Rivian (RIVN 0.67%) stock bulls should put the breaks on their optimism for the electric vehicle company's shares, one analyst said Friday morning. He lowered his 12-month price target for the stock from $63 to $15, noting that Rivian's long-term potential is limited unless the company can raise a substantial sum of cash. The problem, of course, is that this isn't a great time to raise cash. Unsurprisingly, the stock slid sharply following this analyst report.
Here's a closer look at why Rivian may need a huge chunk of cash and where it could potentially get that cash.
NASDAQ: RIVN
Key Data Points
Why Rivian could run out of cash
Rivian wrapped up its fourth quarter of 2022 with $12 billion in cash, cash equivalents, and restricted cash. This might seem like a lot, but the automotive business is extremely capital-intensive. It doesn't take fancy math to understand how Rivian's cash could quickly dwindle.
Rivian's free cash flow was negative $1.7 billion in the fourth quarter alone. Even worse, the company is burning cash at a faster rate than it was a year earlier. In the fourth quarter of 2021, Rivian's free cash flow was negative $1.5 billion. Zooming out to the full year of 2022, negative free cash flow was $6.4 billion, compared to $4.4 billion in 2021.
With this in mind, Piper Sandler analyst Alexander Potter downgraded Rivian stock from buy to hold on Friday morning, noting that the company's cash may not be sufficient to fund its expansion plans. He says the company will need to make millions of vehicles to achieve the scale needed to become a long-term success. Where's Rivian now? It expects to make 50,000 vehicles this year.
For context, when Tesla built around 50,000 units annually, it spent $1.6 billion on capital expenditures and used $525 million in operating activities. That translated to negative free cash flow of more than $2.1 billion.
But Rivian doesn't seem able to generate the same volume on the same level of spending. The company expects capital expenditures to come in at about $2 billion this year. Further, cash used in operating activities isn't trending nicely at all. Last year, the company used more than $5 billion in operations, compared to the $57 million Tesla used in operating activities in the year leading up to its production volume of around 50,000 units.
Raising even more concerns about Rivian's long-term outlook, Tesla didn't start generating meaningful free cash flow until four years following the year in which it produced around 50,000 units. Even then, free cash flow was just $1 billion.
Rivian's options
If Rivian decides it needs to raise cash, the company could either sell equity or raise debt. Selling equity would dilute shareholders. But raising cash with debt would increase the company's interest expense and add debt to the balance sheet. While neither of these options may sound like a good idea, it's likely better than the third alternative of waiting to raise cash and risking getting to the point where a cash crunch becomes a real risk and the company's expansion plans are threatened.
How much more cash does Rivian need? Potter estimates the company needs more than $4 billion in additional cash to fund its growth plans over the next several years. I think he's right.
