When famed short-seller Hindenburg Research posted its short idea against Workhorse (NASDAQ:WKHS) stock, investors already sent shares from a $1.32 low to more than $20.
The bearish call managed to push WKHS stock back to the $15 support line throughout July. If Nikola (NASDAQ:NKLA), which posted just $30,000 in revenue and nearly $20 million in losses in the last quarter, can succeed, how might Workhorse trade in the weeks ahead?
Workhorse, which describes itself as a manufacturer of electrically powered delivery and utility vehicles, was founded in 2007. It continues to bleed money, losing 13.9 cents a share in the first quarter. In the second quarter press release, investors will have trouble finding out what it lost or earned.
WKHS Stock Pure Speculation
Workhorse soared in June as the frenzy for electric vehicle and hydrogen-powered companies intensified. Soon after, the froth subsided.
For example, Nio (NYSE:NIO) peaked at around $16 last month and settled in the $12 range by the end of July. Tesla (NASDAQ:TSLA), which some analysts said would trade at well above $2,000, pulled back.
Nikola fared the worst: a stock sale shook up speculators on July 20. The market did not expect the company to sell a whopping 23.9 million shares and up to 53.39 million shares. The cash raised is an obvious red flag for the sector as a whole.
In the second quarter, Workhorse posted revenue of only $6,000, down from $171,000 last year. Workhorse spent $2 million selling, general and administrative expenses. This is better than the $5.6 million in the first quarter. Research and development expenses fell to $1.2 million. Operating expenses fell 34% to $3.2 million.
Stock Dilution
Just as Nikola filed to sell shares, Workhorse filed a Form S-3 registration statement (shelf offer) too. “We continue to pursue with various parties a credit revolver, which we believe is the best matched with our current capital need of ramping up our truck production,” Chief Financial Officer Steve Schrader said.
In Q1, the company experienced a series of novel coronavirus pandemic-related supply chain disruptions. Instead of initial deliveries in the period, it expects them to happen in the current quarter. The company is guiding 300 to 400 delivery trucks produced this year. It will need financing for this to happen.
Potential Catalysts
Workhorse’s Horsefly is a drone delivery system that may benefit from the ongoing pandemic. As companies move to minimize contact between staff and customers, last-mile delivery from truck launched to drone may add to its revenue.
From a practical viewpoint, the delivery flow that includes drones will require Federal Aviation Administration scrutiny. Even if Workhorse gets FAA approval, delivery truck staff may not face enough of health risk by delivering to the door. Drivers may wear masks and keep physically distant, minimizing Covid-19 infection risks.
Investors could look elsewhere for drone-related investing. Chinese company DJI, for example, is a leader in this space. GoPro (NASDAQ:GPRO) tried to enter the drone market with Karma, only to flop. And as a supplier to the drone market, Ambarella (NASDAQ:AMBA) is less risky than Workhorse. It is more diversified as it develops the computer vision chip and high definition system on a chip solution.
Fair Value
Despite my reservations about Workhorse, the fair value is around $18 (according to Stockrover). Bears think otherwise: the short percent of the float is nearly 25%. Without any meaningful revenue since 2017, when the company posted $11 million, negative net income continued since at least 2015.
Workhorse ended 2019 with $24 million in cash but a net debt of $15 million. Increasing cash burn will force the company to sell shares sooner, diluting existing investors. If speculators cannot resist buying the dip, consider looking at the stock after a major stock sale.
When that happens, the stock will fall by even more, creating a better entry point and lowering the downside risks.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
