After the recent pullback, is it time to dive into Workhorse (NASDAQ:WKHS) or is it an investment you should avoid? With two potentially game-changing catalysts around its belt, investors had plenty of reason to be excited about this stock. But, with these catalysts already priced into shares, this electric vehicle (EV) play may be “too hot to touch” now.
That’s not to say the stock is about to fall off a cliff. Far from it. But, while the underlying prospects remain solid, shares could head lower, as “EV mania” starts to cool.
How so? With the rapid gains seen with Tesla (NASDAQ:TSLA), Nio (NYSE:NIO) and other major EV stocks, their valuations have gotten ahead of themselves.
Yes, given the growth potential of EVs, a premium is warranted. But, if Mr. Market abandons its “growth at any price” philosophy, and starts giving more credence to valuation concerns, expect today’s frothy multiples to contract.
Where does that leave Workhorse? While its delivery van business, as well as its interest in Lordstown Motors (more below) may live up to expectations, this stock could peter out, or head lower, from here.
The Big Potential Is Already Priced Into WKHS Stock
If there’s one thing Workhorse isn’t lacking, it’s catalysts. In fact, the company has not one, but two major game-changers on its plate. Firstly, the company’s U.S. Postal Service (USPS) catalyst. As the only contender offering an electric-only vehicle to replace the Post Office’s dated delivery vans, the company could win all or part of this lucrative contract.
Secondly, consider the company’s stake in Lordstown Motors (LMC). Soon, the privately held company is going public, via a merger with special purpose acquisition company (SPAC) DiamondPeak (NASDAQ:DPHC). Once that happens, Workhorse’s equity interest (10%) could continue rising in value.
Yet, everyone is well-aware of these factors. That’s why Workhorse shares have soared a staggering 1,349% in the past six months. After this epic rally, the aforementioned “needle movers” are more than priced into shares.
Sure, that doesn’t mean shares can’t move higher. Like I said above, “growth at any price” remains the name of the game. But, diving into the details, there’s plenty of reason why these catalysts won’t send this stock parabolic yet again.
What do I mean? For starters, Workhorse isn’t the favorite to win the USPS contract. And, even if they do win, who’s to say it’ll be profitable? As our own Laura Hoy wrote Oct. 2, the company could wind up losing money on the contract.
And the Lordstown catalyst? Sure, the underlying value of this “not-so-hidden asset” makes up a good chunk of the company’s valuation. But, while Lordstown has strong prospects, Workhorse’s small interest may not be enough to sustain today’s valuation.
Investors May Be Overestimating Lordstown Exposure
The USPS catalyst drove this year’s initial excitement for Workhorse. But its exposure to Lordstown is what helped move the needle lately. And, while that company’s upcoming merger with DiamondPeak could create a windfall, who’s to say it’s enough to sustain today’s valuation?
Investors may be putting too much value in Workhorse’s Lordstown interest. Sure, the company’s stake and future licensing fees aren’t anything to sneeze at. But, it’s not enough to justify the massive boost in this company’s market capitalization.
And, as InvestorPlace’s Ian Bezek wrote Oct. 1, there’s also the concern that LMC got the best part of this business, leaving Workhorse stuck with the leftovers.
Given how much more of a “no-brainer” the bull case for Lordstown is versus Workhorse, I agree with this take. Focusing on a niche in the EV market (work trucks), rather than trying to be “the next Tesla,” LMC has a much clearer pathway to profitability.
Workhorse? The jury’s still out. Granted, there’s the chance that the company wins all or part of the USPS contract. And, while this deal may not profitable if the company wins the contracts, it could help fuel interest in its electric vans from delivery names like UPS (NYSE:UPS), FedEx (NYSE:FDX) or even Amazon (NASDAQ:AMZN).
But, for now, this remains a stretch-goal. At today’s share price (approximately $24 per share), you’re betting it goes off without a hitch.
It’s Interesting, But Look Elsewhere for Now
While I’m mixed on the stock, I can’t deny Workhorse is an interesting situation. But, with the stock’s epic performance so far this year, its valuation has gotten out of hand. Sure, we have yet to see the “EV bubble” burst. But, it’s clear this summer’s “EV mania” is starting to cool off.
So, what’s the play here? I don’t see shares crashing anytime soon. But, I don’t see another big move higher, either. If you are bullish on its prospects, wait for a big pullback before jumping into Workhorse. Otherwise, look elsewhere for an opportunity.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.