2020 were $92,000 for the company, which is an increase from $5,500 in the same period in 2019.
The cost of goods sold also increased, from $930,000 to $1.5 million, with $3.9 million in operational expenses (up from $2 million in 2019).
Research and development also increased to $1.6 million from $1.2 million in the previous year. Interest expense also increased to $124.3 million from $15.9 million the previous year.
This saddles the company with a lot of expenses, even though it started the year with $105 million of cash on hand and has yet to turn a profit (nor come anywhere close).
This means the company increased its cash by $170 million, with its debt reworked to keep payments down. The company also delivered its first C-series trucks to Ryder System and Electric Vehicle Fleet Solutions and is on target to deliver close to 400 vehicles by the end of 2020.
Its 10 percent ownership of Lordstown, which has a $160 million value, has a chance to gain value as it gets publicly listed under the NASDAQ ticker RIDE. If it can sell some vehicles, it may be in good shape, although the company has yet to turn a profit, despite being in business much longer than Tesla.
Is Workhorse Valuation Too High?
Originally trading as AMP Electric Vehicles, Workhorse was listed on NASDAQ in 2015 through a 10-to-1 reverse stock split. This pushed the company to an $11.70 trading price in 2016 that soon dropped.
In fact, the company spent the remainder of the 2010s slowly deflating until EV interest grew again in 2019 on the heels of Tesla’s profitability.
It was still trading under $3 until it started climbing in July 2020. But investor interest and an inflated price can’t take away from the reality the company made only $5,500 in sales.
Pivoting to electric vehicles gave the company frontrunner advantage, but its lack of spending cash makes it hard to compete with more established companies.
The company simply doesn’t appear to have the resources nor revenue to justify its market capitalization, which could be true even if it snags the USPS contract. This could make the stock drop.
Will Workhorse Stock Drop?
While most companies experienced record growth in the 2010s, Workhorse wasn’t as lucky. The company consistently deflated as investors failed to see the expected returns.
As it pivoted away from its legacy manufacturing into automated EV delivery vans, it took a major chance that may not pay off. Both Nikola and Toyota-Hino are working on sustainable hydrogen fuel cell semitrucks, and Tesla is not far behind with its promised commercial EV.
Whoever can fulfill this need at a cost-efficient way will do well, but it’s not guaranteed to be Workhorse.
If the company can’t start bringing in sales to justify its price, the market cap will continue shrinking like it did in the 2010s. Fancy tactics like consolidating debt and reverse splits won’t hide the company’s lack of revenues otherwise.
Is Workhorse Stock Overvalued? The Bottom Line
Workhorse is a legacy maker of commercial truck chassis and equipment that’s pivoting into the electric vehicle market. It struggled to keep up for the past decade, as other companies like Tesla took all the spotlight.
Still, the company may be on its way to snagging a lucrative government contract that could justify all the trouble it’s seen the past five years. It’s unclear whether it can secure and fulfill this contract without needing to outsource and cut into the profits.
Investors are generally split on the stock, pointing out that its current financials can’t support the company’s value. If Workhorse gains (and can fulfill) its USPS contract, it could begin to generate profits in a growing market.
Even then, the company will likely experience growth that has trouble being supported by sales. Tread cautiously on this investment.
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