It’s arduous to justify Workhorse’s (WKHS) present ~$three billion valuation, contemplating that the Street expects the corporate to make lower than $150 million in revenues subsequent fiscal 12 months. The main cause why the stock trades so excessive is because of the truth that the corporate may win some portion of USPS’s $6.three billion contract to ship its EV vehicles to the nation’s greatest postal service. Aside from that, we don’t see another cause to justify Workhorse’s current share price appreciation. As well as, the dearth of capability to fabricate vehicles at scale by itself is probably going going to harm the corporate’s margins even when it wins the contract. Contemplating this, we consider that Workhorse is overvalued.
Plenty of Pink Flags
By being a pioneer of the EV enterprise, Workhorse labored on numerous electrification tasks with Basic Motors (GM) and Mercedes for greater than a decade and solely later determined to promote its personal EV autos beneath its model identify. Presently, the corporate has barely greater than 100 workers and it’s on monitor to ship as much as 400 C-Sequence EV vehicles by the top of 2020.
Earlier this 12 months, Workhorse benefited from the injection of liquidity to the markets by the Fed, as stocks managed to shortly get well from their March lows and reached new all-time highs shortly thereafter. By being an EV firm, Workhorse’s stock adopted the upside development of different stocks like Tesla (TSLA), Nikola (NKLA), and NIO (NIO) and shortly appreciated and reached its personal all-time excessive. As well as, the corporate was capable of maintain its momentum by reaching the ultimate stage of the bidding course of for USPS’s $6.three billion contract to fabricate vans for the postal service.
Whereas Workhorse’s development prospects look good, its financials should not as spectacular as some may suppose. In Q2, Workhorse’s web loss widened to $131.three million from a web lack of $20 million a 12 months in the past. Nonetheless, regardless of the rise of losses and curiosity bills, Workhorse’s stock managed to point out an impressive efficiency in current months, particularly if in comparison with the efficiency of the S&P 500.
Regardless of such an increase of the share price in current months, it’s arduous to name Workhorse a stable firm. Whereas Workhorse has barely above $100 million in liquidity, it’s unable to develop into worthwhile and generate optimistic FCF after being in enterprise for over 20 years already. Whereas in an effort to keep afloat Workhorse managed to safe $70 million in exchange for convertible notes earlier this 12 months, it’s very possible that it’s going to proceed to extend its debt burden and dilute its current shareholders within the following months, since its margins will proceed to remain in detrimental territory.
As well as, regardless of pivoting to the manufacturing of business autos a very long time in the past, Workhorse nonetheless didn’t enter the commercialization stage, though it has been a public firm longer than Tesla. The most important downside of Workhorse at this stage is that it doesn’t have a novel enterprise model and it’ll quickly compete in a saturated setting. As the recognition of electrical autos will increase and the market begins to mature, increasingly more competitors will begin to enter the area and scale the manufacturing of their very own EV vehicles. The truth is that by outsourcing numerous duties and having a restricted capability to fabricate vehicles, Workhorse doesn’t have any pricing benefit that would’ve improved its funding attractiveness. If legacy carmakers together with Tesla determine to enter the EV vans market, then it will likely be arduous for Workhorse to compete with them contemplating that it operates with detrimental margins even now, when the competitors is scarce.
Whereas the potential USPS order is actually a significant driver of development for Workhorse’s stock, there’s no assure that the corporate will have the ability to win the entire $6.three billion contract by itself and even win some portion of the contract in any respect regardless of being within the last stage of the bidding course of. Consequently, there’s a threat that its stock will tumble within the near-term, particularly if we take into accounts the power of Workhorse’s vertically built-in opponents to develop their very own model of EV vans for USPS if wanted. In current days, two contradicting experiences surfaced concerning the corporate’s probabilities to win the contract. With a lot uncertainty within the air proper now, we consider that Workhorse isn’t an excellent funding for risk-averse value traders. One factor that’s sure is that even when Workhorse in some way wins some portion of the contract, its lack of capability to construct a excessive variety of vans by itself will deteriorate its future margins.
Contemplating all of this, it’s protected to say that Workhorse is a playing stock, which may go in each instructions within the brief time period, however will possible tumble in the long run attributable to its weak monetary place and the shortcoming to considerably scale its operations. With a market cap of practically $three billion and projected income of lower than $150 million in 2021, it’s protected to say that Workhorse’s present price is unjustified and its stock is overvalued.
Disclosure: I/we now have no positions in any stocks talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.