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Wall Street favorite turned sour: a financial analysis of Workhorse

Written by Theo König - May 18, 2021

Reviewed by Asaf Kedem

When we last wrote about Workhorse, the company was on the back of a 400% increase in stock value in the space of 3 months. Not half a year later, the company’s stock price has fallen dramatically – down 80% from its peak in February. In this article we examine some of the reasons for the downfall, and what to expect from the company in the future.

Disclaimer: Author Theo König and editor Asaf Kedem have no positions in any of the stocks mentioned within this article. The article represents the opinions of the author and should not be taken as a direct encouragement to purchase or sell the mentioned stock. Conclusions formed within this article are based on quarterly and annual earnings published directly by Workhorse.

Workhorse Group Inc. (Nasdaq: WKHS) is an American manufacturer of electric vehicles and drones for the last-mile delivery sector. Workhorse currently has 2 electric delivery trucks available for purchase: the C650 and C1000 (named after the interior volume in cubic feet that each van offers). The main advantage of an electric chassis, according to Workhorse, is the elimination of weight and space that is used by a conventional internal combustion engine. Both vehicles feature a remarkable suspension system built independently into the 4 wheels, rather than the chassis. This gives the truck a much smoother ride to keep packages safely stowed during delivery while also allowing for the truck to drive a mere 18.42 cm (7.25 inches) off the ground, making for easier entry and exit for the driver. Both vehicles are compatible with Workhorse’s fully-autonomous drone: The Horsefly. These unmanned drones are equipped with GPS, use LTE connections, can stay in constant contact with the truck driver, and can meet the van at the next drop-off point. Essentially the driver can now cut down the workload by delivering packages simultaneously with the UAV. Finally, the company also develops its own cloud-based, real-time performance monitoring system.

For a company with so much to offer, it is experiencing an extremely volatile stock price. Workhorse stock initially began an incredible uptick upon announcing that the company would be entering the bid for the renewal of the United States Postal Service fleet. The 10-year contract, aimed at modernizing the current postal services’ vehicles, was worth an estimated $6 billion. Several companies entered the bid, the winner of which would be granted a contract to begin rebuilding USPS vans and charging networks across America. Ultimately, on February 23rd of this year, the Postal Office awarded the contract to Oshkosh. Overnight, Workhorse stock price dropped from $31 to $16. Although Workhorse may never have hoped to land the entire contract (for an estimated 150,000 vehicles), it had hoped to attain at least a small portion. In the eyes of USPS, however, it was more prudent to stick with one, much better established, company. Without a doubt, this has been the most significant blow to the company’s stock price.

Things have gone from bad to worse however, for Workhorse. Workhorse Group’s latest financial results (First Quarter 2021) unfortunately contain a massive $137 million blemish. Back in 2018, the former Workhorse CEO left the company to create another electric vehicle venture: Lordstown Motors (Nasdaq: RIDE). Located in Lordstown, Ohio, the company plans on producing electric light duty trucks, notably the Endurance, based on designs originally conceived at Workhorse. As part of the intellectual property rights deal, Workhorse acquired a 10% stake in Lordstown Motors. With the company gaining national attention through the purchase of a former General Motors plant (U.S. President Donald Trump even took interest and Vice President Mike Pence made a visit to the site), the stock price soared, and interest peaked. Since early February of this year however, the company stock price has been on a steady decline. In particular, a scathing article from Hindenburg Research (known for uncovering fraud at Nikola Corp.) has exposed the supposed 100,000 orders for the Lordstown Endurance vehicle. In essence, thousands of orders were found to be non-binding, and having been placed without requiring a deposit. The article has thrown into question Lordstown’s credibility and sent its stock to an all-time low (on 14th May 2020).

Unfortunately for Workhorse, this has transformed a $860,000 gain in Q1 of 2020 into a $137 million loss in Q1 of 2021. Emphasis should be put on the fact that this is a non-cash loss and is in reality a reduction in overall value of the company through a fair value devaluation of Lordstrom. Increases or decreases in Lordstrom stock should have no influence on Workhorse’s production. But in a very competitive and saturated market such as that of the electric vehicle sector, such large losses, whether cash or not, quickly scare off potential investors.

One final element will have further spooked investors in recent times: a reduction in production expectations. Workhorse revised its annual production targets down from 1800 units to 1000 for 2021, citing in particular a bottleneck within the global supply chain. In our eyes, this is much more worrying than the loss in value caused by Lordstown. It must be said that the automotive industry altogether is experiencing rather tumulus times, exemplified well through the computer-chip shortage. However, the reduction in production announced by Workhorse for 2021 amounts to a 40% reduction, which leaves enough room to suspect that the company is struggling more than it should to deliver its vehicles. First quarter 2021 results state that 38 units were produced, with 6 being delivered. A lack of details surrounding the reduction will certainly not help the stock price bounce back and could help exacerbate the problem.

Despite the above, the company has shown strong promise in many areas. Any fears of liquidity issues (shortages in cash) should be quickly dispelled as the company secured $200 million in funding in October 2020 from its main investors, Antara Capital GP LLC, in exchange for common stock.

The company has also shown a remarkable ability to partner with strong market participants such as CATL (provider of Workhorse battery system), J.B. Poindexter & Co. (vehicle body manufacturer set to help expand Workhorse product line), and Hitachi Capital America (provider of financing options for Workhorse dealers and customers).

Finally, concrete orders being placed is always a positive, of which Workhorse have an abundance. Currently the backlog for vehicle orders sits at 8000 units, amounting to roughly $600 million in revenue. These come not from individual customers, but rather from established companies such as Pride Groupe Enterprises and Pritchard Companies, making them much more reliable.

Auto Trendy’s take:

Volatility in the electric vehicle market is no surprise. The market is in a period of immense transition, with many newcomers entering a market that already consists of well-established giants. In our eyes the market has largely overreacted to the loss of the USPS bid, but that’s not to say that the Workhorse stock was not fundamentally overvalued at the time anyway. Our main source of concern is the production volume. Whether the company is struggling to ramp-up production, or is facing issues with their supply-chain, or a combination of both, is still unclear. The unfortunate timing of the COVID pandemic has certainly not helped. Workhorse’s ability to deliver on their production levels for this year are going to be crucial in establishing trust with its investors.

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