Everyone wants to bet on a beaten-down stock trading at a discount to its long-term potential. After losing around 90% of its value since hitting public markets in late 2021, Rivian Automotive(NASDAQ: RIVN) should surely catch the attention of value-hungry investors.
But with massive cash burn and an uncertain macroeconomic future, will this embattled automaker have a brighter future? Let's discuss what the next three years could have in store.
Electric vehicle lose their luster
When Rivian stock became publicly available through a reverse merger with a special purpose acquisition company (SPAC) in November 2021, electric vehicle (EV) stocks were on top of the world. At the time, industry leaders like Tesla grew significantly faster than traditional automakers, leading many investors to assign high valuations to Rivian and other pure-play EV companies that aimed to imitate Tesla's business model.
Image source: Getty Images.
At its peak that same year, Rivian's market cap exceeded $100 billion (compared to $13.2 billion today), putting it ahead of established traditional automakers like General Motors and Ford Motor. In hindsight, this turned out to be overvaluation. As time went on, it became clearer that the EV opportunity might not be as lucrative as expected.
With the early adopters reached, companies are now struggling for the more discerning mass market, which may be put off by EV range, public charging availability, and repair costs. High interest rates are also making it harder for consumers to buy cars in general because these big-ticket purchases are usually financed with credit. With Rivian's baseline R1T pickup truck starting at $71,700, affordability is also a big challenge.
Second-quarter earnings were a mixed bag
Rivian's second-quarter earnings give clues on how management is trying to navigate this difficult macroeconomic climate. Company revenue increased by just 3.3% year over year to $1.16 billion. But this anemic growth exceeded Wall Street's rock-bottom expectations of $1.14 billion. Rivian's bottom line also came in better than expected, with an adjusted loss of $1.13 per share compared to the analysis forecast of $1.21.
However, beating Wall Street's arguably softball forecasts doesn't matter much right now because Rivian has a bigger problem.
Losses are out of control
Earlier in 2024, Rivian's CEO Ryan Scaringe pledged to make his company profitable on a gross margin basis by the fourth quarter of this year by unlocking manufacturing efficiencies and cutting material costs. However, it is getting harder to see this playing out as he promised.
Rivian's second-quarter gross loss expanded 9.4% year over year to $451 million. This is before even considering operating costs like research, advertising, or office salaries, which take the losses to an eyewatering $1.38 billion in one period.
If Scaringe fails to achieve a gross profit this year, it would be a massive hit on management credibility. Investors would have to ask why Rivian's leadership can't provide accurate near-term projections and what else might they be wrong about, too. That said, the company still has two more quarters to prove the naysayers wrong. And factors like seasonality and product updates could dramatically change the situation.
What will the future hold?
Over the next three years, Rivian's operational losses could go from an inconvenience to an existential threat. With only $5.8 billion in cash on its balance sheet, the company will most likely need to raise outside capital through tactics like equity dilution, which could hurt current shareholders' claim on the potential future earnings.
With all that said, deal-hungry investors should keep a close eye on Rivian stock because there could be some value here. With a price-to-sales ratio of just 2.6, shares are significantly cheaper than Tesla, which trades for 8.2 times sales. And if the automaker can overcome its near-term challenges, its shares could rise significantly. However, it might make the most sense to wait for more quarters of data before taking a position.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. 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.
