Well … that was fast. In less than 24 hours, sell-rated Workhorse (NASDAQ:WKHS) has gone from an electric vehicle investment darling to a cautionary tale about unbounded investor optimism. As of this writing, WKHS stock is down over 50%.
The plummet came from the news yesterday that the electric truck maker had lost a massive USPS van contract to buy-rated OshKosh Defense (NYSE:OSK). It’s a turn of events that few investors expected. But the signs were there. In October last year, a short-seller warned about the quality of Workhorse’s prototypes; the EV prototype reportedly ran out of range and got stranded on a road.
The actual reasons for Workhorse’s failure to ink the $6.3 billion contract could take months to fully emerge. But one thing is clear: as much as we still might love Workhorse’s vision, we shouldn’t try buying into its inevitable short-term rebound. Instead, investors should cut their losses on this once-promising stock and focus on higher-potential long-term EV plays.
WKHS Stock: A Series of Blunders
This isn’t the first time I’ve worried about Workhorse’s troubles. In September, I wrote about the company’s failures at selling electric vans and its deep corporate governance issues. Then in November, I wrote how the company pulled an equally stunning maneuver, losing $84 million on a poorly timed debt raise (only to repeat the same mistake several months later).
But still, the hope of landing an enormous $6.3 billion contract kept the share price alive. The firm was one of the earlier players to embrace electric trucks, and sealing the USPS contract would have acted as a stamp of approval worth even more than the contract itself.
USPS Rejects Workhorse Quality
For a while, it seemed that USPS might even split the contract to replace its massive, aging fleet. That would have still been a win for Workhorse – the company would have received more time to develop its NGDV truck model and ramp up its production lines.
On Tuesday, however, the postal service threw that calculus out the window. By soundly rejecting the Workhorse bid that evening, USPS signaled that Workhorse’s quality and production abilities weren’t acceptable. The experience echoes that of buy-rated UPS (NYSE:UPS), which tested over a thousand of Workhorse’s C-1000 electric delivery vans before choosing to move forward with a different electric van maker, Arrival.
USPS’ doubts casts a long shadow over Workhorse’s prospects. With Workhorse’s high-profile rejection, other fleet operators will think twice about buying in. Few purchasing managers want to roll the dice on a company that others have already rejected. And the fewer sales that Workhorse makes, the greater the chance the company could disappear, taking its supply of essential spare parts along with it.
What’s Workhorse Stock Worth?
The downward cycle will feed on itself. No fleet operator wants a truck that might be impossible to repair. And that perversely makes Workhorse even more likely to fold; if nothing changes, the stock looks on track to sink to its $3-5 liquidation value.
There are, however, several avenues that could still rescue Workhorse stock. Firstly, the company can lean on its fast-growing industry. President Joe Biden has committed the U.S. federal government itself to electrify its entire fleet, so Workhorse could yet win a different contract. Secondly, Workhorse has a high degree of operating leverage – a byproduct of its shallow sales figures. That means even a small improvement in sales could send shares of this $1.7 billion minnow skyrocketing.
And finally, Workhorse still owns 10% of Lordstown Motors, a spinoff that former Workhorse CEO Stephen Burns now runs. As of writing, the stake is still worth over $300 million, or about $2.8/share. Workhorse’s $80 million cash pile also provides some ammunition to turn the firm around.
But cynics might point to the EV maker’s past failures and conclude that the company is beyond saving. At least one of the company’s flagship models use engines and inverters made by buy-rated Dana Incorporated (NYSE:DAN), and the company has little evidence of owning billion-dollar IP.
Short sellers have also had little trouble finding issues with Workhorse’s quality. In one example, an unnamed source claimed that during a USPS test, “the parking brake failed… the truck ran away, the USPS driver, a union member, had to jump out of the truck while it was moving.”
At the time, these were all unproven statements – investors had no way of validating any short seller claims. But as the USPS made clear, Workhorse’s problems were severe enough that not even a dollar of the $6.3 billion contract got awarded to the struggling company.
What to do with WKHS Stock?
Workhorse still burns over $50 million cash per year, giving it only a limited window to turn around. And given Workhorse’s history of missing sales figures, it’s unlikely that the company can recover quickly.
Workhorse’s travails point to a broader investment picture: that the inevitable shakeout of the electric vehicle market has begun. Big winners like Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Lucid Motors (NYSE:CCIV) will provide investors with lasting gains, while weaker ones will disappear.
But as weaker players fold, don’t worry about their losses (or missing out on potential turnarounds). In growth-market investing, shakeouts are just another step on the long road to success.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.