In my previous article on Workhorse Group (NASDAQ:WKHS), I talked about its unclear path to profitability and how investor enthusiasm is starting to wear off. Since then, WKHS stock has bounced back and has gained an impressive 41%. This beckons the question that are these gains justified?
The majority of the hype surrounding the stock pertains to the $6 billion US Postal Service (USPS) contract.
Another growth catalyst is its Lordstown stake, with Lordstown Motors merging with special purpose acquisition company (SPAC) DiamondPeak Holdings (NASDAQ:DPHC).
On the flip side, there can be a significant bear case that can be made for the Ohio-based EV maker. As I discussed in my previous article, the company appears dysfunctional, with ineffective intellectual properties and weak financials.
Its path to profitability is muddled up, and many would question the company’s ability to come through on its deliveries without significantly impacting its margins.
The Bull Case
The bull case for Workhorse is that it wins the lion’s share of the $6 billion USPS contract. With Ohio being a swing state, there is an excellent chance that President Trump alters his view on green vehicles and awards Workhorse the USPS contract.
Additionally, the company could retrofit the Lordstown facility to develop delivery vans and its EV pickup trucks. This is primarily because the management feels that its facility in Indiana might not be cost-competitive for such a massive contract.
Execution remains a challenge for Workhorse, but if its most recent quarter is an indicator, it seems to be doing well in increasing sales. Sales in the second quarter were up by a massive 1572%.
Moreover, the contract is likely to light a fire under WKHS stock, which has already had a stellar year so far. Hence, if you’re bullish on WKHS, now is probably the right time to grab it before it skyrockets
The Bear Case
The bears feel that Workhorse might not even be in a position to compete effectively for the USPS contract. The company’s dismal performance over the years is enough to make anyone skeptical about their ability.
Workhorse has been around since 2007 and has yet to turn a profit. Hence, the bears feel that the company could never deliver several thousands of trucks, part of the USPS contract.
The company is financially weak, with negative free cash flows from its inception. Additionally, it has no experience supplying trucks to the US and other governments, unlike its competitors.
One of the major concerns for Workhorse currently is its unrealistic $2.5 billion valuation. To land the USPS contract, it needs to be able to deliver on the required targets profitably. The bidding process is highly competitive, and its up against companies that have significantly better margins.
Therefore, even if Workhorse wins the contract, its margins are likely to tank even more. Lordstown Motors would also suffer and would never want to reduce its profitable Endurance EV truck’s capacity.
Final Word on WKHS Stock
I’ve laid out the bullish and bearish scenarios for the company, and its now time to look at what’s most likely to happen. As impressive as the USPS deal could be, I have to agree with the bears that it’s tough to see Workhorse getting it at this time.
Even if it does get it, it’s likely to cripple margins, pushing it further down. Moreover, its tough to see how the retrofit scenario will play out with Lordstown Motors. Hence, it’s best to avoid the WKHS stock at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
