With its share price down by a whopping 80% over the last 12 months, Rivian Automotive (RIVN -2.21%) has been a big disappointment for its early investors. While a lot of the downside can be blamed on macroeconomic factors outside management's control, the company's high valuation was hard to justify. Let's discuss whether shares are now cheap enough to make them a buy.
What is Rivian?
Founded in 2009, Rivian Automotive is an American car company that specializes in all-electric trucks and SUVs. The stock went public in late 2021 at $78 per share, giving it a market cap of over $66 billion, despite having virtually no revenue or profits at the time.
Perhaps Rivian's IPO was one of many signs that financial markets were overheating. And by 2022, the U.S. Federal Reserve embarked on its fastest rate-hike cycle in history, taking its federal funds rate from zero to 4.10% at the time of writing. Higher rates increase the cost of capital and change investor risk/reward calculations -- often leading to massive declines for richly valued growth stocks like Rivian.
Similar stocks like Tesla and Lucid Motors also took a beating (both are down 64% and 80% over the last 12 months, respectively). But that shouldn't completely overshadow Rivian's company-specific problems. In March 2022, the company was forced to backtrack on planned price hikes for its preordered R1T truck and R2S SUVs (by $12,000 and $14,500) which suggest supply chain challenges and inflation could be impacting its operations. It will eventually have to push these costs to consumers or face weakening margins.
Can Rivian outgrow its challenges?
If Rivian has anything going for it, it's growth. Third-quarter earnings highlight the company's explosive potential. Third-quarter revenue soared from just $1 million in Q3 2021 to $536 million in Q3 2022 as the company ramped up production. But despite the stellar growth, Rivian is nowhere near profitability. Operating losses more than doubled to $1.77 billion in Q3 2022, and investors should expect this number to increase until the company achieves enough scale to cover substantial outflows like the research and development needed to continue improving its products.
Image source: Getty Images.
Loss-making companies are particularly vulnerable in a Federal Reserve tightening cycle because higher rates make it more expensive to access the capital needed to sustain operations. Rivian is somewhat shielded from this challenge. After its massive IPO, the company boasts a whopping $13.3 billion in cash and equivalents compared to zero long-term debt. It also has rich backers.
Rivian's early investors include global e-commerce giant Amazon, which invested over $1.3 billion in the company before it went public. Amazon plans to partner with Rivian to make its logistics operations more environmentally friendly. And the tech giant has preordered a whopping 100,000 of Rivian's electric delivery vans, providing a stable revenue stream that could eventually grow over the long term.
The stock is still quite richly valued
With a price-to-sales (P/S) multiple of 15, Rivian stock is significantly more expensive than the S&P 500's average of 2.4. But this is a significant drop from the multiple of over 200 it boasted at the start of 2022. As Rivian's revenue continues to grow at a breakneck pace, investors can expect the valuation to fall even further unless the share price rises.
While high rates and other macroeconomic uncertainties make now a difficult time to bet on unprofitable growth stocks, Rivian's rapid top-line expansion and valuable partnership with Amazon could make the company a long-term winner for patient investors.
