When Rivian Automotive (RIVN 1.03%) went public late last year, some investors and analysts marked it as the next Tesla. That was because the company had big-name early investors and a large base of orders.
Fast-forward about six months and the stock has dropped more than 75%. The realities and difficulties related to mass manufacturing have forced the company to pull back its 2022 guidance. Investors should understand the red flags that exist with an investment in Rivian. But there is an important green flag to support an investment as well, and with the stock down so much, it might be time to get some exposure to Rivian.
Image source: Rivian Automotive.
Early missteps
The source of many recent struggles for Rivian are macro issues that include rising inflation and supply chain disruptions. But the company itself has had some missteps as it launched its commercial production.
One notable issue arose when the company sought to implement price increases after customers had already placed preorders for its consumer trucks. Rivian was trying to offset rising raw material costs, but it caused a backlash and raised some investors' eyebrows.
While the company quickly reset prices for those who already held reservations, the situation also identified a red flag for investors. The company would have to shoulder rising costs just as it was working to ramp up production and increase operating efficiencies. Management will have many more big decisions to make and issues to navigate. How they handled an early one didn't give investors confidence, and management will still have to prove itself.
Reservations made beginning in the second quarter will be at the higher price point. But the company already had more than 80,000 vehicles that were preordered prior to the price adjustment. Rivian expects to produce just 25,000 EVs this year, so the higher costs will be a drag on its results well into 2023 at least. Rivian lost nearly $1.6 billion in the first quarter, so investors will likely have to endure significant losses and disappointing margins for the foreseeable future.
Green is the green flag
The good news for investors is the company has the balance sheet to support it through these rough times. It also has a good base of both consumer and commercial orders to work toward improving its manufacturing efficiencies. Rivian had about 90,000 preorders for its R1 platform consumer pickup and SUV trucks. Its commercial side is supported by a 100,000 electric delivery van (EDV) order from early investor Amazon.
But unlike many other electric vehicle start-ups, Rivian is in a good financial position to build its business. Early investors like Amazon and a successful initial public offering have helped it attain about $17 billion in cash as of March 31. Automotive manufacturing is a capital-intensive business. But Rivian CEO R.J. Scaringe told investors in his recent annual letter to shareholders he believes the cash will allow it to get through building its second production facility as well as the launch and ramp up of its consumer second-generation R2 vehicle platform.
For perspective, Rivian has a similar amount of cash on its balance sheet as Tesla. And Tesla earned $8.4 billion in net income in its last four quarters.
RIVN Cash and Equivalents (Quarterly) data by YCharts
The right balance
It shouldn't come as a surprise to investors that there are both potential risks and rewards with an investment in a new and growing field. No one should have expected a smooth road to success for Rivian. Tesla CEO Elon Musk famously once said his company was within about a month of bankruptcy as the company ramped up its Model 3 production.
A proper allocation should always be made with any investment in high-risk names. With potential profits still years away, one should only put in what one can afford to lose. Rivian as an investment certainly has some risks and red flags right now. But it also should have what it takes to make it through the early challenges if it executes well. That's what should still make it a potentially good long-term investment.
