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Workhouse Has a Tall Order to Climb

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The markets dealt Workhorse (NASDAQ:WKHS) stock some heavy blows after the U.S. Postal Service delayed its decision on awarding a potential $8.1 billion federal contract. Investors are betting big on Workhorse winning the contract, either wholly or partially.

Image of a Workhorse (WKHS) logo and drone on the side of a truck.

Source: Photo from WorkHorse.com

Although the cat-and-mouse game will continue, it’s clear investors have already priced in the contract before it’s awarded. Plus, EVs are also red hot this year. When Tesla (NASDAQ:TSLA) is the most prominent auto company in the world, ahead of Ford (NYSE:F) and Toyota (NYSE:TM), the writing is on the wall. All of these factors have pushed WKHS stock to unprecedented and frankly unrealistic highs.

Although the company has evolved and taken on several forms, it has been in business since 1998. It has never turned a profit and analysts do not expect it to until 2022. Even if the company manages to clinch the contract, there are still question marks regarding how well it can execute the task.

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That makes the stock a spec play at this stage, banking more on external factors than fundamentals. That makes me wary of the electrically powered delivery and utility vehicle manufacturer at this stage.

WKHS Stock Is Not for the Faint of Heart

Don’t get me wrong here. There are plenty of reasons to be bullish on the stock. Workhorse occupies a niche space in the EV industry, has a patent portfolio, and a customer list that includes DHL (OTCMKTS:DPSTF), FedEx (NYSE:FDX), and UPS (NYSE:UPS).

Also, Workhorse has closed on $70 million in financing through offering a senior secured convertible note. The company is selling $200 million of its 4% senior secured convertible notes to two institutional lenders. So, plenty of financing here will help in operations. Though the latter comes with a juicy option to convert the notes into stock at $36.14 per share, a premium of 35% over the Oct. 9 closing price.

But you get my point. The company has plenty going for it at this stage. However, that doesn’t justify WKHS stock rising almost 1,300% over the last six months. It’s understandable that the prospect of an $8.1 billion federal contract will send shares soaring. Still, the prospect of getting burned is always omnipresent when you see this kind of share activity.

I always like to dig deep into the fundamentals. Analyst estimates point to less than $150 million of sales in 2021. Although that’s expected to be a 574.34% uptick, the absolute numbers are certainly not impressive for a company with a valuation of approximately $2.45 billion.

Chart showing Workhorse (NASDAQ:WKHS) revenues and estimates
Chart showing Workhorse (NASDAQ:WKHS) revenues and estimates

Source: Chart by Faizan Farooque, data from market estimates

Putting All the Eggs in One Basket

Despite several catalysts, the biggest driver of WKHS stock’s recent surge is the potential USPS contract. The postal service wants to replace the white, right-hand-drive vans with next-generation delivery trucks.

In a research note, Roth Capital analyst Craig Irwin said that Workhorse is a favorite to win the contract. Roth Capital Partners believes the company is the “best fit” out of the competitors left in the race. The bull case may have to do with Workhorse’s headquarters, Ohio, a swing state. Many analysts are betting the president will award the contract to better his chances of winning his re-election bid.

I believe that could factor into the final decision, but it’s certainly not the be-all-end-all reason why Workhorse will get the contract. Still, even if the company receives the contract or a portion of it, it won’t be a straightforward path to the top.

Workhorse is not vertically integrated, like its competitors. If it ends up with such a huge contract, it will have to undergo some massive growing pains that will include ramping up production capacity. It’s not that the company cannot do so, but it doesn’t have a history of delivering such large contracts. It will have to outsource large segments of the agreement to others. That will only contribute to Workhorse’s negative margins.

How to play WKHS stock

If you were an avid InvestorPlace reader, then you probably picked up WKHS stock was about to get hot. Under the circumstances, you made a nice profit, but the moment of truth has arrived. Sometime this month, if the company lands the USPS contract, shares will skyrocket to new heights. If there is a hitch, shares will tank. So, you need to gamble with the money that you can afford to lose.

I would advise keeping some funds invested in WKHS stock while taking some of your hard-earned profits and investing them in other, more stable stocks. The company won’t be profitable for a while, and the contract is not a done deal. So, unless you are in for the long haul, this is an excellent opportunity to part with a portion of your stake.

If you are willing to take on a bit of risk, then go ahead and keep investing in the stock. There are more signs of the company getting the USPS contract than against, so if you are willing to play the numbers, go right ahead.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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Christine founded Sports Grind Entertainment with an aim to bring relevant and unaltered Sports news to the general public with a specific view point for each story catered by the team. She is a proficient journalist who holds a reputable portfolio with proficiency in content analysis and research.

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Christine Watkins

Christine founded Sports Grind Entertainment with an aim to bring relevant and unaltered Sports news to the general public with a specific view point for each story catered by the team. She is a proficient journalist who holds a reputable portfolio with proficiency in content analysis and research.

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