In the last month, Workhorse Group (NASDAQ:WKHS) had trouble breaking out to new highs. Markets are waiting for the company to finalize a deal with US Postal Service by the end of the year. If it happens, it may win more customers for its electric delivery vehicles. WKHS stock is a high risk, high reward investment.
The electric vehicle sector is still very hot. Tesla (NASDAQ:TSLA) led it higher and increased investor interest after its battery day. So, what will it take for Workhorse to keep rising?
Workhorse needs to win a lucrative contract to build mail trucks for the USPS. If it happens, the deal would bring the company up to $6.3 billion in revenue. Conversely, short-sellers are betting that the deal will not pan out.
The bearish bet on Workhorse stock is a massive 23.76%. So, if the company comes up empty-handed, it will not generate the expected revenue. That would put plenty of selling pressure next.
Presently, Workhorse is benefiting from strong investor interest in the EV sector. Tesla is worth over $400 billion in market capitalization while Nio (NYSE:NIO) is up around 20 times from its 52-week low. A similar return on Workhorse is already underway but may potentially reward shareholders more.
WKHS Stock and the Future of Delivery
Workhorse has two-step van models: the C650 and C1000. The vehicles are 100% electric that is powered by a modular battery pack system. When the vehicle has two battery packs, it will give 35-kilowatt hours. A four-pack configuration will provide 70 kWh.
When WKHS gets the USPS contract later this year, it will validate the year-long speculation in shares. Getting $6 billion in revenue would value the stock at around 0.33 times sales, assuming a market capitalization of around $2 billion. Investors will need to exercise patience as they wait for the necessary contract approvals.
Governments typically take their time for signing off on contracts, regardless of the size. The impatient investor selling WKHS shares will create a better entry point. If the stock falls again, the total return increases, assuming that it rebounds.
Still, investors are justifiably nervous about Workhorse winning a contract of that size. The company expects only 300 to 400 vehicles produced by the end of the fourth quarter this year. Furthermore, WKHS posted revenue of just $92,000 in Q2. The cost of goods topped $1.5 million. This resulted in an 11 cent earnings per share loss in the period.
Opportunity for WKHS Stock
Workhorse’s 1,200-unit backlog forecast demonstrates the strong demand for its fleet. It has two orders with Ryder but expects all of its channel partners to help it increase its backlog quantity.
The company has ample cash on hand, too. It has $105 million in cash after tapping its credit line. So, as the cost of capital falls, Workhorse is in a good position to operate without issuing warrants and options until 2022.
Investors should recognize the production ramp from here through to Q4 and beyond. On the conference call, Chief Operating Officer Rob Willison said, “the ramp starts from here and goes up.”
He went on to say in Q4, it expects to produce 100 units a month. Next year, producing 150 – 200 monthly is possible, if the market can absorb that volume.
In 2021, Workhorse will have a higher capacity in place to mass-produce vehicles. Gross margins may turn positive, too. That will require research and development plus general and administrative costs falling.
Only four analysts have an opinion on Workhorse. The average price target is $23.33 (per Tipranks). If analysts are cautious about the stock, it will not attract as many institutional investors. It is also worth mentioning that insiders sold shares regularly in the last three months. The automated selling may not signal much but it does not give a bullish indicator, either.
Keep Workhorse stock on the watch list. If the stock dips sharply, consider starting a position.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.