Even in the fast-moving, forward-looking world of electric vehicle (EV) stocks, Rivian (RIVN +0.28%) is controversial. While the company has been scaling its business rapidly, it's still reporting large losses, and the stock has been incredibly volatile since its late-2021 initial public offering.
Is Rivian a high-risk, high-reward play that's worth betting on, or is the market still too optimistic about this speculative growth stock? Read on for competing bullish and bearish takes on what comes next for the company and its shareholders.
Image source: Rivian.
Bear case: Rivian is still priced for perfection
Jeremy Bowman: Rivian stock is down more than 90% since it peaked shortly after its IPO in November 2021.
That decline has more to do with the stock's stratospheric valuation when it debuted than anything that's gone wrong for the company in the past year, but investors shouldn't be fooled into thinking that the shares are cheap just because they're a fraction of their peak price.
Rivian is still an unproven start-up, and high expectations are very much priced into the stock, given the company is a long way from becoming profitable.
In Rivian's first-quarter earnings report, it posted a negative gross profit of $535 million and an operating loss of $1.4 billion. For the full year, the business will continue to be a cash furnace, with an expected adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $4.3 billion.
NASDAQ: RIVN
Key Data Points
Those numbers didn't alarm investors -- in fact, the stock rose following the report. It's expensive to build a manufacturing business, and Rivian is spending on its new R2 platform and expanding capacity. Production is remains tiny compared to its peers at just 50,000 vehicles this year. It's targeting a gross profit next year, but that still implies a multibillion operating loss.
For the stock to be a winner, it seems that everything will have to go right from here. The electric vehicle market is already reaching a new stage of competitiveness with manufacturers like Tesla, Ford, Nissan, and Hyundai lowering prices, and the industry will only become more crowded as legacy automakers ramp up EV production as well.
Rivian is targeting production of 1 million vehicles by 2030, but even if it reaches that level, the company will need to be highly profitable to deliver value for investors. Given the competitive nature of the auto industry, as well as CEO RJ Scaringe's own admission that the company would have to differentiate itself beyond electrification, Rivian stock still has a steep hill to climb to generate strong returns for investors.
Bull case: Improving unit economics and solid demand
Keith Noonan: As Rivian increases its production volume, it should be able to significantly lower its fixed costs per vehicle. While it's too early to tell whether the company's strategy will ultimately pay off, this is essentially the same playbook that Tesla used to shift into profitability. No doubt about it, this is a speculative stock, but the potential for explosive returns is there if the EV upstart gets into the black.
There are some signs that Rivian is making progress on that front. The company increased its gross margin 17 percentage points sequentially in the fourth quarter. Admittedly, it still posted a gross loss of $535 million, but that performance was somewhat remarkable given that the business reported a gross loss of $502 million in the prior-year period. On a year-over-year basis, Rivian grew revenue nearly 600% in Q1, so the relatively small gross loss expansion suggests the company is making some progress.
RIVN Revenue (Quarterly) data by YCharts.
In line with that progress, management expects that the business will be able to deliver positive gross profits next year. That would still likely make Rivian years away from generating positive net income, but the company continues to look well capitalized. Following a new senior convertible note offering, Rivian closed out last quarter with approximately $11.8 billion in cash, equivalents, and restricted cash, giving it reasonably sound financial footing in the near term even as it continues to burn cash as it scales.
And while Tesla and other competitors in the EV space have been lowering prices, Rivian actually expects to be able to increase its average selling price. With the company seemingly on track to increase prices, there appears to be a strong demand for its vehicles. Rivian's average selling price will likely drop with the introduction of its next-generation vehicle platform in 2026, but by then the company could be enjoying significantly better unit economics.
Rivian stock is undoubtedly high risk, but it does have avenues to delivering gains for shareholders.
Should you buy Rivian stock?
For most investors, Rivian stock may simply be too risky. Even after steep sell-offs, the shares trade at a highly growth-dependent valuation, and it's not clear whether the business will be able to make the transition to delivering regular profits. The EV market will likely become even more competitive, and there may not be room for many smaller players to thrive in the space.
On the other hand, the stock could be worth the gamble for those with a significantly above-average risk tolerance. Rivian probably isn't the kind of stock that should form the foundation of a portfolio, but as a speculative growth bet, it could have appeal for those who approach it with a reasonable risk-reward analysis.
The EV upstart has a lot to prove. If it can't scale effectively, the company could be on the road to bankruptcy or getting bought out at a valuation that's significantly below current levels. But if Rivian is able to effectively execute its growth strategy, the industry challenger could deliver explosive returns for patient shareholders.
