The stock of Rivian Automotive (RIVN +1.75%) has floundered since hitting public markets in late 2021, losing more than 90% of its value in just over two years. Industrywide weakness can take the blame for some of these declines in the electric vehicle (EV) business. But Rivian also faces company-specific challenges that have made it particularly vulnerable to the poor macroeconomic environment.
Let's discuss how the struggling automaker might perform as these headwinds potentially ease over the next decade.
A challenging time for the industry
The early adopters for EVs have already been reached. So companies must now appeal to more-discriminating mass market consumers who might be less worried about the environment when compared to the familiarity and conveniences of a gasoline-powered vehicle. Challenges like high interest rates (which can make financing a car more expensive) could further strain the industry.
That said, Rivian's top-line growth is still impressive. First-quarter revenue surged 82% year over year to $1.2 billion. But while momentum is good, this only tells half the story.
NASDAQ: RIVN
Key Data Points
Management said it generated a gross loss of $38,784 on every vehicle it sold that quarter -- before accounting for overhead like advertising, office salaries, or research. At the end of the day, companies exist to generate profits. With such poor margins, it's no surprise that Rivian's shares have performed so catastrophically since going public, despite the company's impressive revenue growth.
Rivian's long-term future
The decisions Rivian makes today will make or break its future. And the good news is that management has a plan to turn things around. According to CEO R.J. Scaringe, the company expects to generate a gross profit by the fourth quarter of this year. It aims to achieve this ambitious goal by improving economies of scale, plant retooling, and cost-focused material changes in the vehicle lineup.
Switching to cheaper materials is within Rivian's control, so management has a high likelihood of meeting guidance. And if the company can achieve a gross profit this year (while maintaining a healthy growth rate), that opens the door for it to scale up into operating profitability and eventually net income, which will generate sustainable value for investors.
Over the next 10 years, Rivian might also enjoy macroeconomic tailwinds. Many analysts believe interest rates have peaked for the foreseeable future, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, saying it is a "reasonable prediction" that the central bank could start cutting rates this year. With lower interest rates, more people will be able to purchase Rivian's relatively expensive vehicles.
Image source: Getty Images.
Rivian should also benefit from U.S. protectionist policies. In May, the White House imposed a 100% tariff on Chinese EVs. This move could decimate the market for cheaper imports and buy Rivian time to get its act together. Unlike rivals such as Tesla, Rivian has no significant operations in China, limiting the impact of potential retaliation from Beijing.
Is the stock a buy?
Rivian seems to have a bright future over the next 10 years as a combination of falling interest rates, protectionism, and improving margins boosts its growth and profit potential. And with a forward price-to-sales (P/S) multiple of 2.1, the stock is an affordable way to bet on the industry relative to alternatives like Tesla, which has a P/S ratio of 6.8.
That said, investors might still want to wait for a few more quarters of data before betting on Rivian. While the company's long-term future looks bright, it is currently in a challenging situation that could cause its stock price to continue dropping before things get better.
