Down More Than 23% So Far This Year, Could Rivian Stock Plummet in 2024?

After surging 40% in December, Rivian Automotive (RIVN 3.76%) has cooled off in 2024, falling over 23% in the first two trading weeks of the year. The stock has been and continues to be all over the place.

Here's why Rivian will likely remain a volatile stock for the foreseeable future, what it would take to become more stable, and what investors should look for from the electric car company this year.

Image source: Getty Images.

The makings of a volatile stock

Rivian's history in the public markets is rooted in speculation and volatility. The electric vehicle maker's highly anticipated initial public offering (IPO) came in November 2021, an extremely optimistic -- and arguably misguided -- time in the market. "Misguided" because the meme stock frenzy was still occurring. Rivian was certainly impacted by mass speculation.

On Nov. 16, shortly after its IPO, Rivian briefly reached a market value above $150 billion. Bear in mind that this was when the company produced a negligible number of vehicles.

The story has cooled since then, and Rivian finds itself at a much more reasonable $17.3 billion market capitalization. And while the swings aren't nearly as wild as a couple of years ago, Rivian will likely remain a very volatile stock because its value is derived not from where it is today but from where it could be headed.

Valuation is one of the strangest concepts to wrap your head around in the stock market. There are plenty of cases of companies that barely make any profit and, yet, are worth so much. Netflix was like this for a while. So was Tesla. But what eventually happened is that these companies captured a massive market share, achieved pricing power, and then were able to become free-cash-flow positive.

For several years, investors valued these companies at tens of billions or even hundreds of billions of dollars because of their future earnings potential. But when a company is in that speculative, unproven phase, the stock price can do just about anything in the short term because the value isn't based on fundamentals but on future growth potential.

Netflix and Tesla have been phenomenal investments that proved worthy of the hype. But each had a unique first-mover advantage. It would be unrealistic to expect the same explosive growth from Rivian.

On the mark

Rivian the stock may be a whirlwind of unpredictability, but Rivian the company has been remarkably consistent. On Jan. 2, the company reported full-year 2023 production of 57,232 vehicles and deliveries of 50,122, exceeding its production goal of 54,000. It also produced a record number of vehicles for a quarter. Looking at the last two years of production and delivery data, it's clear that Rivian has been growing quickly and steadily, with 2023 production at more than double 2022's.

Data source: Rivian Automotive.

Another encouraging note is that Rivian's losses are flatlining despite higher vehicle production.

RIVN Operating Income (Quarterly) data by YCharts.

It's worth mentioning that Rivian frontloaded some of its major expenses. The company's nameplate capacity at its factory in Illinois is 150,000, which exceeds what it will likely produce in 2024 and maybe even 2025. Rivian is also investing in another factory in Georgia with a capacity of 400,000 units. Rivian's manufacturing capacity is steadily ahead of its actual production, which is good because the company won't be scrambling to ramp manufacturing capacity if demand is better than expected.

Managing costs

Rivian's cash position remains a sizable $7.9 billion. It will continue to decline until the company reaches positive cash flow, which is unlikely for 2024. The good news is that Rivian is burning through less cash now than a few quarters ago.

Trailing-12-month operating cash flow was negative $5.2 billion. It takes a bit of guesswork, but Rivian likely has enough cash to fund its operations for at least another year and a half to two years. By then, Rivian will either reach positive cash flow or have to do another capital raise.

If Wall Street views its growth as legitimate, a capital raise shouldn't be as difficult as it would be today, especially if Rivian's stock is higher. But a lot could go wrong to throw a wrench in Rivian's profitability between now and 2026. Time is Rivian's worst enemy. Right now, things look pretty good. But that could change in a heartbeat. And Rivian doesn't have a lot of margin for error.

The Rivian game plan

Despite the surface-level craziness in the stock price, what I like about Rivian is that it is a fairly straightforward investment opportunity. The first step is to expect anything and everything in the short term. But once you do that, the market noise dissipates, and the objectives become clear.

There's a short list of things to look for here: a path toward profitability, cash management, production growth, and a sustained favorable reception of Rivian's products by consumers. Focusing on these elements rather than the stock price makes Rivian a worthy investment -- but only with a portion of your portfolio that you are fully comfortable losing.

Despite its strong start, Rivian is far from a surefire winner. Ten years from now, it could cease to exist, see massive success, or be something in between. Until then, there's no sugarcoating that it is a speculative stock and should only be considered if you have a high-risk tolerance.