As I write on Workhorse Group (NASDAQ:WKHS), I am reminded of a fiscal year 2016 article on Tesla (NASDAQ:TSLA) that was published in the Time Magazine as it provides salient context for WKHS stock.
The article focused on the reason “why investors are being so patient with Elon Musk.” The key reason was that investors were looking for what’s coming few years down the line than the present earnings or cash burn. TSLA stock has paid for investor patience with stellar returns generated in the recent past.
Workhorse Group is another name in the electric vehicle business that deserves a closer look and potential exposure. Even after a big rally of 970% in the last six months. The reason: I believe that the growth journey has just started for the company. WKHS stock might correct after a massive rally. However, corrections would be an opportunity for fresh exposure.
Investors would still be wary of a stock that has skyrocketed in the recent past. So, let’s look at some valuation insight. WKHS stock currently has a market capitalization of $2.5 billion.
Back in June 2020, Formidable Asset Management LLC opined that WKHS stock is undervalued. The hedge fund noted that the company’s 10% stake in Lordstown Motors could be potentially valued at $1.0 billion “even if the market views Lordstown as only half as valuable as Nikola (NASDAQ:NKLA).”
Therefore, if the stake is as valuable as Nikola, the 10% investment would be valued at $2 billion. Clearly, a current market capitalization of $2.5 billion is not expensive. As the company’s business grows, the stock has significant scope for upside.
Business at Inflection Point
I believe that Workhorse Group is at an inflection point and top-line growth will accelerate in the coming years.
Skeptics will immediately point to the fact that the company signed an agreement with United Parcel Service (NYSE:UPS) in April 2012. This was an initial agreement to electrify UPS delivery trucks. However, eight years down the line, only six orders have been placed totaling 1,345 vehicles. The scalability of the business can therefore be questioned.
The key reason is that there has been a gradual progress in development of charging infrastructure and lowering of charging cost over the years. Finally, the industry is at a point where delivery truck orders are poised to accelerate.
A recent article in The New York Times perfectly sums up this view:
“Now that battery technology is catching up to ambitions, many companies are making big commitments to electrify the last delivery mile…The rush to electrify, prompted by concern about climate change, a chance to offset growing delivery costs, government regulation and big advances in battery technology, is occurring as the coronavirus pandemic has caused a huge spike in package delivery.”
WKHS stock surging in the recent past is because of these potential changes. The company is expecting a $6.3 billion contract from U.S. Postal Service for 165,000 vehicles. Any positive development on this possible contract can send the stock skyrocketing.
Workhorse Group also claims of validation from blue-chip customers and partners. Some of the names include United Parcel Service, FedEx Corporation (NYSE:FDX), Ryder System (NYSE:R) and DHL. These partnerships can translate into contracts in the coming years as EV truck adoption gains traction.
From a manufacturing perspective, the company already has the ability to produce more than 60,000 vehicles on an annual basis. The company is therefore positioned to execute bigger orders.
Concluding Thoughts on WKHS Stock
Coming back to the company’s 10% stake in Lordstown Motors: The management has mentioned in the second quarter 2020 conference call that LMC has already received 27,000 pre-orders for a potential revenue of $1.4 billion.
Further, LMC has the capacity to produce 600,000 electric vehicles annually. Therefore, once production commences in FY2021, the stake can itself be a game-changer for the company.
In addition, the company’s C-Series trucks can help in increasing the order backlog as companies increasingly adopt electric vehicles for last-mile delivery. The company believes that there is a total addressable market of $18 billion for delivery vehicles in the U.S. With the license to sell vehicles in all 50 states, Workhorse Group is well positioned for growth.
Overall, WKHS stock is attractive and the best part of growth is still to come for the company. With the positive catalysts discussed, the stock can be considered for exposure on any potential correction from current levels.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.