Bears who bet against Workhorse Group (NASDAQ:WKHS), an auto manufacturer, may want to reconsider their position. At a short float of 23.9%, the bearish bet may not pay off if the stock finds new highs. Conversely, Workhorse stock is ripe for a correction after electric vehicle stocks plunged last week. Tesla (NASDAQ:TSLA) shares fell 16.75% from its peak, albeit down only 5.5% in the last week. Nio Limited (NYSE:NIO) is off 14.6% from its high.
Why should investors like Workhorse, especially after posting a second-quarter loss?
WKHS Stock Steady
After posting a net loss of $131.3 million in the second quarter, markets barely reacted. The firm is focused “on providing sustainable and cost-effective drone-integrated electric vehicles to the last-mile delivery sector.” In the last quarter, is delivered three C-series electric step vans to Ryder Systems and Electric Vehicle Fleet.
The low delivery number is just a start. Ramping up its operational and EV operations must happen first. CEO Duane Hughes said that Workhorse is the only battery-electric vehicle OEM that may sell and deliver vehicles in all 50 states. So, the total addressable mile is potentially the biggest among the BEV players.
Workhorse reported revenue of $92,00, compared to $5,500 last year. Costs of goods rose from $930,000 to $1.5 million. It also incurred higher expenses due to staff costs, stock incentives, and consulting costs.
Opportunity
The company’s relationship with Ryder and other electric vehicle solutions firms is a positive catalyst. Just as the UPS may garner large scale orders, Ryder will have sizeable orders, too. The CEO said on the conference call that it expects around 1,200 units in backlog orders. As Workhorse’s channel partners help it increase its order quantity, revenues will grow.
Workhorse stock is already up 1,399% from just a few months ago. And since the potential revenue is not yet realized, the stock is at risk of selling off. Just as Tesla stock fell, this company could face a steep correction. But as the company fulfills customer orders and it exceeds product satisfaction, deliveries should grow. CEO Hughes said on the conference call, “We are continuing to make sure that the trucks that we do deliver to UPS knock it out of the park if you will.”
Investors should watch for Workhorse reaching a 100-unit production rate per month as early as the third quarter. At that time, the company will identify efficiencies and engineer out costs. That would maximize operating margins and minimize overall costs. As its business scales, Workhorse is well-positioned to operate at a profit.
Workhorse benefited from a $50,000 incentive program from California. And each fleet may put in 200 units in the region to get the voucher.
Company Value
Workhorse’s valuation does not depend only on unit sales. Its technology value will increase over time. Plus, its licensing agreement will allow the company to share components from its different suppliers. For example, in its unit delivery to the Post Office, it uses parts from its various supply partners.
Its partnership with Duke Energy is progressing. For now, Duke will supply infrastructure to Workhorse’s customers. In return, Workhorse is Duke Energy’s first choice for supplying trucks.
On Wall Street, four of the five analysts rate Workhorse stock as a buy (per tipranks). The average price target is $24, which implies the stock has an upside of ~22%. Based on the scoring system, the margin of safety, based on enterprise value to sales, suggests a lower price target.
The stock scores a 96/100 on sentiment due to the rally but falls short on quality. The negative return on assets, a negative operating margin, and a negative return on invested capital are triggering the 4/100 score. As the company ramps up shipments, this score should increase.
Investors who missed the rally in Workhorse should stay on the sidelines and wait for a pull-back first. Those who bought shares early should not sell it.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
