Rivian's (RIVN -2.25%) stock price fell 23% on Oct. 5 -- its biggest one-day decline since its initial public offering (IPO) in November 2021 -- after the company announced a $1.5 billion convertible debt offering and reported preliminary third-quarter numbers.
The sell-off was a bit puzzling. Sellers seemed to dislike the debt offering since the company already has billions in cash on the books. The other issue that led to the sell-off was Rivian's reveal that its cash and short-term investments balance declined from $10.2 billion at the end of the second quarter to $9.1 billion at the end of the third quarter. Rivian also said third-quarter revenue came in at $1.29 billion to $1.33 billion, up 143% from the quarter a year ago.
Image source: Rivian.
Are you really surprised?
With Thursday's sell-off, the market seemed to be taken aback by the decline in Rivian's cash balance and its desire to raise more cash to fund its ongoing production ramp. However, it shouldn't come as a surprise that the EV stock blew through more than $1 billion in the third quarter, especially since it topped production estimates.
As the chart below shows, the company has been rapidly burning cash since it raised billions in its IPO. It was also clear from the beginning that Rivian would have to do that to scale up the business and one day turn profitable.
Rivian is deeply unprofitable. The company loses money on every car it sells and has been selling cars for negative gross profit since it started making them. In the second quarter, it had $412 million in total gross loss or a gross loss of $32,594 per vehicle sold based on the 12,640 vehicles it delivered.
Given its established relationship between selling cars and losing money, it shouldn't be surprising that Rivian burned through more cash than expected in Q3 since it manufactured more vehicles than expected, producing 16,304 vehicles and delivering 15,564.
Sending the wrong message
Rivian is at a crucial stage right now. The company needs to ramp up production as fast as possible to gain scale, become profitable, and be competitive in the rapidly expanding EV industry.
There's no guarantee that the company will become profitable or thrive in the emerging EV sector, but to do so, it needs to invest in the business. By balking at the debt raise and the cash burn with the stock sell-off, sellers seem to be telling management that they'd prefer a slower growth ramp with less cash burn. They appear more interested in short-term profits than long-term growth, but that's the wrong approach.
Despite the billions on its balance sheet, proprietary technology, rave reviews, and a partnership with Amazon, Rivian is still a David facing off against multiple deep-pocketed Goliaths. For example, Tesla is expected to produce nearly 2 billion EVs this year, more than 30 times Rivian's goal of 52,000. General Motors, which investors seem to regard as an aging dinosaur, is expected to make around 150,000 EVs this year. And Ford Motor Company -- arguably Rivian's closest competitor as it makes the electric Lightning pickup truck -- is aiming for 400,000 EVs this year.
Rivian is in a race with those automakers and others. To win, it needs to scale up quickly.
What's next for Rivian stock
The preliminary update paints only a vague picture of the company's third-quarter performance for investors. Investors will get the full report on Nov. 7. The key number to look for there is the company's total gross loss and its gross loss per vehicle, as well as confirmation that it's still on track to deliver a gross profit in 2024.
If Rivian's gross loss per vehicle did improve from the second quarter and the company is still on target to hit gross profitability in 2024, Thursday's sell-off will end up looking senseless. On the other hand, if Rivian whiffs on those targets, the stock will likely find itself in a deeper hole.
No matter what happens, investors need to understand the decision they're making by owning Rivian stock. They must trust the management team to invest for the long term and build the business, which means accepting cash burn and debt raises to ramp up production.
If you're displeased with the better-than-expected deliveries in exchange for additional cash burn, you're probably better off owning a lower-risk stock.
