For years now, the discussion around Workhorse Group (NASDAQ:WKHS) stock has centered on a potential contract with the United States Postal Service. At a certain point, the USPS speculation drowned out of the rest of the investment case.
But the USPS deal alone wasn’t enough to support WKHS stock, which at last month’s highs had a market capitalization approaching $5 billion. Workhorse needed to use that deal as a springboard to establishing itself as a legitimate player in commercial electric vehicles.
Without that deal, there’s still a path. And there are still hopes that Workhorse might be able to grab some kind of victory from the jaws of defeat.
Regardless, more is needed. And on that front, Workhorse hasn’t delivered either.
Understanding the USPS Deal
It was easy to see the USPS deal as potentially transformative for Workhorse and for WKHS stock. The contract has a total value of $6 billion. That’s higher than Workhorse’s peak market capitalization.
But, fundamentally, the importance of the contract might have been overstated. Bulk orders of that size generally don’t have attractive pricing. Workhorse is mostly an assembler of externally produced components, meaning that much of the revenue would have gone out the door. Certainly, the contract on its own was not going to provide enough profit to support the current valuation.
To be fair, that wasn’t necessarily the point. The USPS deal would establish Workhorse as a leader in the industry. It would allow for economies of scale for vehicles sold to other, mostly commercial customers. It could even provide a beachhead within the federal government for additional, if smaller, contracts with other agencies.
Workhorse still has hopes that it can salvage the deal. It’s set up a meeting with the Postal Service to understand why the agency went with Oshkosh. Politicians in Ohio, where Workhorse is headquartered, have weighed in. They’ve asked the President Joe Biden administration to investigate whether there was “inappropriate political influence,” given that the Oshkosh deal provides only a small portion of the vehicles to be electric.
Some investors see hope on that front. Regardless, contract or no contract, the bull case here needs more.
The Concerns in Q4
The bear case for Workhorse can be summed up simply: there’s just not that much here. It’s why bears argued last year that Workhorse had little chance of winning any portion of the USPS contract.
Lost in the news surrounding the Postal Service was the fact that 2020 financial results seem to support that bear case. Workhorse generated just $1.4 million in revenue through 2020. The company posted a significant profit, but that all came from the rising value of Workhorse’s stake in Lordstown Motors (NASDAQ:RIDE).
Even more concerning is the delivery numbers. In the fourth quarter, according to the earnings call, Workhorse delivered just seven vehicles for the quarter.
For an early stage company, that might not be a problem. But only a few months ago, Workhorse expected 2020 deliveries of 300 to 400 vehicles, most of which would be delivered in Q4. Though that guidance was pulled after Q3, a single-digit number for the quarter looks disappointing.
And it’s part of a long-running trend. It’s worth remembering that Workhorse targeted 2,000 deliveries in 2018. According to the 2020 annual report, it has delivered 370 vehicles in its entire history.
For all the claims about political interference, it’s that problem that may have been the biggest factor in the USPS deal. Workhorse simply has never shown it has the capability to deliver on any major order, let alone an order valued at $6 billion. The company’s results suggest that commercial customers largely feel the same way.
The Case for WKHS Stock
Certainly, the Workhorse story isn’t over. The stake in Lordstown is worth almost $350 million, and Workhorse can start monetizing its investment this year. There’s another $200 million-plus on the balance sheet. Bankruptcy is not on the table.
Meanwhile, Tesla (NASDAQ:TSLA) infamously has missed more than its share of targets. Barely a year ago, Nio (NYSE:NIO) was delaying payroll. The growth of a vehicle manufacturing business is not linear, and it’s certainly not always smooth.
So it’s too early to simply write off WKHS stock. But the flip side is that at a certain point, the company needs to give investors some reason for confidence, particularly if USPS sticks with Oshkosh. And we just don’t have that evidence.
The company hasn’t built a business. It has only eight patents, according to the annual report, though 19 applications are pending. Research and development spending totaled just $9.1 million in 2020, which hardly seems like the kind of outlay that builds a technological “moat”.
The USPS deal could have brought in the revenue to fix a lot of those problems. Perhaps it still will. But regardless, those problems still exist. They need to get fixed.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.