The Holes in the Bull Case for Workhorse Stock

Shares of Workhorse Group (NASDAQ:WKHS) have rallied 719% so far in 2020, even with an 11% decline on Tuesday. Yet somehow those shares still look potentially cheap.

Image of a Workhorse (WKHS) logo and drone on the side of a truck.
Source: Photo from

After all, Workhorse has plenty of promise. It’s a potential leader in electric vans for “last mile” delivery. It has a significant order from United Parcel Services (NYSE:UPS). Investors clearly are bullish on a long-awaited decision from the United States Postal Service. Workhorse even has a 10% stake in Lordstown Motors, which is going public via a merger with SPAC (special purpose acquisition company) DiamondPeak Holdings (NASDAQ:DPHC).

Despite all those positive attributes, Workhorse still has a market capitalization below $3 billion. Tesla (NASDAQ:TSLA) is worth more than 100x as much. Surely, an investor might argue, Workhorse’s addressable markets are at least 1% as large as those of Tesla.

The problem with that broad case is that it’s, well, broad. And it misses some of the very real question marks about Workhorse itself. Yes, the company has a massive opportunity, but it still has to prove that it can capitalize on that opportunity. Even after Tuesday’s pullback, some investors seem to be missing that crucial point.

This Is Not “Tesla But for Vans”

The success of Tesla, both as a stock and a company, makes it the comparison for every electric vehicle play out there. Nio (NYSE:NIO) is called the “Tesla of China,” for example. Nikola (NASDAQ:NKLA) is the “Tesla of semis,” And Workhorse, to some bulls, is the “Tesla of delivery vans.”

The problem is that comparisons often miss the mark: Nio is a great example on that front. That’s true for Workhorse as well.

For better or for worse, Tesla’s automotive manufacturing operations are almost totally integrated. The company does outsource battery production to Panasonic (OTCMKTS:PCRFY), but even that might change. As far as the vehicles go, however, Tesla is a traditional manufacturer, even designing and producing its own semiconductors and onboard computers.

Workhorse, however, is not nearly at that level. Its model is to assemble mostly “off-the-shelf” components, as the company details in its Form 10-K filed with the U.S. Securities and Exchange Commission.

That’s not necessarily a bad model, to be sure. But the idea that Workhorse is as innovative as Tesla seems like a significant stretch. At the end of 2019, Workhorse had just eight patents and four applications.

Workhorse’s chief financial officer has said that the company has at least a two-year lead on rivals, including Rivian and Ford (NYSE:F). But CFOs generally are going to be optimistic, and with few proprietary parts rivals ostensibly can catch up. Bear in mind that Workhorse spent just $3.5 million on research and development in the first half of the year.

Promises, Promises

Meanwhile, Workhorse hasn’t exactly delivered on its promises so far.

Back in 2018, Workhorse said it would have 2,000 vehicles on the road by the end of the year. Per the 10-K, the company had delivered a cumulative total of just 360 vehicles. Even assuming the company hits guidance for 300-400 vehicles this year, deliveries will be less than half the initial target two years later.

Much of the disappointment appears to stem from the 1,000-unit order with UPS — which hasn’t been close to fulfilled. That colors that oft-cited deal. So does UPS’ strategy of pursuing multiple electrification efforts worldwide.

The UPS deal simply isn’t as impressive as bulls make it out to be. That in turn raises questions about the hopes for the USPS contract. Is the agency, even with President Trump’s expressed interest, going to give a contract for 165,000 vehicles to a company that in its history has delivered less than 400?

Possibly. But like so much with Workhorse, it’s far from guaranteed.

The Case For and Against WKHS Stock

From here, the case for WKHS seems rather simple. If the company can deliver on its promise, then its stock is too cheap, even after the monster year-to-date rally.

But that is an enormous “if.” Workhorse has been around for over a decade. It has had minimal success so far.

The USPS contract is not a given. Workhorse has generated minimal revenue from a UPS order that was made two years ago. Competition is going to intensify.

The opportunity is there, certainly. But Workhorse has to capitalize. At this point, I’m simply not convinced.

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

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