However, as an experienced tech investor, let me tell you this: don’t bet against Workhorse just yet.
Though I usually favor high growth companies with a strong technological edge, I will concede one thing. Struggling Workhorse is the ultimate “bear trap.” As investor mania in the electric vehicle space continues to heat up, here’s why Workhorse is a short-term tactical “buy” despite its shaky business.
The Great 2020 Electric Vehicle Bubble
“Value is dead,” proclaimed Bank of America in March. “The last ten years have been even worse for value investors than the dotcom bubble.”
They’ve been right, at least for now. Because since then, growth stocks have continued to trounce value: Since March, the Vanguard Growth Index has returned 46%, more than triple the gains of its Value Index counterpart. Investors have been reaching for growth.
Professional market commentators have pointed to many reasons for the change, from Tesla’s sudden profits to bearish analysts throwing in the towel.
But there’s also a more straightforward explanation: EVs are in a massive bubble.
Up Like a Rocket, Down Like a Stick
How do I know we’re in a bubble? On Wednesday, a small Hong Kong-based solar panel company, SPI Energy (NASDAQ:SPI), announced a plan to enter the EV race. Shares immediately shot up 1,200% as investors looked to “buy first and Google later.” A similar mania is shaping up in Lordstown Motor’s upcoming SPAC, with its “blank-check” company tripling in value even before its merger. (SPACs typically trade for just 10-20% higher than cash in their trusts until they complete their listings.)
These are classic signs of a market gone haywire. And it’s not without precedent. For example, during the 2000 tech bubble, companies adding “dotcom” to the end of their company’s names saw share prices rise 74% on average.
This mania also feels much like the 2018 cryptocurrency boom-and-bust.
Here’s what happened: as bitcoin prices skyrocketed from $900 to over $19,000 in 2018, enterprising companies tried to shamelessly cash in. The Long Island Iced Tea Company (OTCMKTS:LBCC), a New-York based beverage maker, changed its name to “Long Blockchain Corp.” That sent shares rocketing 450% even though the company didn’t have any business in cryptocurrency. The SEC and FBI both mounted investigations into insider trading, and the company now languishes as a penny stock.
“History Doesn’t Repeat Itself, but It Often Rhymes”
With EVs, investors are once again losing their collective heads. Companies with scant history in electric vehicles are raising billions from hopeful investors. While Workhorse does have a decade of experience building electric vans, it has never managed commercial success.
But don’t stand in front of a tidal wave of investor cheer. Workhorse owns a 10% stake in electric pickup truck hopeful Lordstown Motors. I have previously written about the company’s corporate governance shenanigans.
Legalities aside, Lordstown has all the makings of a SPAC-gone-wild. Starry-eyed investors will undoubtedly lap up the company’s claims that they have 40,000 preorders. And if the EV bubble stays inflated when Lordstown goes public, the company could rocket to a $10-20 billion valuation as investors compare the pickup truck maker against Tesla in 2013, the year Tesla produced 22,000 vehicles and ended with a $18.5 billion market capitalization.
That alone would add 80% to WKHS share value.
And with Nikola’s public relations team now stuck in full reverse, that leaves Workhorse as the only publicly traded U.S. EV maker besides Tesla. Investors won’t ignore that fact for long.
What’s WKHS Stock Worth?
Now here’s a fly in the ointment. Outside of a bubble, both Workhorse its Lordstown stake are worth $0. Why?
Firstly, take Lordstown. The company’s CEO, Steve Burns, has a history of inflating expectations. As CEO of Workhorse, he claimed to have over 5,500 preorders for the W-15 pickup truck (the forerunner to the Lordstown Endurance). A closer read of SEC filings shows these “preorders” were non-binding “letters-of-intent.” So, once Lordstown finally publishes its financials, don’t expect to see $40 million in customer deposits to back up its 40,000-preorder claim.
Secondly, there’s Workhorse itself. In Q2, the company generated just $91,942 of sales but logged $1.5 million in production costs. In other words, a negative -1,540% gross margin. That seems almost incomprehensible, considering the company also had $5.5 million in sales and R&D. How can a company lose so much money?
In a bubble, however, none of that matters. If investors play along, Workhorse gains access to one of the ingredients it needs most: cheap capital. At its current $2.3 billion market capitalization, the company only needs to dilute shareholders by 1.6% to plug its entire annual cashflow gap. And now that Nikola is in full retreat, Workhorse could presumably pull an SRI (the Hong Kong-based solar company) and announce plans for a Class-8 semi truck. The company could easily become worth $10 billion or more, a 300% upside.
What Should Investors Do about WKHS Stock?
For Workhorse to succeed long-term, the company firstly needs better management. The departure of CEO Steve Burns in 2019 was an excellent first step. “I have watched this comedy act evolve, but the time has finally come for these guys,” Stephen Baksa, a 6% owner of WKHS, said to the New York Times at the time. Perhaps current CEO Duane Hughes can do it, or perhaps they need an outsider.
Secondly, the company needs to expand its reach beyond delivery vans. Americans buy just 490,000 commercial vans per year, compared to 12.2 million SUVs, pickup trucks and heavy trucks. It’s a massive growth market if only Workhorse could reach out and grab it.
And that’s why short-sellers should stay far away from Workhorse. The hapless EV maker could realistically become the next Tesla, if only it can find the right management. Even if the company bungles and heads to zero, there’s a strong chance its wild ride to bankruptcy will bring many bears along with it.
Investors, be warned. We’re in the 2020 EV bubble.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.