The Second-Most Interesting Question About Workhorse Stock Right Now

When it comes to Workhorse (NASDAQ:WKHS) , everything right now seems to boil down to one question. Will the company win the award — or at least part of the award — for the next-generation vehicle for the United States Postal Service? It’s a critical one about WKHS stock.

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

It’s not hard to see why. The USPS award has the potential to transform Workhorse. This is a company that over the past four quarters has generated just $200,000 in revenue. The USPS award could total more than $6 billion.

After the recent pullback in WKHS stock, meanwhile, Workhorse has a market capitalization of less than $2 billion. And so Luke Lango argued on this site that the stock could triple should Workhorse win the award. Lango may well be right.

Of course, WKHS, even with the recent decline from $30 to $17, probably plunges if it doesn’t win that contract. Barring another significant win, the current revenue base seems unlikely to support a market capitalization over $1 billion, let alone near $2 billion.

Again, it’s not hard to see why seemingly every investor long (or short) Workhorse stock is intently focused on the USPS decision. But given that the decision has been delayed until year-end (at least; Workhorse at one point thought the decision would be made by the end of last year), there’s another important question worth asking in the meantime.

What’s changed?

The Big Rally in WKHS Stock

On the last day of 2019, WKHS stock closed at $3.04. It ended Tuesday at $17.25, up a whopping 467%.

That kind of rally would suggest that the Workhorse story has meaningfully changed. But in fact, it really hasn’t.

Again, the USPS award was supposed to be finalized last year. In fact, one analyst argued in April that Workhorse had a real shot to win the USPS contract. That analyst put a price target on Workhorse stock of just $4.

Elsewhere in the business, the story too seems mostly the same. Workhorse long has touted its relationship with United Parcel Service (NYSE:UPS), but a short seller reported that UPS has “already moved on” to a new electric truck partner.

Whether that’s precisely true or not, a company that said it would deliver 2,000 vehicles in 2018 now plans to deliver just 300 to 400 this year — most of which are projected to come toward the end of the year. At the least, the pace of the UPS contract has been disappointing.

Elsewhere, there’s not much news, either. Again, revenue remains minimal. Workhorse talks up its HorseFly drone delivery system, but its SureFly VTOL (vertical take-off and landing) offering, a long-touted effort, was sold for just $4 million in November.

Again, it’s an important question: what’s changed?

The EV Rally

The most obvious answer is the market’s perception of electric vehicle stocks. Indeed, the sector has had a monster 2020.

Nio (NYSE:NIO) has rallied 600%. Tesla (NASDAQ:TSLA) has gained 400%, and incredibly added over $300 billion in market capitalization. Plug Power (NASDAQ:PLUG) isn’t precisely an EV play, but that commercially-focused, alternative-fuel name has climbed 368%.

But each of those stories have improved this year. Nio executed a major financing deal which put it on firm financial footing. Deliveries have shown solid growth as well. Tesla has powered through the pandemic. Plug Power keeps adding new customers and expanding its market.

For Workhorse, however, 2020 hasn’t been all that eventful, stock price aside. The USPS deal still is in a holding pattern. The company hasn’t announced any significant contract wins elsewhere. A partnership with Hitachi looks more like Workhorse being a customer than a true partner.

The lack of movement and the 400%-plus stock price increase seems contradictory, even in the context of optimism toward the sector.

The Virtuous Circle

And to some extent, I think that’s the case. I was skeptical toward Workhorse a month ago with the stock at $23, and the cheaper price doesn’t necessarily change my opinion.

This simply doesn’t look like a transformative company, whether considering minimal patents (just eight), its need for “off-the-shelf” components, or minimal research and development spending (just $3.5 million in the first half of this year).

But reasonable investors can see it differently. And the political considerations that could impact the USPS decision may make any current concerns moot. If Workhorse has a $6 billion award in front of it, it will easily be able to attract the capital and resources needed to serve that contract. That deal in turn could attract new customers as well.

That aside, there is one fundamental aspect to keep in mind. The higher WKHS stock price itself is a help.

For instance, Workhorse was able to raise $200 million through a convertible bond offering this month, with a conversion price above $36. That deal does de-risk the story, particularly given that it was not certain a year ago that Workhorse could last until the USPS decision.

The higher stock price provides access to more capital at a lower price, which in turn provides an advantage against smaller, private rivals. A similar cycle seems to be playing out elsewhere in the EV space, with both Nio and Tesla prime examples.

Of course, the risk at the moment is that a virtuous circle can turn into a vicious cycle. That in turn suggests that the sell-off in WKHS stock could lead to a bigger sell-off, unless or until the USPS finally steps up.

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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