On Nov. 16, 2021, just one week after its initial public offering, Rivian Automotive (RIVN 2.84%) soared to an intraday high of $179.47 per share. It's been all downhill from there, with the stock off a painful 90% from that high.
When a stock suffers a sharp and rapid decline of Rivian's magnitude, it's usually because it either never should have been so high in the first place or the company is undergoing severe challenges. In the case of Rivian, both of these factors are true -- to an extent.
Yet the company has quite a lot going for it, and the stock could even be worth a look now that it sports a more reasonable valuation. Here's why.
Image source: Rivian Automotive.
Management's focus has pivoted
Howard Smith (Rivian Automotive): There isn't a stock out there where I would truly consider going "all-in" other than possibly Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). That's because all portfolios need diversity, and Berkshire has much of that built in with its array of businesses and investments. But for a portion of a portfolio one can dedicate to aggressive growth stocks, Rivian looks to be one that can fit the bill in the EV sector.
Some analysts have touted the bull case for Rivian stock based on the pile of cash on its balance sheet. The company ended 2022 with about $12 billion, and only has a market capitalization of about $13 billion. But that is somewhat misleading, as it has been burning through cash at a rather rapid rate over the past year.
Data source: Rivian Automotive. Chart by author.
Even management feels its cash balance isn't adequate, as it has recently announced that it plans to sell another $1.5 billion in bonds to further shore up its balance sheet. Investors also shouldn't just look to its expected 2023 performance to determine whether it makes good sense to buy Rivian stock now.
The start-up EV maker produced nearly 25,000 vehicles in its first full year of production in 2022. While it plans to double that in 2023, investors weren't satisfied with that rate of growth. But management may be offering conservative guidance as it takes a more measured approach to growth.
That is a pivot that should catch investors' attention. Rivian is looking to now focus on efficiency above production growth. The new capital raise is geared toward Rivian's next-generation R2 platform while it focuses on its core business in the near-term.
The company has said it is throttling back production of its commercial vans for Amazon (NASDAQ: AMZN) in the first quarter. That will allow it to more quickly implement a new motor and lithium iron phosphate (LFP) battery pack system that the company says will lower costs and add to performance. It also expects to improve customer demand with a 400 mile battery range option for its consumer trucks beginning this fall.
It is probably a good strategy to improve its existing products as it also prepares for future technologies and the scaling up in production. That sets Rivian apart among EV start-ups, and makes it a good option as an aggressive investment in the EV sector.
The same risks, but with more potential reward
Daniel Foelber (Rivian Automotive): On the surface, Rivian's market cap of just over $13 billion and its $12 billion in cash, equivalents, and restricted cash left on its balance sheet don't make sense. Surely, Rivian's assets and potential are worth more than $1 billion?
Yet, as Howard pointed out, the disparity is misleading, because Rivian told investors on its Q4 2022 conference call that it will burn through that cash by the end of 2025. The question is if that cash will be put toward something bigger or spent in vain.
The glass-half-full approach to Rivian is that the company has an ace in the hole that other companies can only dream of. Rivian essentially raised enough cash from its IPO to fund four full years of capital-intensive investments across its manufacturing, marketing, research and development, battery production, etc. And it got that capital during a tipping point in the EV industry when adoption is growing, and nearly every major legacy automaker is rolling out aggressive battery electric programs.
The glass-half-empty approach to Rivian is that despite its cash and well-received electric pickup, SUV, and delivery van, the company's business model isn't sustainable because it's losing too much money. And given the current prices of the R1T relative to the Ford F-150 Lighting, for example, there's little room for Rivian to raise prices to boost margins.
This tug-of-war between the pros and cons is how you get a hyper-growth stock like Rivian to skyrocket to nose-bleed heights like we saw in 2021, only to crash land where it is today. The issue is that Rivian stock isn't glaringly cheap even now.
Given that profitability is still years away, one of the few reasonable ways to value the stock is on its price-to-sales (P/S) ratio, which is currently 8.3. However, the forward P/S multiple is likely half that given that production is forecast to double in 2023. That puts the forward P/S ratio just over 4 -- which isn't terrible, but it's also not cheap for an automaker.
Another counterpoint is, "Why buy Rivian stock when you can buy Tesla (NASDAQ: TSLA), which is already profitable and generates a ton of free cash flow?" The answer is growth. Tesla has a P/S ratio of 7.8, and it isn't growing its sales nearly as fast as Rivian. So from a P/S perspective, Rivian is cheaper.
If Rivian can overcome its challenges, lower its costs, and chart a path toward profitably, then the stock could easily outperform Tesla and the rest of its EV peers over the next three to five years. But given all the uncertainty, it seems best to own only a comfortable amount of Rivian stock instead of going all-in.
Setting realistic expectations
Rivian has a lot to prove, both as a company and as a stock. As a company, Rivian is taking on an industry with deep pockets that is accepting the growth potential of EVs. A head start could fall by the wayside if Rivian's products can't compete on price or performance year after year.
As a stock, Rivian has lost public equity investors a lot of money. And there's just no sugarcoating that fact. After falling 82% in 2022, Rivian is down another 18% in 2023. Investors have no reason to give the stock a chance until the company's fundamentals support a higher valuation. For that reason, Rivian stock could continue to languish before turning the corner.
