Not every stock is a successful investment from day one; many stocks that went public during the height of the bull market in 2020 and 2021 are still down today. Electric vehicle start-up Rivian Automotive (RIVN -3.62%) has been among Wall Street's biggest disappointments. Shares trade at $18, from an IPO price of $78. In other words, a $10,000 investment would be worth just over $1,900 today.
That's all water under the bridge, though -- where the stock goes from here is what matters now. Will investors sitting on losses see their investments rebound? Is $18 per share an attractive entry point for long-term investors? I'll detail the challenges facing Rivian to help you make a decision.
Rivian's production ramp will take time
Every company's journey is unique, but there are some lessons we can take from those before us. Rivian is an automotive start-up trying to build enough vehicles to become profitable. Competitor Tesla made the same journey years before, and looking at that process can give you some clues to the potential challenges facing Rivian.
Rivian hasn't yet released its complete 2022 financials, but did announce that it produced 10,020 vehicles in the fourth quarter, bringing total 2022 production to 24,337, and delivering 20,332 of those. You can see below that Rivian is losing billions in cash, burning $6.2 billion over the past four quarters (again, Q4 financials aren't out yet). Rivian needs to make many more vehicles to spread out the costs of running a factory and make vehicles profitably on a per-unit basis.
RIVN Free Cash Flow data by YCharts
Tesla delivered 22,477 vehicles in 2013; the company didn't generate positive free cash flow until 2019. In other words, it took Tesla six years from approximately the same production level as Rivian in 2022 to generate cash flow. Will Rivian take six years from now to do the same? Nobody knows; Rivian could take more or less time than Tesla. At the very least, Rivian's cash losses could continue for several years.
The implications of Rivian's losses
Rivian's cash losses aren't an immediate concern for shareholders -- the company's balance sheet carries about $12 billion in net cash, enough to last two years if you annualized Rivian's Q3 cash burn of $1.66 billion. The company's Q4 earnings will show investors whether cash losses are improving.
RIVN Free Cash Flow (Quarterly) data by YCharts
Shareholders face more risks over the long term. Rivian could easily run out of cash before turning profitable, which could mean a new share offering to raise funds. Adding new shares dilutes investors; the increasing outstanding shares mean that existing shares represent a smaller piece of the business, making them less valuable. Remember that the company's stock-based compensation, which totaled $1.4 billion over the past year, is already diluting shareholders, so an additional offering would hurt quite a bit.
Is Rivian worth buying today?
Despite early investors sitting on losses, it's unclear whether Rivian stock is attractive today. The stock's no longer valued at the eye-popping price-to-sales ratio (P/S) it once was, but remains at a premium to where Tesla traded throughout much of the past decade.
Can Rivian maintain that premium? There are some reasons it may not. It has more competition than a younger Tesla faced, especially as Tesla is cutting its products' prices. Rivian arguably hasn't established the brand power that Tesla has, which Statista estimates at a $75 billion value. Buying Rivian here is a leap of faith that it will perform at a high level and Wall Street will continue rewarding that potential with a higher valuation.
TSLA PS Ratio data by YCharts
If the market decides that Rivian's growth potential isn't what it once was, or if Rivian needs to raise significant amounts of new cash over the coming years, the stock could easily fail to live up to investors' hopes. These risks place Rivian squarely into the speculative stock category, so consider this before adding shares to your portfolio.
