Investors in the electric vehicle (EV) sector have been fans of Rivian Automotive (RIVN -3.78%) in recent months. The stock gained momentum as the company appeared to get past supply chain and other headwinds as it swiftly ramped up vehicle production.
The stock has rocketed more than 60% over the past three months. But that return would have been much higher had it not been for a more recent sell-off after the company released its second-quarter earnings report. A 15% pullback since the report probably has many trying to decide whether it's now a good time to buy shares in the upstart EV company.
Underpromising and hoping to overdeliver
After a series of missteps at the earliest stages of its production ramp, Rivian seems to be using a different tactic in communicating with investors and customers. After initiating production in late 2021, the company announced a major price increase in March 2022 that angered preorder holders. It wanted to increase prices by up to 20% to help cover rising raw material costs and other growing expenses. But it quickly backtracked after reservation holders reacted angrily.
The company also had to reverse course on its production volume projections last year. After saying it believed it could make 50,000 EVs in 2022, it slashed that in half due to start-up struggles and supply chain issues.
But it seems Rivian has righted the ship and has production growing quickly. It now looks like it was conservative in projecting the 50,000 unit goal at the start of 2023. In fact, in its recent second-quarter report, it raised that to let investors know to expect 52,000 vehicles to be made this year. And it still may be underpromising and hoping to overdeliver.
Image source: Rivian Automotive.
The nearly 14,000 vehicles the company produced in the second quarter was about 10% more than Wall Street expected. But the slight increase in its 2023 production estimate still may be very conservative. If it simply maintains the same level as it achieved in second-quarter production, the company would end up making over 51,000 units this year. And as can be seen on the above graph, Rivian has been quickly growing its production rate. So it seems likely that it could beat its current estimates and please investors in the coming months.
More work to do
While production is back on track and is likely to exceed current expectations this year, there is still a lot of work left for Rivian to become a successful long-term business and investment. Producing 52,000, or even 60,000, vehicles this year might make some investors and analysts on Wall Street more bullish on the stock, but it won't result in Rivian reaching profitability.
But for investors with a long time horizon, and a belief that Rivian will continue to grow, it doesn't look like a bad time to buy the stock. Assuming a 60,000 production rate at the average selling price per vehicle realized in the second quarter, Rivian stock was recently trading at a forward price-to-sales (P/S) ratio of slightly more than 5.0. That compares to about 7.0 for Tesla based on its expected 2023 sales.
Though Tesla deserves a premium in that metric versus Rivian based on its solid financials, Rivian's valuation doesn't seem excessive after its recent 15% pullback. The company ended the second quarter with more than $10 billion in cash and equivalents and $11.3 billion in total liquidity when including its existing credit facility. Though investors should be aware that it still may need to raise additional capital if it doesn't achieve positive free cash flow until the expected 2027 fiscal year.
Rivian used about $1.6 billion in cash in the most recent quarter, but it did say it expects a slightly improved full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss than previous guidance.
So Rivian's financials are starting to move in the right direction as the company's production volumes accelerate. For long-term investors in the EV sector, putting some speculative money in Rivian stock now looks to be a reasonable idea.
