With its shares down by almost 90% since it went public in November 2022, Rivian (RIVN -0.69%) has been a hugely disappointing investment for those who bought shares early, especially compared to alternatives like Tesla, which is up by around 27% over that one-year timeframe. The upstart electric vehicle (EV) maker has had to raise capital as its cash burn has continued.
But now that those issues have been priced into the previously overvalued stock, could it be time to buy?
What went wrong for Rivian?
Rivian's story over the past year illustrates some of the dangers of investing in initial public offerings (IPOs) -- a dynamic where retail investors can often end up holding the bag for a start-up's powerful early-stage backers. In Rivian's case, these included giants like Amazon and Ford Motor Company, both of which had business partnerships with Rivian prior to its IPO. These deals were votes of confidence in the automaker, and likely contributed to its lofty initial valuation of $85.9 billion -- more than Ford and General Motors combined.
The problem is that Rivian's fundamentals didn't support such a high price tag. In 2022, the company generated just $1.66 billion in revenue and a whopping $6.86 billion in operational losses.
To be fair, it is normal for early-stage companies to post small amounts of revenue and big losses as they pour resources into scaling up their businesses. But Rivian's valuation was far out of touch with reality. Its current market capitalization of around $16 billion makes more sense considering the uncertainty around its future in its competitive industry, as well as macroeconomic challenges like higher interest rates and inflation.
Rivian stock now trades at a price-to-sales multiple of 4.1, which is a sharp discount to its rival Tesla, which trades for 8.5 times sales. Its valuation makes more sense now, and positions the company as a relatively affordable way to bet on the EV opportunity. That said, valuation isn't the only factor a potential investor needs to consider.
What about its operational performance?
Rivian's operational performance has been mixed. In the third quarter, revenue jumped by an impressive 149% year over year to $1.33 billion. And despite the challenging macroeconomic environment, the company has thus far avoided getting caught up in the EV industry's price war. Indeed, it has actually increased its average sales price per vehicle thanks to strong demand for its models, according to CEO RJ Scaringe. This trend suggests customers see standout value in its unique, outdoorsy EV brand.
Image source: Getty Images.
Management is also optimistic about the future. The company has raised its full-year production guidance to 54,000 vehicles for 2023 (up from 52,000 previously).
That said, Rivian's bottom line still leaves much to be desired. The company generated an operating loss of $1.44 billion in Q3. While this was an improvement from the $1.77 billion it lost in the prior-year period, Rivian is still draining its cash reserves, which stood at just $7.9 billion as of the end of the quarter. Investors should expect this company to eventually issue more debt or sell more shares (with the resulting equity dilution) -- or both -- to fund operations as it runs low on liquidity.
Management has said it expects Rivian's gross margin will turn positive in 2024. But this simply means that the selling prices of its vehicles will at that point be higher than their direct production costs -- gross margin doesn't factor in substantial overhead expenses like office salaries, marketing, or research and development.
Is Rivian a better buy than Tesla?
For investors, Rivian has two things that make it attractive compared to Tesla. Firstly, it is a smaller company with possibly more expansion potential. And secondly, it has a lower valuation. However, investors should be careful about betting on less mature companies because their challenges can quickly spiral out of control, particularly if macroeconomic conditions worsen.
Ultimately, Rivian looks like an appealing long-term buy. But investors may want to wait for a few more quarters of upbeat data before purchasing the stock.
