There’s More Bad News Than Good News Ahead for Workhorse Stock

Workhorse (NASDAQ:WKHS) is a stock with a Beta (5Y Monthly) of 2.73 according to Yahoo! Finance. This means that based on the latest regression statistical data, WKHS stock is to move significantly more compared to the Beta of 1.0 for the S&P 500 or any other widely used stock market index.

If you like very volatile stock price swings, then WKHS may be a stock to monitor for thrills. But if you want to invest in the electric vehicle industry, then you may be disappointed finding out that Workhorse stock is down 54% in 2021.

But the stock price does not always tell us everything about the quality and the valuation of a stock. So what are four important factors you should know about Workhorse now?

WKHS Stock: Business Model Review

Workhorse is a U.S. technology company that is producing all-electric delivery vans and drones. It also provides a telematics system — a mobile technology application that allows you to monitor and analyze the performance of your Workhorse vehicles in your fleet.

In an era where the future of mobility is electrification, Workhorse offers two types of electric vans. One is called the C 650 and the larger vehicle is called the C 1000. Their names derive directly from their interior volume, 650 cubic feet for the smaller one and 1000 cubic feet for the larger one. While they’re not very attractive vans, they are built for business, not fun.

However, there is an issue to consider from a buyer’s perspective. The range of both vans is set at 100 miles. This means that they need frequent charging and could hardly last a few days of daily business operations without constantly monitoring their autonomy. That also means they are mainly only viable in urban environments. They can hardly be used to deliver goods at large distances. That is, of course, unless a planned route full of chargers is well designed in advance.

But even if we ignore these important disadvantages, I expect a company that’s been in business since 2007 (it’s not a startup) with a near $1.1 billion market capitalization should have plenty of sales of its electric vans to justify its position.

In its second-quarter 2021 results, Workhorse stated that it “[p]roduced 133 C-Series vehicles year to date, which included 14 deliveries in the second quarter … [it] anticipates the remainder to be sold or leased to niche markets in the next twelve months.”

There is a big difference between producing electric vehicles and actually selling them. If you produce them and do not sell them, you incur costs, probably lose money and your cash flow from operations weakens. Cash is king for any type of business.

Right now, Workhorse expects that either it will sell the remaining of its produced electric vehicles or lease them. If they lease the stock of its electric vehicles, then revenue should be much less than selling them. And herein lies one of my biggest concerns.

How do you produce electric vehicles if you are not sure 100% that these will be sold? If you don’t sell the vehicles, then the risk is too high, as you have invested capital and money and tied up inventory that is losing value as time passes.

That’s not a great business decision.

Perhaps Workhorse produced these vans expecting to win the USPS contract. However, it lost that contract. It would have been a game-changer for Workhorse if it won.

And that’s not the only issue with Workhorse’s business. The company is already making changes and revising its designs to increase the payload capacity of its vehicles. It has delivered very limited quantities so far.

These changes mean two things to me. First, extra costs. Second, the remaining stock of already produced vehicles could be sold at a discount to attract potential buyers.

New CEO: A Positive Signal to Change Things

But it’s not necessarily all doom and gloom for WKHS stock. Richard F. Dauch was appointed as new CEO of Workhorse assigning his duties as of early August 2021. He has more than 25 years of industry experience, from manufacturing to commercial vehicle and automotive industry experience.

This should be a strong asset to Workhorse moving forward.

Before we let Dauch’s arrival sound bullish horns of victory, however, we also need to consider the company’s financials and valuation.

The Q2 2021 earnings report showed some worrisome facts. The troublesome report is largely why WKHS stock fell from its 52-week high of $42.96 back in early 2021 to its current price of $9.70.

But first, let’s start with the good news. According to Workhorse, “[s]ales for the second quarter of 2021 were recorded at $1.2 million compared to $92,000 in the second quarter of 2020.” This is all good news. Because the cost of goods increased “to $14.8 million from $1.5 million in the same period last year … Selling, general and administrative (“SG&A”) expenses increased to $7.0 million from $3.9 million in the same period last year … [and] [r]esearch and development (“R&D”) expenses increased to $2.1 million compared to $1.6 million in the same period last year.”

Furthermore, its “[n]et loss was $43.6 million, compared to net loss of $131.3 million in the same period last year.” But this is where things take a bit of a negative turn. Although this net loss may seem like an improvement, I still see it as a negative, since it shows a company that is losing money from its core operations.

Still, there is an important nuance to consider here. Workhorse stated in this Q2 2021 report that “[s]ubsequent to the end of the second quarter, the Company sold 72% of its RIDE shares, providing expected net proceeds of nearly $79 million.” This means that Workhorse has improved substantially its cash balance on its balance sheet not by sales, but by selling the majority of the stake it had to Lordstown Motors (NASDAQ:RIDE).

The Bottom Line on WKHS Stock

Even so, this is a one-time event. Although it is positive, it should not be considered as a factor that will distort the cash position of Workhorse.

Without this extra and significant cash infusion by selling this stake at RIDE stock, Workhorse has raised cash by issuing both stock and debt. At the same time its free cash flow trend according to MarketWatch is not good. It is negative for all years during the 2016 to 2020 period. And in 2020, it reported a free cash flow loss of $76.01 million compared to a loss of $38.88 million reported in 2019.

When you put it all together, there are simply too many risks involved with WKHS right now. Its sales are still not enough to justify its valuation. The company is burning cash, losing money and incurring costs to make design changes to its models. Plus it’s increasing its debt level and its stock dilution too.

Ultimately, I cannot be thrilled about Workhorse right now. We’ll simply have to wait and see if the new CEO can deliver results soon.

On the date of publication, Stavros Georgiadis, CFA  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.