Despite last week's broader market rebound, many electric vehicle (EV) stocks remain down substantially from their all-time highs. Chinese automaker Nio (NIO -0.48%) and American EV newcomer Rivian Automotive (RIVN -3.41%) have seen their share prices fall as much as 80% from their respective all-time highs. Both stocks remain down over 70% from their all-time highs as of this writing
Is either electric car stock worth buying now, or should investors avoid these two companies for the time being?
Image source: Rivian Automotive.
Pricing in the risk
Howard Smith (Nio): Nio shares have been trending down this year, but a recent tumble has brought them to the lowest level in almost two years. In those same two years, the company has successfully commercialized its product, shipping most of the more than 180,000 electric vehicles it has so far delivered.
Nio has three new products being launched this year, is expanding its production capacity, and has begun an expansion outside of China into Europe. But recently, investors have been more focused on some real, or potential, headwinds. Like many global automakers, Nio has struggled with supply chain challenges that have crimped recent delivery numbers. But several other factors outside of its operations are what have investors selling shares, too.
Nio expects its first deliveries of the ET7 luxury electric sedan this month. Image source: Nio.
The stock has fallen along with other U.S.-listed Chinese shares on fears that they could be delisted from U.S. stock exchanges. That possibility comes from the Holding Foreign Companies Accountable Act (HFCAA), which became law in December 2020. Investors have a renewed focus on it since the Securities and Exchange Commission (SEC) just identified five U.S.-listed American depositary receipts of Chinese companies that are currently not complying with American audit and accounting regulations. Nio was not one of the names on the list, but if named, the company would have to comply within three years or face possible delisting.
Other recent fears come from a new COVID-19 outbreak in China that is affecting several manufacturing companies, geopolitical uncertainty from the war in Ukraine, and the prospect of rising commodity prices that could affect margins.
But new lockdowns related to COVID-19 aren't affecting Nio's manufacturing plant at this point. And geopolitical risk has always existed for Nio and other Chinese stocks. While Nio will have to navigate the current inflationary environment, so will its competitors. Tesla just announced price increases to combat its rising costs in China, for example.
Investors should always properly allocate for equity risks. But the recent share decline has now helped to address some of that risk. With the underlying business still expected to grow in the coming years, now might be a good time to gain exposure while taking all of the above risks into consideration.
Rivian stock may finally be worth buying
Daniel Foelber (Rivian): After reporting disappointing third-quarter 2021 earnings in December, Rivian stock fell to the low $100 per share range, which seemed like a big drawdown at the time. But Rivian still fetched an $80 billion market cap despite underdelivering on its production and delivery figures and taking a blowtorch to its cash position.
Things have changed since December, and quickly too. Rivian stock is now down 75% from its high and has a market cap of roughly $37 billion -- which is still expensive but a lot more reasonable than prior price tags on Rivian stock. Rivian finished 2021 with $18.1 billion in cash and cash equivalents on its balance sheet, total assets of $22.3 billion, and total liabilities of just $2.8 billion. In this vein, Rivian stock starts to look a lot less expensive when you factor in its cash position.
To be fair, Rivian is spending a ton of money to scale production, invest in new technology, and expand its manufacturing capacity. In fourth-quarter 2021 alone, Rivian spent a staggering $2.1 billion on operating expenses and plans to increase spending going forward. With an accelerated cash burn rate, you could argue that Rivian's cash position is deceptively high and could evaporate in two to three years if the company fails to generate meaningful cash flows.
But even with ramped spending, Rivian's rich cash position provides ample dry powder for the company to outlast the short-term chip shortage and supply chain constraints. In fact, Rivian is already charting an end in sight. The company expects to ramp production of its EDV van as soon as second-quarter 2022. Amazon has 100,000 orders for the EDV.
As of March 8, Rivian had 83,000 pre-orders for its R1T pickup truck but has only produced 2,425 vehicles since the start of production in late 2021. Yet the company said it is confident it could produce 50,000 vehicles this year if it weren't for supply chain constraints. It sees supply chain constraints easing in the second half of the year and plans to ramp production considerably in Q2 and Q3 to finish 2022 with at least 25,000 vehicles produced -- including the EDV.
In short, the worst of Rivian's supply chain woes seem to be behind it. The company has proven it has robust demand for its products and the cash needed to scale. I wouldn't have touched Rivian stock with a 10-foot pole a few months ago. But given the lower stock price and the favorable 2023 and 2024 outlook, Rivian stands out as one of the better high-risk, high-reward EV stocks to buy on sale.
An exciting, but challenging industry
Both Nio and Rivian are attempting to make a name for themselves in an increasingly competitive global industry. The EV industry is growing, but it is also capital intensive and vulnerable to rising interest rates and supply chain constraints. For those reasons, it is unsurprising that many EV stocks have seen their valuations taken to the woodshed in recent months. The best way to approach the EV industry is to understand the risks and the advantages of holding multiple companies in a diversified basket that protects against downside risk even at the expense of sacrificing some upside.
