Shares of Rivian (RIVN 3.65%) are up 25% since July 3, when it reported production numbers for the second quarter. That's a huge gain in a very short period of time, which hints strongly that investor sentiment is the real driving force behind the stock moves here -- not fundamentals. If you are looking at this upstart electric vehicle (EV) company, you should probably err on the side of caution. Here's why.
1. More and more competition
Rivian's production is heading higher and, according to management, on track to meet its full-year 2023 targets. That's great news, but you have to step back and look at the bigger picture. Rivian's goal is to produce 50,000 vehicles a year. That's a drop in the bucket compared to other companies in the EV space. For example, Tesla produced roughly 480,000 vehicles in the second quarter alone.
Image source: Getty Images.
And then there are the legacy automakers, which are also quickly building up their EV businesses. Ford sold roughly 25,000 EVs in the first half of 2023 and another 60,000 hybrid vehicles. And that's just one of the many legacy companies with which Rivian has to compete, and it's not even the furthest along on the EV journey. Put simply, Rivian can hit its production goals and still end up being an also-ran in what is an increasingly competitive market.
2. Continued red ink
Rivian is a young company, having held its initial public offering (IPO) in late 2021. Since it is still trying to build out its business, it makes sense that the company isn't profitable. But investors shouldn't ignore the losses. In 2022, the first full year of operations, Rivian lost a huge $22.98 per share. That's a massive number for any company. In the first quarter of 2023, the company lost $1.45 per share, slightly better than the $1.77 it lost in the same quarter of the previous year. An improvement for sure, but still a sizable loss.
RIVN EPS Diluted (Quarterly) data by YCharts
Building a manufacturing-based business costs a lot of money up front before sales can start to take place. And getting all of the moving parts to work right can take time. However, a company can only lose money for so long before investors start to worry about its long-term future.
Given that Rivian's stock has fallen around 85% since its IPO, investors look like they are already worried. That decline, by the way, includes the recent price advance. Until Rivian's earnings get consistently into the positive column, uncertainty will remain high.
3. Running out of time
Quarterly losses aren't, in and of themselves, a death knell for a company, though they do speak to how well (or poorly) a business is operating at any given moment. Indeed, a company with a strong balance sheet can muddle along for a long time before red ink is a material problem. On the surface, Rivian looks like it has a solid financial foundation with roughly $11.7 billion of cash at the end of the first quarter.
The offset to that is the cash burn in the quarter of $1.8 billion. Remember, Rivian is still spending heavily to build out its operations. At that rate, it will run out of cash in roughly six quarters. That's a year and a half. If it were a profitable company, it could refill its coffers, but the high cash burn and the red ink together paint an ugly picture.
Yes, Rivian can sell more stock and dilute existing shareholders. And it could issue debt, increasing its interest expenses and, thus, ongoing costs. Neither is all that great an outcome for shareholders, but one or the other -- or both -- will probably have to happen quite soon. If not, then the cash will run dry and Rivian could quickly find itself relegated to the Wall Street history books.
Risk/reward isn't in balance
Rivian might end up being the best EV company ever created. But right now, it looks like the company is facing an uphill climb with an increasingly competitive market, ongoing losses, and a rapidly shrinking cash hoard.
Investors got excited by the company's production results in the second quarter. And it was good news. But it isn't enough to suggest that Rivian is worth buying for the long term. All but the most aggressive investors should probably remain on the sidelines here.
