Workhorse (NASDAQ:WKHS) stock is making a comeback, up more than 80% in the past month. On the surface, things don’t look good. The company lost a $6 billion contract with the U.S. Postal Service to replace its aging fleet of delivery vehicles over ten years. Workhorse generated a mere $521,000 in revenues last quarter and delivered just 6 trucks (okay, it produced 38). And, Cathie Wood, mother of technology growth investing, bailed on the stock. Yet, WKHS still stands at a market cap of $1.9 billion.
For retail investor bulls “HODLing” on Reddit, there’s buzz around a new patent filing, hope of a short squeeze and a potential reversal of the contract award.
Unfortunately, the odds of instant gratification are slim. But WKHS stock is absolutely still a buy. Here’s why.
WKHS Stock: Rise and Fall
Following Tesla’s (NASDAQ:TSLA) meteoric rise last year (+510%), investors looking for the “next Tesla” have bid up smaller electric vehicle stocks, most of which have become public via SPACs (special purpose acquisition companies). Not surprisingly, Workhorse, which builds electrically powered delivery and utility vehicles targeted at last-mile delivery, has been a perennial retail investor favorite.
To some extent, the recent movement in WKHS stock is part of the broader rally in heavily shorted meme stocks. Redditor squeeze favorite AMC Entertainment (NYSE:AMC) has rocketed 121% in the past month. And, when it comes to being a prime squeeze candidate, WKHS stock has two key characteristics going for it. First, WKHS’ float of 114 million is much lower than other similar high-short interest stocks. Second, WKHS stock has an exceptionally high short interest, at 38% of the float.
But Workhorse wasn’t always just a short squeeze play. Back in August 2020, the company garnered investor attention for its appointment as one of three finalists for a $6 billion-plus contract to replace the U.S. Postal Service’s aging fleet of delivery trucks. Anticipation surrounding this Next-Generation Delivery Vehicles (NGDV) contract fueled an almost 1,000% rally in the stock last year.
USPS: No Use Crying Over Spilled Milk
Unfortunately, Workhorse’s fortunes reversed quickly in February of this year, when USPS announced it had awarded the entirety of the 10-year NGDV contract to Oshkosh Defense (NYSE:OSK). A brutal plunge in the shares ensued. After hitting a high of over $40, shares collapsed to below $8. By May, Cathie Wood had liquidated the vast majority of her position.
It wasn’t just WKHS investors that didn’t take the USPS news well. Environmentalists and U.S. lawmakers were also upset, largely owing to the fact that only 10% of the Oshkosh contract consists of electric vehicles. In May, over 50 U.S. House Democrats wrote a letter urging for a proposal that would allocate $8 billion for the electrification of the U.S. Postal Service fleet. Workhorse is expected to win a sizable piece of this new government contract.
For its part, Workhorse hasn’t sat idly by. The company filed a bid protest in the U.S. Court of Federal Claims, under seal, to block the procurement process that USPS awarded to Oshkosh.
This dust-up around USPS has galvanized an entire community of Reddit bulls hoping for a retail-led short squeeze and a reversal of the contract award. But, the best way to look at the stock is to forget the USPS drama and look ahead. If it sounds like a stretch to expect a $6 billion contract to be awarded to a company that booked just $377,000 in revenue the entire year before — that’s probably because it is.
Numbers Still Matter
Even if Workhorse manages to win an additional contract for the electrification of the USPS, there are considerable challenges ahead.
First, Workhorse hasn’t manufactured or delivered trucks at scale. The company manufactured just six vehicles over the last quarter. Since the beginning of the year, the company has so far manufactured 38 of its C-Series vans. While that’s still more than double the amount it produced in 2020, it’s a very small number. Making its target of 1,000 vehicles for the full year may also be a stretch owing to widely documented industry supply chain issues.
Second, while the company does have other orders for its commercial vehicles, these are much, much smaller than the USPS contract. Workhorse’s largest wins are 1) a contract to supply roughly 6,320 vehicles to Pride Group Enterprises, a commercial vehicle rental company, and 2) another to supply 500 vehicles to Pritchard Companies. Other high-profile announcements include Ryder System (NYSE:R), which announced a contract to place Workhorse C-1000 vehicles on its peer-to-peer truck rental platform. FedEx (NYSE:FDX)
While the company says that it has orders for over 8,000 vehicles, it’s not clear that these orders will translate into actual revenue. The deal with the Pride Group, for example, is dependent on demand for delivery vehicles from Pride Group’s end customers. That means the final number of vehicles delivered could be much smaller than the 6,320 announced in the press release.
Competition, Big and Small
Third, if we’re honestly observing this market, it’s clear that the barriers to entry into the electric delivery vehicle space aren’t really high. Workhorse’s technology isn’t very differentiated and the company is likely to face a lot more competition as mainstream automakers including Daimler (OTCMKTS:DMLRY), General Motors (NYSE:GM) and Ford (NYSE:F), which also have plans to make commercial EVs.
These companies have considerable manufacturing scale as well as a broader customer base from which to potentially sell their EVs. Even other upstarts, such as privately held Rivan Automotive, are poised to gain traction, driven by big partnerships. For example, Amazon (NASDAQ:AMZN) has already started to use Rivan delivery vans in select locations. It plans to have as many as 100,000 vehicles on the road via this partnership within the next decade.
Finally, Workhorse’s 10% equity stake in electric truck maker Lordstown Motors (NASDAQ:RIDE) doesn’t look like it’s about to take off anytime soon. Workhorse took a $136.6 million non-cash accounting charge last quarter owing to the decline in the market value of RIDE stock. RIDE stock declined over 40% in Q1 as the company inflated its order book.
I Believe I Can Fly
To be fair, none of this sounds like a compelling long-term investment thesis. So, what else does Workhorse have going for it? Quite a lot, potentially, for patient investors. Workhorse’s Horsefly drone, designed for parcel delivery, is really the singular bull case for WKHS stock.
Delivery drones sound futuristic. And there are safety and logistics concerns. But, companies are beginning to embrace the benefits of driver productivity and faster delivery. While a drone is making its delivery, the driver can get back into the driver’s seat and go on to his next delivery, improving efficiency. When the drone has completed its task, it locates the vehicle and returns to its roof portal, ready for its next delivery.
The Horsefly, almost a decade in the making, has suffered critical quality issues, including poor navigation software and substandard construction. Now, it could finally be ready to take off. The unmanned aircraft system (UAS) is currently undergoing Federal Aviation Administration certification following a formal application by Workhorse in October 2020.
Its use is currently limited to situations where the operator can see the drone through the entire flight. But with certification potentially coming by year end or early 2022, its use case could change very quickly. Notably, during the company’s Q1 earnings call, management stated that they delivered their first HorseFly system to a commercial test customer.
FedEx (NYSE:FDX), UPS (NYSE:UPS) and DHL (OTCMKTS:DPSGY) have already announced interest in drone delivery. Amazon has already won FAA approval for its Prime Air drone delivery fleet. Walmart (NYSE:WMT) announced this week an investment in DroneUp, an on-demand drone delivery network, following a pilot last year with automated deliveries of Covid-19 test kits. The retailer also has two other drone trials — one with Flytrex for groceries and essential items and another with Zipline for health and wellness products.
The Bottom Line on WKHS Stock
Despite the recent stock surge, retail trading hype and promise of a drone-filled future, the fundamental narrative around WKHS stock hasn’t changed. Workhorse remains a speculative buy. But with the stock trading at 8x estimated 2022 sales, the valuation doesn’t look unreasonable in the context of broader EV sector valuations.
For investors willing to see the long-term picture, WKHS has a legitimate shot at the last mile delivery segment, which is ideally suited for EVs, given the low maintenance costs and lower range related issues. Sometimes, good things come to those who wait.
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On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.