Workhorse Group vs. Nikola: Which Stock is a Better Buy?

When it comes to the auto industry, going electric has been the trend for quite some time now. People are increasingly shifting to battery powered cars and trucks for higher efficiency. Though the overhead costs are relatively higher, the lower maintenance expenses as well as carbon-free energy usage has attracted people from across the world.

With fewer moving parts and higher mileage benefits, electric trucks are expected to revolutionize bulk transports across the United States. At a time when e-commerce deliveries are reaching all-time highs with the raging pandemic increasing the preference for home deliveries, several companies are working to gain first mover advantage by rolling out a premier EV at the earliest.

Nikola Corporation (NKLA), dubbed as the ‘Tesla of trucking,’ made headlines with its SPAC launch in June this year, as people were racing to bet on proprietary hydrogen fuel cell integrated trucks. As a result, NKLA soared 178.5% to hit its 52-week high of $93.99 on June 6th, within two days of its market debut. However, the stock has tanked since then, as claims regarding fraudulent advertising and misleading progress came into light, alleged by a short seller, and later published by Hindenburg research.

Though the EV industry came into focus in recent years, particularly as Tesla, Inc (TSLA) took off, many companies have been operating in this industry for more than a decade. Workhorse Group, Inc. (WKHS) has been experimenting with electric vehicles since 2007, way before TSLA rolled out its first commercial vehicle. Though making slow progress over the years, its decade long industry knowledge has put the company on many investors’ radar, with the EV frenzy kicking in over the past couple months.

Apart from delivery EV trucks, the company has a dedicated segment catering to unmanned electric drone development, as well as a distinct telematics branch focusing on hassle free and quick delivery systems. The company’s industry knowledge has been perceived well in the market, as the stock has gained 439.1% year-to-date.

However, given the risks surmounting in this industry, combined with the fact that WKHS has not commercially launched its product yet, research firm Fuzzy Panda has alleged that the company has misled its investors with its prototype details and cost expectations. Though most investors have labelled this report to be false, given Fuzzy Panda has assumed a short position in the company, it has tarnished WKHS’ reputation to a certain extent.

While both NKLA and WKHS have proven to be highly speculative investments, the potential returns have attracted investors from all spheres. But which stock is a better buy now? Let’s find out.

Latest Movements

WKHS has made substantial progress in developing its Horsefly Unmanned Aerial System. It submitted a type certification application to the Federal Aviation Administration (FAA). If sanctioned, WKHS’ Horsefly commercial drone will be able to deliver parcels, carry sensors, and cameras.

Earlier this year, WKHS’ C-series trucks received executive order from California Air Resources board, designating it as a zero-emission vehicle. This bodes well for the company, as it requires each of its vehicles to be tested as per norms set by the Environmental Protection Agency (EPA), as a part of its executive approval process. WKHS partnered with Hitachi America in August to streamline its production and delivery process by leveraging Hitachi’s industry knowledge in this field.

WKHS’s electric truck division is currently in the process of signing a contract with United States Postal Service (USPS) to become a prime supplier of electric trucks for delivering mail across the country.

Earlier this year in July, WKHS entered into an agreement to sell 950 electric delivery trucks to United Parcel Service, forming one of the largest EV orders of this size in the United States. The company also received a delivery order of 20 electric trucks from eTrucks company this month.

WKHS has raised approximately $540 million over the past couple of months through investments from institutional lenders and a senior note offering, supplying the company with sufficient capital to finance its electric truck production to ensure timely delivery of the existing orders in place.

WKHS’ long time strategic partner Lordstown Motors Corporation has announced a SPAC agreement with DiamondPeak Holding Corp, following which Lordstown will become public. Post this transaction, WKHS will retain its 10% ownership stake in the newly merged company with an estimated valuation of $1.60 billion.

NKLA went public on June 4th through a reverse merger with blank check company Vector IQ. It is currently constructing its manufacturing facilities in Coolidge and Arizona, following which production should begin. The company partnered with IVECO (owned by CNH Industrial) for a $250 million capital infusion in exchange for approximately a 7.11% stake. This should allow NKLA to become a leading Original Equipment Manufacturer (OEM) in the future.

On September 8th, NKLA entered into a strategic partnership agreement with General Motors Company (GM) for $2 billion in exchange for an 11% equity stake. This deal is expected to help NKLA cut down approximately $5 billion in costs over the next 10 years. Earlier this year, NKLA announced a sale of 23.90 million shares following an exercise of warrant.

However, following some fraudulent allegations against CEO and founder Trevor Milton, he stepped down in September.

Recent Financial Results

WKHS’ sales increased 1,572.7% year-over-year to $92,000 in the second quarter that ended June 2020. It is currently in the process of manufacturing electric trucks, with a production and delivery target of 300-400 vehicles by the end of this year.

NKLA generated $36,000 in solar revenues in the second quarter that ended June 2020. However, since solar installation projects are not related to the company’s primary operations, these are expected to be discontinued in the near future. Its German manufacturing facility Iveco’s Ulm is currently under construction, and is expected to produce 10,000 units per year starting in the fourth quarter of 2021. NKLA is also building a production unit in Arizona, which is expected to deliver 30,000 trucks by the fourth quarter of 2021.

Past and Expected Financial Performance

WKHS’s EPS grew 134.7% year-over-year. Analysts estimate the company’s EPS to grow 41.2% in the current quarter, and 82.6% next year. The consensus revenue estimates indicate 45,150% improvement in the current quarter, and 629.4% improvement next year.

NKLA’s EPS rose 63.6% year-over-year. Analysts expect NKLA’s revenues to grow 56,257.1% next year, when the company launches its product for commercial sale in the market. Its EPS is expected to grow at a rate of 21% per annum over the next five years.

Profitability

NKLA’s revenue is 240.29 times what WKHS generates. NKLA is also more profitable with a gross margin of 41.6%, compared to WKHS’ negative values.

However, WKHS’ 237.9% ROE compares favorably with NKLA’s negative returns.

Valuation

In terms of trailing 12-month price/sales, WKHS is currently trading at 6253.34x, 101.8% more expensive than NKLA, which is currently trading at 3099.40x. However, in terms of trailing 12-month EV/Sales, NKLA is more expensive than WKHS (14323.65x versus 9904.27x).

POWR Rating

Both WKHS and NKLA are rated a “Sell” in our proprietary POWR Ratings system. Here’s how the four components of the POWR Ratings are graded for each of these stocks:

WKHS has a “F” for Trade Grade and Buy & Hold Grade, a “D” for Peer Grade, and a “C” for Industry Rank. It is currently ranked #22 out of 32 stocks in the Auto & Vehicle Manufacturers industry.

NKLA also has a “F” for Trade Grade and Buy & Hold Grade, a “D” for Peer Grade, and a “C” for Industry Rank. It is currently ranked #19 in the same industry.

The Verdict

Both WKHS and NKLA are expected to emerge as market leaders in the EV industry. Both the companies are currently competing to secure first mover advantage by launching their products first, and have received multiple pre-orders to that end. However, it should be noted that none of the companies have rolled out the prototype of their products yet, as they are still in the testing stage.

With no concrete evidence regarding the efficiency of these vehicles on road, blindly relying on theoretical demonstrations might not be the best idea. Adding onto the concerns, both WKHS and NKLA had negative reports published regarding their emerging products, tainting their reputation in the market.

With 2021 just round the corner, investors should wait for a couple of more months for a prototype model to be released in the market. At this moment, judging the stocks based on their innovation and plans would be a wise approach.

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NKLA shares were trading at $19.84 per share on Thursday afternoon, up $1.38 (+7.48%). Year-to-date, NKLA has gained 92.25%, versus a 10.84% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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