Rivian Automotive (RIVN 6.10%) attracted a lot of attention when it went public in November 2021, but the electric vehicle (EV) maker's stock now trades nearly 90% below its IPO price. Rivian ran out of juice as it grappled with supply chain constraints, persistent losses, and the broader slowdown of the EV market. Rising interest rates also compressed its valuation and drove investors toward safer alternatives.
So should investors buy, sell, or hold Rivian stock? Let's review its biggest near-term challenges and long-term opportunities to decide.
Image source: Rivian Automotive.
The reasons to sell Rivian's stock
The bears believe Rivian will still struggle to ramp up its production as its liquidity dries up. Before Rivian went public, it claimed it could produce 50,000 vehicles in 2022. But it subsequently halved that estimate to 25,000 vehicles as it dealt with supply chain issues -- and it eventually missed that lowered target by only producing 24,337.
Rivian then set a goal of more than doubling its production to 50,000 vehicles in 2023. It gradually raised that target to 54,000 vehicles as supply chain constraints eased, and it eventually produced 57,232 vehicles for the full year.
But looking ahead, Rivian only expects to produce 57,000 vehicles in 2024 as it deals with a tougher macro environment, a slower EV market, and the upcoming shutdown of its plant for "several weeks" in the second quarter. The plant is pausing manufacturing in order to expand its production capacity by 30%, roll out new in-vehicle technologies for its R1 platform, and reduce its raw material costs. The EV maker also plans to lay off another 10% of its workforce as it streamlines its business.
As Rivian's year-over-year production growth flatlines, it's reducing the prices of its base R1T and R1S models. Those discounts aren't surprising -- given Tesla is also enacting price cuts, interest rates are elevated, and the broader slowdown of the EV market has lowered the average prices of EVs -- but they could make it difficult for Rivian to achieve its goal of generating a positive gross margin by the fourth quarter of 2024.
Simply put, Rivian hasn't proven that its business model is sustainable yet. In 2023, it generated $4.43 billion in revenue by delivering 50,122 vehicles, but only narrowed its operating loss from $6.86 billion to $5.74 billion. That equals an average operating loss of about $114,500 per vehicle.
For 2024, analysts expect Rivian's revenue to rise 11% to $4.92 billion as it delivers more vehicles amid flat production, but they believe it will only decrease its operating loss to $4.82 billion.
Rivian ended 2023 with $10.47 billion in total liquidity, which includes its cash, cash equivalents, short-term investments, and revolving credit facility. But it also generated negative free cash flow (FCF) of $5.89 billion in 2023, and it's expected to post negative FCF of $4.43 billion in 2024. Therefore, the company could easily burn through nearly half of its cash this year and be forced to raise additional funds through more debt and stock offerings as its vehicle production stalls out. That ugly balance sheet will also likely keep investors on the sidelines as long as interest rates stay elevated.
The reasons to buy or hold Rivian's stock
The bulls believe Rivian can overcome its near-term challenges as it ramps up production of its own in-house Enduro drive unit (which should reduce its production costs and dependence on third-party suppliers), rolls out its new R2 SUV in March, and chips away at Amazon's long-term order for 100,000 electric delivery vans.
If Rivian achieves those goals and generates a positive gross margin per vehicle by the end of 2024, investors might be more forgiving as economies of scale kick in and the company focuses on narrowing its operating losses. If that happens, Rivian's stock might be a bargain right now at 2 times this year's sales. For reference, Tesla -- which is profitable and growing faster -- trades for 6 times this year's sales.
The bulls will also point out that Rivian's reasonable debt-to-equity ratio of 0.8 at the end of 2023 still gives it room to take on more debt as it scales up its business. It might struggle to issue more debt at favorable interest rates in this challenging market, but it probably won't go bankrupt within the next few years.
Should you buy, sell, or hold Rivian's stock?
Rivian's near-term future is murky, but it doesn't make sense to sell its stock at these dirt-cheap valuations. That's probably why Amazon still hasn't sold its big stake in Rivian -- even as the latter's tumbling stock price weighs down the tech titan's near-term profits.
But it's also a bit too risky to buy Rivian's stock right now as it tries to simultaneously reboot its business, roll out its new SUV, and streamline its spending. So for now, I think investors should still hold Rivian's stock if they already own it, but they shouldn't start a new position until it stabilizes its core business and more green shoots appear.
