Excitement reached a fever pitch for electric vehicles (EVs) in 2021 when Rivian Automotive (RIVN -7.26%) hit the public markets. The EV start-up had a market cap of over $100 billion, even though it was barely starting to deliver products to customers. With a focus on upscale outdoor vehicles sold as better for the planet, many investors were betting this would be the next Tesla in the fast-growing EV sector.
Today, in 2024, expectations have come down quite a bit. Rivian's stock is down more than 90% from all-time highs to a market cap of $11 billion as the company posts heavy losses each quarter and slowing delivery growth. What's going on with Rivian stock, and should investors buy the dip at this discounted price?
Let's take a closer look and find out.
A delivery slowdown, negative gross margins
Rivian came to the public markets with a bang, raising almost $12 billion in one of the largest IPOs ever. With a huge war chest, it has invested in the production of new vehicles such as the R1T, which is an all-electric premium truck. Deliveries shot up with production in early 2022, with cars delivered to customers going from barely over 1K to over 15K in less than two years.
But over the last two quarters, Rivian has hit a wall with deliveries. This is even with the new R1S SUV hitting production, giving it a smaller option for its environmentally conscious customers. Last quarter -- the first quarter of 2024 -- Rivian delivered just 13.6K cars to customers, down from 15.6K in Q3 of 2023. Automotive companies need scale in order to reach profitability, which you can now see in Rivian's gross margins.
Last quarter, its gross margin was negative 44%, a number that has moved in the wrong direction since September of last year, when it was 36%. Gross margins don't even include marketing and research costs, on which Rivian will need to spend heavily in order to maintain any sort of business momentum. In this rough spot, it is no wonder Rivian's stock has fallen so far from its all-time high.
Can it reach scale?
In order to generate a profit, Rivian will need to scale its car deliveries to much greater heights. Can they do it? I think it will prove difficult.
A ton of supply is hitting the automotive market in the form of EVs and hybrid vehicles. These include legacy players like Toyota, Volkswagen, Tesla, and Chinese players such as BYD. Chinese competition won't matter much in the United States due to the high tariffs, but if Rivian only competes domestically, its total addressable market will be severely limited.
Suppose Rivian is only able to sell 15K vehicles a quarter when the economy is booming. In that case, investors need to ask themselves how this business can scale to 10 times or more its current size (which it will need to do to flip to profitability). This puts the company in a tough spot.
RIVN Free Cash Flow data by YCharts
The stock looks treacherous
There is a ticking clock for Rivian. It is currently burning a ton of cash and will run out of its IPO war chest shortly. Over the last 12 months, free cash flow was negative $5.6 billion. With well under $10 billion in cash on the balance sheet, Rivian will run out of cash in less than two years unless it can reaccelerate delivery growth. Otherwise, it will be looking for new financing and perhaps an acquirer for its distressed business. Time is running out for this EV start-up.
Huge cash burn and no growth should scare shareholders. Rivian could run out of cash and see its stock fall another 90% or worse in the coming years if things go wrong. Unless you believe these last two quarters are a small bump in the road and Rivian is set to boost deliveries in the coming quarters, it is best to avoid buying Rivian stock at current prices.
The EV market is littered with dead companies from the 2020-2021 bubble. Rivian has a chance to join them if it isn't careful, which would be terrible news for stock investors.
