What happened
Shares of electric truck manufacturer Rivian Automotive (RIVN -2.21%) tumbled 2.4% on Wednesday, only to spin around and race ahead 4.6% on Thursday (as of 10:55 a.m. ET).
Curiously, the report that seems to have inspired this turnaround (a positive report from Morgan Stanley) actually came out yesterday -- but was immediately drowned out by news of another 0.25% interest rate hike at the Federal Reserve, and by Treasury Secretary Yellen's disclaimer of a plan to expand bank customers' deposit insurance. Investors couldn't really focus on Rivian's good news yesterday with so much bad news still ringing in their ears.
But perhaps today they can.
So what
StreetInsider.com has the details. As the ratings watcher explains, Morgan Stanley reiterated its overweight (i.e., buy) rating on Rivian stock Wednesday, observing that at $13 a share, Rivian stock trades for only a few cents more than the $12.48 it has in cash. This banker, though, thinks Rivian is worth quite a bit more than that -- twice what Rivian stock currently costs, in fact -- and therefore set a $26 price target on the stock.
Why is Rivian stock so cheap today? MS says investors are "discounting continued cash burn that lasts for years, not quarters," and so assuming that Rivian's $12.48 per share in cash will quickly evaporate, making the company increasingly less valuable in consequence.
Now what
How realistic is this risk? Actually...pretty realistic. Last year alone, Rivian posted negative free cash flow of $6.4 billion, burning through $6.92 per share in cash. The year before that, Rivian burned only $4.4 billion in cash -- $4.76 per share (according to data from S&P Global Market Intelligence) -- so cash burn is accelerating, not slowing, and at its current rate, Rivian's $12.48 in cash could in fact disappear in less than two years.
Nevertheless, Morgan Stanley remains optimistic. "We understand it may take several quarters for the company to establish an execution track-record," writes the analyst. But Rivian has a differentiated product (one of only a handful of electric pickup trucks on the market and already available for sale), the ability to scale up production to gain efficiencies, cut costs, and reduce losses -- and probably enough cash to keep the company alive long enough to do all this.
For the time being at least, Morgan Stanley is content to give Rivian the benefit of the doubt. Whether it's right or wrong to do so, at the very least, we can say that Rivian has a couple more years before it will be clear that it's failed.
