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How the Risk in Workhorse May Have Entered the Left Lane

As millennials and Generation Z make their presence increasingly known in the work force, the profile of alternative energy vehicle manufacturer Workhorse (NASDAQ:WKHS) looks better and better. Young Americans have been placing greater emphasis on environmental concerns and overall sustainability. That benefits WKHS stock for the long haul.

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

Surprisingly enough, though, another catalyst for Workhorse has been the novel coronavirus. While no one wants this pandemic to continue, fossil-fuel based firms have been severely affected, giving electric vehicles (EV) a headwind. That’s because the electric delivery trucks that Workhorse specializes in require fewer moving parts than their combustion-engine counterparts, making them more reliable as well as resilient to global supply chain disruptions.

But that’s just a granular detail. The more obvious benefit? WKHS stock gains from the increased demand in contactless delivery. As you probably know, if people can get something online instead of in person now, they will. To meet that need, carriers have ramped up their routes.

Under a fossil-fuel paradigm, this increased volume costs a lot due to the last-mile dilemma. At the same time, though, the large volume provides the scale needed to make a transition to EV feasible for carriers. So, as long as Covid-19 sticks around — and data from the Centers for Disease Control and Prevention (CDC) indicates just that — the company has a viable upside pathway.

And even if Covid-19 fades away, the collective shift to e-commerce could at least be semi-permanent. For instance, online sales represented 16.1% of total retail revenue in the second quarter. That’s up a staggering 49% year-over-year. For context, this metric increased at a compound annual growth rate (CAGR) of about 15% between 1999 and 2019.

So, WKHS stock should be an easy buy, right? I don’t disagree that the longer-term fundamentals are positive. However, there are other angles to consider with this company.

WKHS Stock, USPS and Lackluster Earnings

One of the biggest catalysts for WKHS stock is that the underlying company is a finalist for the U.S. Postal Service’s (USPS) contract to develop next-generation delivery trucks. According to some sources, Workhorse has the highest probability of being selected. If so, that would be stunningly positive for the organization.

However, the company’s disappointing third quarter earnings report put a damper on the excitement. Workhorse posted a net loss of $84.1 million, compared to a loss of $11.5 million in Q3 of 2019. The company also had a loss of “$9.8 million compared to a loss of $5.6 million in the third quarter of 2019.”

But the main concern from the report was actually the Q4 guidance. Workhorse stated that production would be  “substantially lower” than the prior guidance calling for around 300 to 400 vehicles. Management cited battery supply issues and staff quarantines due to Covid-19.

Frankly, I’m not sure that this will damage Workhorse’s chances at securing the USPS contract. However, it’s not a great look. Remember, the reliability of the USPS was under severe scrutiny — and still is — because of the contentious election cycle. So, the federal agency will likely want to work with a company that it can trust under any circumstances.

The Future of EV and E-commerce

Setting that aside, the earnings disappointment also highlighted that emerging technologies are often vulnerable to unforeseen disruptions. And that potentially means that how the pandemic benefits the company could just as easily be taken away.

While I and many other analysts have touted the strong e-commerce integration as a bullish factor for WKHS stock, it’s also important to look at it from all angles. For example, what is the increase — if any — in product returns from e-commerce channels? If it’s greater than pre-pandemic online sales, this would imply that consumers could resort back to brick-and-mortar purchases upon the return to normal.

Unfortunately, I don’t think that this data is readily available right now. What I did find, though, is that 40% of prospective e-commerce shoppers “held back on purchasing online due to complicated returns processes.”

Now that is an interesting fact. Due to the overwhelming runup in e-commerce, many retailers had to adjust their return policy — otherwise, the logistics could be a nightmare. How does that apply to Workhorse? Well, e-commerce might not be the panacea we once thought it was.

Still an Intriguing Bet — But Be Careful

When stacked up against the other USPS finalists, Workhorse does seem to be the best fit. Of course, I’m not suggesting that this is a foregone conclusion. In a year full of surprises, you’ll forgive me for not wanting to make firm predictions.

But I’m encouraged with the overall picture of WKHS stock. That being said, I also don’t think it’s a bad idea to be careful about this. In fact, it’s a very smart idea.

So, take a modest bet if you like, but keep the powder keg dry in case of further pullbacks.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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