Once considered a no-brainer by eager investors banking on the electrified future of transportation, Workhorse (NASDAQ:WKHS) has been struggling for credibility since failing to secure a contract with the U.S. Postal Service (USPS) to replace its aging vehicle fleet. Though the company is legally challenging the contract loss, I wouldn’t bet on WKHS stock solely for that potentially positive outcome.
Rather, I think we should note that there’s real danger in jumping on particular investments that have enjoyed tremendous upside. Although it’s not always the case, when everyone seems to believe in the same thesis, you should pause for a moment. The market is full of people negotiating from opposite ends. When this dynamic fails to materialize, there’s probably a reason for it.
For WKHS stock, what likely happened was that its supporters focused so heavily on the electrification element that they became vulnerable to a blindside. Back in January, I warned that Workhorse wasn’t a shoo-in for the contract:
“[T]he EV platform, while offering myriad benefits, also has multiple questions. For instance, EV usage data indicates that EVs driven in hot temperatures degrade their batteries conspicuously more than vehicles driven in temperate climates […] Eyeballing the data, it looks to me that there’s a 7% degradation difference […] At scale, 7% could mean a world of difference for a fleet owner like the USPS.”
But beyond the technical challenges of electric vehicles (EVs), WKHS stock faces other headwinds — ones from economic considerations.
Declining Battery Costs Both Help and Hinder WKHS Stock
Looking at the developments impacting our planet, it’s pretty clear that climate change is here. So, assuming most people recognize this, the reasonable response is to promote clean transportation solutions, right? Naturally, such a backdrop benefits WKHS stock.
But one of the lingering problems of the effort to integrate EVs into the mainstream is cost. Outside of generous government subsidies, it’s simply difficult for many folks to afford the upfront costs associated with an EV. Similarly, fleet owners face a near-identical challenge, eschewing electric (and expensive) solutions for platforms that already work and are generally cost effective.
However, BloombergNEF reported late last year that the market average for EV battery costs might dip to $101 per kilowatt-hour (kWh) by 2023. For context, back in 2010, the price of a battery pack averaged $1,100 per kWh.
On the surface, that’s brilliant news for WKHS stock. Theoretically, the underlying company can start manufacturing its electric vehicles at a much lower price, passing on the savings to prospective commercial fleet owners. But there’s just one catch: battery-pack costs are expected to drop every year.
In fact, BloombergNEF estimates that, due to increasingly favorable economies of scale, battery prices could average $58 per kWh by 2030. So, if costs are going to drop by almost 43% over a seven-year period, wouldn’t the smartest approach be for fleet owners to wait?
What the Bond Market Teaches Us About Workhorse
This is why the innovations that undergird WKHS stock are both a blessing and a curse of the issuing company. On one hand, Workhorse will be able to increasingly market its viable electric transportation. But on the other, clients will also know they can save a ton of money by simply waiting — or by placing just a few orders at a time.
When I consider WKHS stock in the above context, I can’t help but think about the bond market. If interest rates rise, older bonds that have a lower yield will simply be worth less than newly issued bonds. Why pay the same stated price for a product that yields less?
If interest rates decline, then those same older bonds will comparatively have a higher yield. Therefore, investors will pay a premium for them.
Likewise, I find it hard to believe that fleet owners will make huge purchases today for electric commercial vehicles, knowing full well that they could enjoy a hefty discount in a few years. In the meantime, what’s to stop them from using what they already have?
The Bottom Line on WKHS Stock
Interestingly, The New York Times reported that, even by 2050, the majority of vehicles will still run on gasoline. That will be in large part to slow fleet turnover. When you consider how battery costs are projected to plummet, why would anybody commit to a big purchase today?
As the bond market proves, virtually all investors are rational beings. Ultimately, this old-school truth could end up upsetting Workhorse’s next-gen tech. That’s the big issue with WKHS stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.