What happened
No sooner had the news broke that electric truck start-up Rivian Automotive (RIVN 4.17%) has suffered another fire at its Illinois factory, than the second shoe dropped: Investment bank D.A. Davidson just started coverage of Rivian stock with an underperform rating and a $24 price target that implies it could fall as much as 24%.
But instead of going down today, Rivian stock was up 7.7% as of 1:40 p.m. ET. Bad news, and a stock goes up? How does that work?
A Rivian R1T electric pickup. Image source: Rivian.
So what
The explanation is pretty simple. In announcing its reasoning for not rating Rivian a buy, Davidson explained that "there have been bumps in the road" (like a fire!) as Rivian gets its operations ramped up. And as The Fly reported today, Davidson further assumes that, like many start-ups, Rivian will continue to go through growing pains in the months to come, and bad headlines as these bumps come to light could keep a lid on the stock price. For this reason, the analyst hesitates to recommend buying Rivian until all the kinks have been worked out.
Now what
But Davidson also said Rivian builds "high-performance and feature-rich vehicles," and its trucks are so good as to "be able to justify ... premium pricing" relative to other EV makers.
In other words, Rivian has a competitive advantage that will give it pricing power as the EV competition heats up. And this long-term advantage should outlast any short-term growing pains and the headlines that accompany them.
Of somewhat greater to concern to me as an investor is Davidson's observation that Rivian is already talking about introducing lower-priced models of its electric trucks. The analyst's concern is that this will create confusion among "high-end customers." If Rivian is too quick to give up its premium pricing advantage in a race for market share, then this could hurt profit margins and postpone when it becomes profitable.
The Wall Street consensus is that Rivian won't earn its first full-year profit before 2028 -- which is already a long time to ask investors to wait, especially in a quickly evolving and highly competitive market. If Davidson is right, though, investors might have to wait six, seven, or even eight more years to see their first profits.
I'm not convinced that enough investors have enough patience for that. Better to sit on the sidelines until Rivian proves that it's a bit more of a sure thing.
