This year is shaping up to be the year of electric vehicles. We get more and more EV stocks rallying with every passing month. And after a long time in the shadows, Workhorse (NASDAQ:WKHS) stock has shot into the spotlight.
Shares of WKHS stock are up as much as 10-fold from earlier this year. There’s good reason for at least some of that run-up; Workhorse’s investment in another related venture is set to pay dividends.
Still, questions remain. Workhorse itself has struggled to commercialize its delivery vehicles. The company has produced less than $1 million in revenue annually each of the past two years. And there’s still little concrete evidence that Workhorse has what it takes to become a long-term winner.
Still, with the success of its Lordstown investment, Workhorse should have funding to keep developing its business in the years to come.
Still Hoping for a Post Office Contract
Workhorse has long sought to commercialize delivery vehicles. It has appeared to be on the verge of success several times. There have long been rumors and speculation about the company scoring major deals with DHL and UPS (NYSE:UPS) among others. However, so far these possibilities have failed to turn into meaningful contracts.
One bright spot for Workhorse is that it is focused on winning business with the U.S. Postal Service (USPS). Right now, the USPS is a hot topic. Due to the novel coronavirus, many states are planning on holding their elections by mail. This is raising a variety of challenges and concerns about the postal service’s reliability.
As such, it wouldn’t be surprising if Congress chooses to spend more money on the USPS to help it modernize its facilities and vehicles. This could create contract opportunities for Workhorse. In fact, on Sunday, Democratic leader Nancy Pelosi urged Congress to take emergency measures to shore up the USPS.
Separate Lordstown From the Thesis
The big win for Workhorse recently is its investment in Lordstown Motors. Workhorse has a 10% stake in that EV company. Lordstown recently announced plans to go public via a special purpose acquisition company (SPAC). Currently, Workhorse’s stake is worth around $150 million, and that could rise sharply in coming weeks if the SPAC takes off, as many have this year.
One important point in the Workhorse debate is how to treat Lordstown. Bulls are using it to justify the whole Workhorse story. And I get it to a degree. Many speculative companies such as Workhorse never have a highly successful moment like this. The upcoming Lordstown public offering is a massive win for Workhorse. Short sellers missed this development and paid the price.
However, it’s important to clarify, this is a one-off accomplishment for Workhorse. It is going to earn a windfall from this successful investment. But once it takes profits, there will still be a distinct lack of recurring business at Workhorse. Gains from financing events aren’t the same as having a stable operating profit.
Workhorse also is entitled to a small royalty on sales from Lordstown through the first 200,000 vehicles, but analysts concluded this won’t add a meaningful sum to Workhorse’s overall value.
No, the big pay-day comes up front, when Workhorse will be able to sell its equity stake at a large profit. The Lordstown event is going to load up Workhorse’s coffers. With cash in hand, any near-term bankruptcy or toxic financing spirals are off the table. That’s a huge win for the bulls. But it probably isn’t enough to justify shares surging from $3 to $16 this year.
Bottom Line on WKHS Stock
The upcoming Lordstown public offering is a huge deal for Workhorse. It validates Workhorse’s business model and staves off any near-term liquidity problems. Workhorse will have plenty of time and capital to pursue its own development plans. That separates it from many of the other small electric vehicle companies.
Still, investors should be careful. WKHS stock has run up so far that the benefits of the Lordstown deal seem fully priced in and then some.
Don’t lose sight of the main attraction here. Workhorse is gunning for a big contract from the U.S. Postal Service or another delivery operation. That’s what the company needs for shares to rally further from current levels. Otherwise, look for a sell-off in Workhorse stock in coming weeks and months.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities.
