Up 15% year-to-date, Rivian (RIVN -3.56%) stock is in recovery mode after its disastrous performance in 2022. But investors should still tread with caution. The company's poor margins and massive losses could position it for long-term weakness in an increasingly challenging industry.
What is Rivian?
Founded in 2009, Rivian is an electric automaker focusing on trucks and SUVs. The company hit public markets in late 2021, a time of low interest rates and what, in hindsight, looks like a tech bubble. Shares were valued at $78 per share, giving Rivian an eye-watering market cap of over $66 billion on its first day of trading --- despite the company having practically no profits or revenue at the time.
The irrational exuberance didn't last. And Rivian's early investors were soon hit with a dose of reality as the Federal Reserve began its tightening cycle.
When the Fed raises rates, it changes investors' risk/reward perception, hurting the market for richly valued growth stocks with significant expectations built into their price tags. This is a double whammy for unprofitable companies like Rivian, because higher rates increase the cost of the external capital needed to maintain and grow their businesses. Bonds will have a higher coupon rate. And now that Rivian's share price is significantly cheaper, it will have to sell more stock (equity dilution) to obtain the same amount of cash it would have gotten in the past.
How deep are the losses?
As far as unprofitable companies go, Rivian seems to be in a particularly bad spot because of the immaturity of its operations. While third-quarter revenue stands at came in at $536 million, operating losses more than doubled year over year to $1.8 billion. The company doesn't even earn a gross profit, which means it costs more to manufacture and distribute its cars than it can recoup by selling them -- and that's before considering operating expenses like advertising or research and development.
Image source: Getty Images.
Investors should expect the cash burn to get worse before it gets better as Rivian attempts to scale up its business. With $13.3 billion in cash and equivalents on the balance sheet, it has some runaway before needing external financing. But profitability looks to be far in the future. It is also unclear if the market has the patience to wait for Rivian to scale up, especially as the industry becomes more competitive.
Recent price cuts by major electric automaker Tesla have risen fears of increasing competition in the E.V industry. If price wars ensue, unprofitable automakers like Rivian will be at a disadvantage to rivals with deeper pockets and more leeway to keep their prices lower for longer. The company's backlog of 114,000 preorders in the U.S. and Canada gives it some near-term demand stability. But over the long-term, competition could become a make-or-break issue.
Is Rivian a buy?
While Rivian could eventually bounce back from its current challenges, the risks seem quite steep for investors who want to bet on the stock right now. The combination of massive losses, a tight macroeconomic environment, and rising competition in the EV industry could lead to continued downside for the automaker. Investors may want to avoid the stock until some of these headwinds are resolved.
