Down by 89% from its initial public offering price of $78 in November 2021, RivianAutomotive's(NASDAQ: RIVN) stock performance has been catastrophic for its early investors. While the electric vehicle (EV) maker has quickly built a leading brand with its trucks and SUVs, market weakness has soured investor interest in this once-exciting industry.
Will Rivian's future be brighter than its past? Let's dig deeper to find out.
What is going wrong with Rivian?
Rivian's stock has faced multiple challenges during its short history on the public markets. The first was overvaluation. In late 2021 the company's market cap of over $100 billion put it ahead of major automakers like General Motors and Ford Motor Company despite having little production volume or revenue. Unsurprisingly, that absurd situation wasn't going to last forever.
More recently, Rivian's problems have had more to do with macroeconomic factors largely outside its control. High interest rates mean consumers are less likely to spend money on big-ticket items like cars -- especially while inflation eats into their spending power. Most importantly, the much-hyped electric vehicle (EV) industry is not meeting analysts' optimistic projections.
Harvard Business Review suggests that most buyers aren't ready for all-electric vehicles. While early adopters were willing to take risks on the new technology, it may be years or even decades for most consumers to be comfortable making the switch.
Research from GBK Collective finds that consumers are significantly more interested in hybrids than their fully electric counterparts. This could create an off-ramp for legacy automakers, while crushing the market for pure-play EV makers like Rivian that lack the manufacturing expertise and supply chains to quickly pivot to this side of the market.
How is Rivian's business performing?
Despite industry weakness, Rivian's 2023 revenue soared 167% to $4.43 billion with a ramp-up in sales of its all-electric trucks and SUVs. The problem is that the company is in an extremely early stage of maturity, and the revenue earned from selling its vehicles doesn't even defray the costs of manufacturing and delivering them to consumers (a gross loss).
Image source: Getty Images.
While gross losses have been reduced from $3.1 billion to $2 billion, this is still an extremely high number -- and it doesn't account for other outflows like office salaries, research, and advertising, which bring the total operating losses to $5.7 billion.
With just $7.8 billion in cash and equivalents, Rivian may need to rely on outside sources of capital, such as bond issuance or equity dilution, to fund its operations. And this could hurt the stock by reducing current investors' claims on potential future earnings.
What could the next five years have in store for Rivian?
While Rivian is in an undeniably terrible situation, I think there is light at the end of the tunnel. For starters, interest rates seem unlikely to stay this high forever. And when they fall, that could unlock pent-up EV demand. Rivian also has intangible value related to its brand and quality (its R1T pickup truck is rated 10/10 by Car & Driver). This could make it more resilient than its financial statements suggest.
Management is also working hard to trim Rivian's losses, announcing plans to lay off 10% of the salaried workforce in 2023 and a further 1% in April. More importantly, the company's rapid growth could unlock economies of scale, which make production more efficient and reduce per-unit costs.
While Rivian stock is not a buy right now, investors should not give up on the company as its branding power, growth, and cost-cutting efforts play out over the medium to long term.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
