Rivian Automotive (RIVN 4.78%) burst onto the scene in 2021 when it went public amid a surge in electric vehicle (EV) interest. The company, which makes an all-electric pickup truck and SUV, has earned a spot among some of the most innovative electric vehicle makers -- but unfortunately, its share price hasn't kept pace.
Rivian's stock has tumbled 87% since its IPO. Under the weight of an increasingly competitive EV market and rising material costs, it's worth asking the question: Is Rivian stock worth owning? Here are a few reasons why Rivian is appealing, but also why investors need to be cautious before hitting the buy button right now.
Image source: Rivian.
What's going right for Rivian right now
One of the main things going well for Rivian right now is the company's ability to ramp up its production. Rivian's vehicle production soared 268% to 9,395 vehicles in the fourth quarter, and it also delivered an impressive 7,946 vehicles -- a more than 5X increase from the year-ago quarter.
The strong quarterly vehicle production prompted Rivian's management to reiterate its confidence in meeting its goal of 50,000 in annual vehicle production in 2023. That's an important figure not just for Rivian, but also because it sets the company apart from many smaller EV start-ups, which don't even come close to Rivian's quarterly production output.
The byproduct of rapidly increasing vehicle production is that Rivian's sales are also climbing higher. Revenue jumped by more than 10 times in Q4 (first-quarter sales won't be released until next month) to $663 million. And Rivian has no shortage of orders for its vehicles either. Amazon has an order of 100,000 vehicles that Rivian has already begun delivering, and the company has a customer preorder backlog "that extends into 2024."
What's going wrong for Rivian
While Rivian is clearly increasing vehicle production, deliveries, and revenue, there are some significant speed bumps in its path right now. One of the most challenging could be the company's potential cash crunch.
It takes a lot of time and money to get a new EV company up and running, which has resulted in $1.7 billion in negative free cash flow in Rivian's Q4. The company ended the year with about $12 billion in cash, which is a substantial enough amount to keep it running through 2025. But one problem is that negative free cash flow is moving in the wrong direction. At the end of 2021, the company had $4.4 billion of negative free cash flow, but that had grown to $6.4 billion in 2022.
Of course, Rivian could raise capital by issuing new shares or by taking on more debt, but investors need to be aware that significant spending at Rivian could slow down the company's path toward profitability.
Making matters worse is the fact that rival Tesla has been cutting vehicle prices lately, which could put more pressure on Rivian to do the same. So far, Rivian has said that its demand is "robust" and that it won't lower prices. But if it has to eventually lower prices to stay competitive, then that could put additional strain on the company's financial picture.
If all of that weren't bad enough, Rivian just lost a very important tax break for its vehicles. Customers buying Rivian vehicles are no longer eligible for a $7,500 tax break because of new rules requiring a certain amount of battery materials needing to be sourced in the U.S.
Rivian could eventually source more of its battery materials from the U.S., making its vehicles eligible for the credit again, but for now, customers will have to pay the full price.
It may be best to hold off on buying Rivian right now
I've been optimistic about Rivian's future for a while, and I still think the company has an opportunity to become a key player in the EV market. If you already own shares, I don't think you should sell, but I also believe that investors should be cautious about diving in with Rivian at this time.
The company is spending a lot of money right now -- at a time when borrowing money is getting more expensive and a potential recession could be around the corner. The truth is that it's a very difficult time for small EV companies to try to find their footing. While I still think Rivian could do just that, I don't think sitting on the sidelines right now will cause investors to miss the boat either.
