Tesla's success drew many players in the growing electric vehicle (EV) space. While all the new entrants might not succeed, some look promising. Rivian (RIVN -0.79%), which went public less than five months ago, drew immense interest from investors and analysts alike soon after listing. But developments since then have made analysts increasingly concerned about the young company's prospects, prompting sharp price-target cuts.
Let's check what caused analysts to change their minds on Rivian stock within such a short time. More importantly, are their new price targets right this time?
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Rivian's stock price target falls by $60
Many analysts initiated coverage on Rivian stock in December last year. Most were bullish, while a couple of them were neutral. The share price targets ranged from $130 to $170. Analysts believed that with thousands of pre-orders, as well as a mega initial order of 100,000 delivery vans from Amazon, Rivian would gain significant market share in the EV market.
However, in less than five months, analysts seem to be having second thoughts on their thesis. They now believe that Rivian might not perform as they were expecting.
The first event that triggered this change of opinion was an update in the pricing of vehicles that Rivian announced on March 1. The move drew sharp reactions from existing reservation holders, prompting the company to backtrack on that decision. Nevertheless, Rivian kept the revised pricing for new bookings.
Wells Fargo analysts were among the first to lower their price target for Rivian stock. The investment firm cut the target from $110 to $70 citing "risk to Q1 delivery expectations, the negative impact from rising interest rates, increased [battery electric vehicle] competition, and potential selling post the [initial public offering] lockup expiration in mid-May." This was soon followed by a cut at RBC Capital. Notably, RBC has announced price target cuts on Rivian stock twice within this month, effectively cutting it from $165 to $100.
Baird Financial followed, and it also slashed Rivian's price target twice in March, from $150 to $84. Similarly, Barclays cut its price target by nearly 60%, from $115 to $47, citing margin pressure due to higher costs, as Rivian rolled back price increases for existing reservation holders.
The second wave of price target cuts came after Rivian's fourth-quarter results when the company slashed its production targets for 2022 by half. Wolfe Research lowered its price target from $130 to $78. Mizuho Financial also announced a cut while Barclays, Baird, and RBC cut their targets on the stock for a second time within a month. Wedbush Financial slashed its target on Rivian by more than half, from $130 to $60.
Overall, analysts' average price target for Rivian stock fell by $60 -- from $147 to $87 -- in less than five months.
Are analysts right on Rivian this time?
Even though the cuts were triggered after two of Rivian's announcements (a vehicle price hike and a cut in the 2022 delivery target), there were several other contributing factors. Growth stocks, especially EV stocks, have witnessed a major correction this year. High valuations combined with heightened uncertainties contributed to the sell-off in these names.
Additionally, rising interest rates, inflation concerns, and increasing competition hit EV stocks particularly hard. All these factors contributed to analysts' price target cuts.
To be fair, the initial run-up in the stock's price was attributed more to euphoria than the fundamentals of the company. As a young player, Rivian was expected to encounter challenges in ramping up production. The EV space is intensely competitive.
Lastly, though Rivian goofed up in the way it handled the price increases on its vehicles, the hike itself does make sense. The company revised its pricing after carefully assessing the impact of inflation and supply chain challenges on its costs. As the number of vehicles Rivian will produce in 2022 is constrained by supply chain challenges, its cost per vehicle also increased largely due to fixed costs. The company has taken into consideration all these and other factors to come up with its pricing strategy.
At the same time, the revised pricing hasn't impacted the flow of new orders. The company says it is still receiving interest for its vehicles that is similar to what it was getting prior to announcing the price change. It also indicates that Rivian's vehicles can command higher pricing, and the company is correct in revising the price tag.
So, to me, just those two announcements don't look like enough reasons for such steep price target cuts. What this all tells me is that the targets were too optimistic to begin with. So in that respect, the cuts look correct.
Rivian's upside potential
Based on analysts' current average price target of $87 a share, Rivian stock could still double; the price target looks much more plausible now.
However, it is important to note that it could take as much as three years, or longer, for Rivian to grow sustainably to that kind of valuation.
In the meantime, its stock will likely remain volatile. And the company is yet to prove that it can scale up profitably. So Rivian shares entail significant risk, too. Investors should keep these points in mind before making an investment decision.
