Is Rivian Stock a Buy?

Is Rivian Stock a Buy? EV manufacturer Rivian (NASDAQ:RIVN) is one of the most-discussed stocks in the electric vehicle world. Sometimes touted as the next Tesla, Rivian has a strong technological argument behind it. But the stock is down over 65 percent this year. The flipside of that bearish trend is it’s now squarely a focus for EV investors.

 

Analysts like Loup Ventures’ Gene Munster have argued that the stock is trading above its intrinsic value due to factors such as scarcity value and fear of missing out. So what does the future hold? Is RIVN a buy or a sell?

Rivian is a manufacturer of electric vehicles that is best known for its R1 electric pickup truck platform. In addition to consumer vehicles, Rivian has also entered into a partnership with Amazon that resulted in a $700 million investment in the EV startup.

 

As part of this agreement, Amazon plans to order 100,000 electric delivery vehicles from Rivian. This partnership massively boosted Rivian stock and has caused it to be one of the most intriguing EV startups outside of Tesla.

 

Rivian’s unique selling point is that it has developed an EV truck platform that other companies can build off of. The Rivian truck includes a basic chassis that can be upgraded by other companies with unique features and technology. As such, Rivian has the opportunity to develop vehicles for use in many different settings and industries.

 

In the most recent quarter, Rivian beat expected revenues of $337.5 million, reporting a total of $364 million for the quarter. While this was certainly a positive aspect of the quarterly report, the company’s losses were closely in line with analysts’ expectations.

 

The consensus estimate for Rivian was a loss of $1.63 per share, and the company posted an adjusted loss of $1.62 per share.

 

In the same quarter of 2021, Rivian posted no revenue. Rivian also achieved strong sequential growth in revenue, increasing total inflows from $95 million in Q1 to over $360 million in Q2.

 

Despite this rapid revenue growth, Rivian tempered production expectations by maintaining its guidance of 25,000 vehicles manufactured in 2022. This target had been set following Q1’s somewhat lackluster earnings report.

 

Rivian is still in the early stages of setting prices for its vehicles, but the company plans on margins of approximately 25 percent. To achieve this, Rivian increased the prices of its vehicles substantially earlier this year. While this move could slightly depress long-term sales, it should help Rivian maintain its margin targets.

 

Most analysts are quite bullish on Rivian, as the stock maintains a consensus buy rating.

 

The median 12-month target price for RIVN is $50.50, a 37.4 percent increase from the current price of $36.75. The price forecasts do, however, fall into a very wide range. The lowest target is $27, while the highest is $83.

 

Despite these seemingly optimistic forecasts, there’s a strong argument to be made that Rivian is substantially overvalued.

 

As a company that has not yet achieved profitability, standard metrics such as P/E or price-to-earnings-growth don’t apply to Rivian. One figure that does jump out, however, is an astronomical price-to-sales ratio of 65.5. The company is also posting negative cash flows at a rate of -$3.13 per share. That’s a red flag.

 

The biggest risk for Rivian at the moment is the strong possibility that it will underperform its production forecast for 2022. If the company manufactures fewer electric vehicles than expected, its stock could continue to slide.

 

Supply chain issues that have plagued EV manufacturers across the board could also hamper Rivian’s growth. Chips and battery components have presented problems for makers of electric vehicles, and ongoing supply chain disruptions could put further pressure on Rivian as it moves to increase its production.

 

Competition is also a serious problem for Rivian. While other small EV startups are mostly behind Rivian, the company faces fierce competition from Tesla and the traditional auto majors. Unlike Tesla, Rivian is not entering an underserved market for electric vehicles. As such, its path to profitability could be much harder than Tesla’s.

 

A final risk factor investors should consider is the possibility that Rivian could run out of funding before achieving profitability, forcing it to take on more debt.

 

At present, the company’s reserve of cash and equivalents stands at $15.5 billion. While this gives it a decent amount of room to invest in growth, it may not be enough for Rivian to reach profitability.

 

While Rivian shows a great deal of promise, the stock is likely still too risky for the vast majority of investors. With the company being as young as it is and still so far away from profitability, it’s difficult to justify its current valuation. The argument made by Munster seems to hold true, even taking Rivian’s massive drop this year.

 

Until Rivian can show steady production increases and improvements in earnings, the stock will likely remain overvalued.

 

Extremely bullish investors searching for early-phase EV stocks have run Rivian to an extremely high and largely unjustified valuation. Although Rivian’s partnerships and technology have some real potential, it’s unlikely that the company is appropriately valued at today’s prices.

 

Cash burn and growth are arguably the two largest hurdles for Rivian. The company could burn through its cash reserves by 2025, and current projections suggest growth of just 18.4 percent for the next year. Without higher growth rates or more capital, Rivian could have a very difficult time raising its stock price reliably.

 

This doesn’t mean, however, that Rivian is without merit as a company. With the stock sold off so far, investors looking for opportunities in the EV market would do well to keep an eye on this company. Future developments may make Rivian look more attractive from a value perspective and create buying opportunities with less risk.

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