Is Workhorse Group a worthwhile investment?

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The electric vehicle space has been garnering significant interest in recent times. As people all over the world are transitioning towards environmentally friendly vehicles, share prices of Tesla (NASDAQ:TSLA) and peers have gained solid momentum right now. One such company is WorkHorse Group (NASDAQ:WKHS) that has surged close to 600% in 2020 and is valued at a market cap of $2.1 billion.

Why has WorkHouse stock gained over 35% this week

WorkHorse Group saw a sudden spike in its stock price on Monday after the electric vehicle manufacturer entered into a strategic agreement with the US subsidiary of Hitachi, Hitachi America as well as Hitachi Capital America Corporation.

According to the terms of the agreement, both the American arms of Hitachi will undertake assessment of the operational, manufacturing, and supply chain capabilities of Workhorse. The assessment will be done in relation to the best-in-class standards and Hitachi will offer recommendations to Workhorse. This will in turn help the Loveland-based technology company to scale up the production of its new series of package-delivery vans.

The agreement also entails that Hitachi would offer a rapid-solution-delivery platform in tune with its smart manufacturing plans. Hitachi would also utilize its Lumada platform to support Workhorse’s rapid expansion plans.

The financing arm, Hitachi Capital America will help the electric van maker to create a dealership network across the US for smooth delivery of products to customers and dealers.  It would also help Workhorse to procure the necessary financing required for the same.

This partnership with Hitachi proves that Workhorse is taking concrete steps to become profitable and stave off competition. The technology company is ensuring to harness the expertise of Hitachi in the automated manufacturing of electric vehicles. Workhorse also seeks to reap advantages of the financial capabilities of the Japanese tech giant.

Earlier in August, the shares of Workhorse soared more than 10%, but not because of any company specific development. Lordstwon Motors, in which Workhorse has a 10% stake, announced plans of public listing after a reverse merger with DiamondPeak Holdings.

Workhorse stands to gain indirectly from this development. After listing, Lordstown would get better access to financing resulting in faster production. This is when Workhorse can anticipate getting more loyalties from the intellectual properties it has licensed to Lordstown.

Shares have been on fire despite weak financials

Since the beginning of 2020, Workhorse has urged more than 500%, but will the stock be able to sustain this momentum, or is the bubble going to burst? The investor enthusiasm for this stock was at its peak in July, however, it slightly wore off in August. Despite rising high, Workhorse still hasn’t been able to touch its all-time high level of $22.9.

The company’s shaky financials are a major source of concern for the investors. In its latest second-quarter results, the loss per share widened to $0.12, compared to $0.10 in the same period past year. The numbers met the market expectations, though. Workhorse’s revenue on the other hand trailed expectations by a large margin. However, there was a significant improvement in the revenue from the prior year quarter.

The financials of the company indicated that the widening of losses is because of higher interest expenses. As a result of seeking more financing, Workhorse’s cash balance at the end of Q2 almost tripled as compared to that of 2019. The company has been on high levels of debt since 2007. Moreover, increased capital expenditure and higher labor cost also has pressurised the company’s bottom line.

Another area of concern for investors are the soon-to-expire intellectual properties of Workhorse. Out of the eight patents that the company currently has, most of them are set to expire in the next couple of years.

Riding high on prospective industry growth amid coronavirus crisis

On the brighter side, Workhorse belongs to an industry which has immense potential and has held investor interest since long. According to the latest report by ICCT, the United States is the third-largest electric vehicle market globally, after China and Europe.

In 2019 alone, the country saw sales of 320,000 units with battery-operated vehicles clocking in 73% of the sales while the plug-in hybrid ones accounted for the remaining. The report further indicates that further growth in the industry depends on increased availability of electric models as well as state-level zero-emission vehicle regulations.

Electric Vehicles are not just exciting from an individual use perspective, but also from industrial and commercial use perspective. This is what adds to the appeal of Workhorse as a stock.

Impressive product line but gap in profitability is worrying

Workhorse’s flagship products, the C-Series Workhorse, an all-electric step van, and the HouseFly delivery drone indicate massive business opportunities as more businesses adapt to the new normal amid the COVID-19 pandemic.

Workhorse CEO Duane Hughes expressed optimism on this note and stated, “We feel strongly that all Workhorse electric delivery vehicles, with their integrated drone capabilities, are the most economical and efficient last mile option currently available, making our solutions a necessity now and for future critical applications.”

There is no doubt that the space Workhorse is operating in, holds massive potential. It has some of the cutting-edge and sophisticated products in its pipeline. In its Q2 results, the company reiterated its target of producing and delivering 300-400 vehicles in 2020.

However, it is far from achieving operational profitability. It still has to chalk out a full-fledged plan for a turnaround. To keep investor enthusiasm from fizzling out, the electric-vehicle maker has to justify its finances in relation to its $2 billion valuation, given estimated sales of $22 million in 2020.

Further developments in the industry and financing environment are also likely to have a potential impact on the stock. Thus, investors must be cautiously optimistic about the stock and be in a wait-and-watch mode.

 

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