Workhorse Group (NASDAQ:WKHS) hoped to revolutionize the trucking industry. However, WKHS stock has turned into a total bust over the past year. Shares peaked at $42 in February, but have now fallen below $10 for a greater than 75% loss.
Workhorse is part of a broader exodus from the electric vehicle stocks. Investors got a little carried away bidding up the EV names last year. As it’s taken longer to ramp up commercial production than expected for many EV operators, however, valuations have crashed.
A trader might be tempted to buy WKHS stock here thinking it’s a deep value. Shares are down sharply, after all, and the sector has gotten pummeled. However, there are very specific reasons to steer clear of Workhorse in particular. Even once EVs recover, Workhorse may not take part in the comeback.
Insufficient Payload Capacity
Workhorse has gotten hit with another classic EV start-up problem: The prototype doesn’t translate to reality. It’s easy to draw up a flashy electric vehicle. Actually manufacturing and delivering on the prototype is a different issue. In this case, Workhorse’s vehicles simply don’t have enough hauling power to meet demand.
From the company’s most recent conference call, we got this alarming disclosure:
What is clear from initial customer feedback is that we need to further increase the payload capacity of our vehicles. Although there are niche market opportunities for the lower payload vehicle, those opportunities are limited. The majority of our customers need a higher payload vehicle, which serves a much larger market segment.
Management stated that its engineers are already at work. They intend to redesign the C1000 to meet the needs of the majority of its customers that demand more payload capacity.
Better late than never, of course. But how did the company not manage to get such a basic thing right from the jump? Presumably the company could talk to potential customers before building vehicles to see what customers wanted. This seems like a major unforced error on Workhorse’s part.
Heading Toward Financial Concerns
As part of Workhorse’s recent debt offering, it was saddled with financial covenants. One of these is a minimum sales backlog. This requirement doesn’t start off too onerous, it needs just $25 million in backlog at the end of March 2022. But by the end of 2022, this figure climbs to $100 million.
Given the problems with Workhorse’s vehicle design, it’s far from a sure thing that Workhorse will be able to meet this threshold for product demand. Can the truck be redesigned in time to get those orders rolling back in? If not, Workhorse will likely have to amend its debt offering, which could allow creditors to extract a pound of flesh from the equity.
Workhorse does have $157 million in cash as of the end of its June quarter. And it raised some additional funds subsequent to that with the sale of the majority of its stake in Lordstown Motors (NASDAQ:RIDE). Still, the company lost $44 million last quarter alone. Its cash reserve won’t last forever given the large operating losses.
In the past, an EV company could easily get around a cash shortfall by selling more stock to the public. However, WKHS stock has already crashed in recent months. Plus, the outstanding debt could give potential investors more pause before putting fresh capital into the company. Long story short, it’s key that Workhorse get a more powerful vehicle design ready as soon as possible.
WKHS Stock Verdict
If you’re counting on Workhorse stock to carry a big load in your portfolio, you may come up well short of your intended destination.
Workhorse has been a massive disappointment so far. And, given its less than pristine balance sheet, it doesn’t have that much time to make things right. Many of the other EV companies, for all their faults, have plenty of cash. Workhorse, however, has a ticking clock in terms of its debt obligations. Meanwhile, a big rival, Rivian, is set to launch its initial public offering (IPO) at an up to $80 billion valuation, leaving Workhorse in the dust.
It’s not too late for WKHS stock to start a comeback. However, it’s far from the most promising pick in the EV space. With the sector seeing such as huge sell-off lately, you can find much better bargains than this.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.