Workhorse (NASDAQ:WKHS) stock should have had a dismal Q3. It didn’t. The company recorded an overall weak period, yet markets didn’t punish it.
The company has serious efficiency issues which need to be fixed. Yet, the company continues to be full of promise and has EV tailwinds as well as political tailwinds.
I believe the company will rise for at least the next year despite its internal problems. After that, there’s a much bigger external force on the horizon. The stock is likely going to rise despite all of its problems. For some investors, it will make sense to buy now and ride out the hiccups that are sure to come. But the business case in the next few years looks very problematic.
Sales Have Actually Gone Well
Sales should be the primary driver for WKHS stock while it establishes itself as an EV maker. Yes, now there are many knocks on the company, and many kinks to work out. Those will continue to garner scrutiny, as they should. However, top line revenue is the driver. The company can continue to operate inefficiently but also see its price rise as long as sales rise.
Therefore, credit should be given because credit is due.
The company made progress in the last year. Investors who compare Workhorse’s sales in Q3 2019 and Q3 2020 must admit the change has been dramatic. Q3 2019 saw Workhorse make $4,258 in sales. Workhorse made $564,707 in sales in the same quarter this year. And yes, that is a spot comparison but it does merit consideration as a positive. In fact, those Q3 sales accounted for 76.2% of the company’s 2020 profits. The narrative is clear: Workhorse is increasing its sales pace.
WKHS Stock Investors Can’t Ignore Problems
Yet, investors cannot turn a blind eye to the company’s inefficiency woes. The costs associated with those sales are concerning. Investors and pundits alike need to consider not only the pace with which sales accelerate in a young company, but also how quickly said company can reduce expenses associated with those sales.
Workhorse hasn’t done much, frankly.
Workhorse recorded a gross sales loss of nearly $3.4 million on just over $370,000 in sales through Q3 2019. Put another way, Workhorse spent $9 to make a single dollar of sales. That’s value destruction in a nutshell. Through Q3 2020 the story has been only slightly better. It has cost the company $7.20 to make $1 of sales through Q3 this year. Workhorse might have become 20% less inefficient this year, but it’s really just a serious knock no matter how you slice it.
Serious Operational Trouble
Further – and this point is important – the company lost a massive amount in Q3 2020 when operational inefficiencies are added to the already high cost of sales. The company lost $2.25 million making sales of nearly $565,000 in Q3. That isn’t good, but it is not uncommon in fledgling companies. However, the company managed to record an $84 million operating loss in Q3.
Some $74 million of that $84 million dollar operational loss was incurred through interest expenses. Without looking deeper into the origin of that interest expense (bonds, loans, convertible debt, lines of credit), investors should simply note that this indicates the company makes poor investments of shareholder money. My InvestorPlace colleague Thomas Yeung does in fact do a deep dive into this issue, and it turns out convertible notes were the culprit.
This inefficiency is indicative in Workhorse’s WACC (Weighted Average Cost of Capital) versus ROIC (Return On Invested Capital) number. Its average cost of capital is 21.42%, and its return is -22.16%. Ideally return should outstrip cost. A return equal to costs is a good goal for a young company. However, Workhorse’s metric is quite bad.
USPS Contract Chances
Workhorse is still a strong candidate to win a portion of the U.S. Postal Service’s Next Generation Delivery Vehicle (NGDV) contract. I can find no evidence that they have been locked out despite some unfounded speculation on the internet.
In fact, I believe their chances increased given President-elect Biden’s stance on EVs. He specifically intends to focus on government fleet electrification efforts, which of course bodes well for Workhorse’s chances. It is the only fully electric option of the remaining contenders.
The two remaining finalists’ vehicles, one jointly developed by Ford (NYSE:F) and Oshkosh (NYSE:OSK), and the other by Karsan/Morgan Olsen, are not full EVs.
I still believe the NGDV contract is going to make or break this company. And its chances apparently improved. But a bigger EV van problem exists for this company: Amazon.
On Track and Cash Rich
Rivian and Amazon (NASDAQ:AMZN) recently unveiled their jointly developed EV van. Given Amazon’s deep pockets and the scale at which they deliver packages, Workhorse has a big problem on its hands.
No matter how much of the postal service contract Workhorse wins it will still have a big question mark in front of it: How does Workhorse compete against Amazon/Rivian for delivery van market share?
Amazon plans to have 10,000 Rivian EV vans on the road by 2022. Workhorse plans to produce 1,800 in 2021. Those numbers are projections, however betting money would have to assume Amazon can mobilize the capital to get more EVs produced, and faster.
My point here is that Workhorse may become the postal vehicle, but Rivian’s EV van is likely going to be much more ubiquitous. And Amazon is going to be much more capable of working out the flaws in those vehicles quicker (Amazon data capabilities and capital versus those of Workhorse).
Therefore, it seems likely that Rivian can gobble up much more EV van market share than Workhorse. Long-term, Rivian looks much stronger even though WKHS stock is arguably more strongly associated with EV vans in the public perception now.
Verdict
I still think WKHS stock is going to continue to rise in the next year despite all the negatives I listed in this article. There’s too much potential, and I think they have to win a good chunk of the postal NGDV contract.
I also think Rivian is going to be stronger long-term. Investors can make money off Workhorse for the next few quarters, but I think Rivian will be much stronger when it goes public.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.
