Is Workhorse Stock Worth A Look After 60% Drop?

Workhorse Group (NASDAQ: WKHS) – an electric vehicle player focused on delivery vehicles – has seen its stock price collapse 60% over the last month, after the company lost out on a potentially lucrative United States Postal Service Contract to competitor Oshkosh. Investors saw Workhorse as a front runner for the $6 billion-plus deal to replace the Postal Service’s aging fleet of delivery vehicles over ten years, counting on the deal to help the company scale up its fledgling operations. However, with the loss of the deal now priced in, is Workhorse stock worth a look? We don’t think so, for a couple of reasons.

Workhorse has other orders for its commercial vehicles, but they are much smaller than the USPS contract. The company’s largest orders include a deal to supply around 6,300 vehicles to Pride Group, a commercial vehicle rental company, and another 500 vehicles to Pritchard Companies. That said, we are not sure if these deals will be binding. The  Pride Group contract, for instance, is apparently tied to demand delivery vehicles from Pride’s end customers. Scaling up production could also be challenging. The company manufactured just seven vehicles over the last quarter, and it’s not clear if it can meet its target of producing 1,800 vehicles for the full year on account of supply chain issues and limited supply of battery packs. Moreover, Workhorse’s technology isn’t very differentiated and the company is likely to face a lot more competition as mainstream automakers including Daimler, General Motors, and Ford also have plans to make commercial EVs. These players could have an edge over Workhorse, given the scale of their manufacturing and their ability to potentially sell their EVs to existing customers.

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[2/24/2021] Pick Canoo Over Workhorse

Following Tesla’s big rally last year, investors are warming up to smaller electric vehicle (EV) stocks that recently went public via the SPAC route. Workhorse Group (NASDAQ: WKHS) – which is focusing on delivery vehicles, and Canoo (NASDAQ: GOEV), which is looking to cater to the commercial and consumer market, have received a lot of attention, with their stocks up by almost 45% and 20%, respectively, year-to-date. While both companies trade at market caps of around $3.5 to $4 billion and have yet to start commercial deliveries, making them potentially risky bets, we think that Canoo is likely to offer better long-term upside for investors. Here’s a bit more about the two companies.

Want to play growth in the EV market without betting on individual OEMs? Check out our indicative theme of Electric Vehicle Component Supplier Stocks for more details.

Canoo is looking to develop multiple consumer and commercial vehicles, based on its modular “skateboard” platform that integrates batteries into the EV’s chassis. This allows the company to build highly customized vehicles that can serve multiple applications. The company is looking to launch its first lifestyle vehicle in late 2022, following it up with a delivery vehicle in 2023 and a sports vehicle in 2025. Canoo is looking to make its first vehicle available via an all-inclusive subscription fee. The company is also likely to consider licensing its platform to other OEMs. In fact, there were reports that Apple and Canoo were in discussions relating to the rumored Apple car late last year. Canoo projects revenue of close to $330 million in 2022 and is targeting a revenue CAGR of 88% through 2026. ^[1]

Workhorse builds electrically powered delivery and utility vehicles, targeted at last-mile delivery – a segment that should be an ideal application for EVs, given the low maintenance costs and lower range related issues. Workhorse’s business appears to be more focused although its product doesn’t appear to be as innovative as Canoo. However, the company has been highlighting orders for its EVs from several customers, the largest of which is a 6,000 plus vehicle order from Pride Group, a company that specializes in commercial vehicle rentals and leasing. Workhorse is one of three finalists for a $6 billion-plus fleet upgrade contract to replace the U.S. Postal Service’s aging fleet of delivery trucks and anticipation surrounding a deal has been a big factor driving the stock this year.

Overall, we think that deciding between the two stocks comes down to choosing between Workhorse’s potential order backlog and Canoo’s interesting tech. Workhorse hasn’t manufactured or delivered trucks at scale yet and it’s not clear if all of its orders will translate into actual revenue. The deal with the Pride Group, for instance, is apparently tied to demand for delivery vehicles from Pride Group’s end customers and the final number of vehicles delivered could be smaller. It’s also probably far-fetched to expect a multi-billion contract from the USPS to be awarded to a company without much of a track record. On the other side, while Canoo also has a lot to prove, the company’s flexible technology platform, plans of offering subscription services, and licensing its platform to other EV makers could give it sizable upside in the long-term, if it executes well.

While Canoo might look like a better long-term bet compared to Workhorse, 2020 has also created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Apple vs. Logitech shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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1. Canoo Investor Presentation [↩]