Shares of Rivian (NASDAQ: RIVN) have lost 68% of their value in the past year as the electric vehicle (EV) hype has worn off and investors are questioning whether the company can profitability make vehicles amid increasing competition and pricing pressure.
Shares have recovered lately off their recent lows, but is the stock a buy today? The answer depends on how bullish you are on Rivian’s execution and the future of the EV market.
Rivian faces lots of questions
Like any company that’s yet to establish itself, Rivian has a lot of questions to answer. Some of those are within its control and others aren’t. Here are the outstanding questions we don’t have answers to yet that should be addressed on Rivian’s fourth-quarter 2022 conference call on Feb. 28, 2023.
- Will prices come under pressure? Tesla (NASDAQ: TSLA) has cut prices by as much as 20% this year and Ford (NYSE: F) followed. Is a price war brewing in electric vehicles?
- Can Rivian produce vehicles cost-effectively? From the outside, it’s hard to tell what unit economics look like, especially as a product is ramping up. Third-quarter 2022 gross margin was negative 172%. But how will that figure change over time?
- How quickly will production ramp up? We know Rivian produced nearly 25,000 vehicles in 2022 and it has the nameplate capacity of up to 200,000 at the current Normal, Illinois plant with some upgrades. But how fast will that ramp-up happen?
- Why is a start-up already laying off workers? One of the more concerning announcements recently was Rivian laying off 6% of its workforce — for a second time. Investors need to know why belt-tightening is needed this early in the company’s history.
Earnings should give us some insights into these questions, but some answers are still years away. And that’s what makes this a risky stock to own.
While there are plenty of risks, there are great reasons to own Rivian stock right now, too.
- Cash: Rivian has $14 billion in cash and equivalents as of the third quarter of 2022. That’s a cushion the company can use to make it through its production ramp and any bumps along the way.
- Trucks and SUVs are a good segment of the market: Trucks and SUVs are typically much higher margin than cars, so Rivian should be well positioned against both legacy automakers and newer entrants long term. We will see how big the market is for $70,000+ electric trucks and SUVs, but we know buyers are used to a high price point.
- Electric delivery vans: Rivian has Amazon as the first, best customer for electric delivery vans, or EDVs, with a 100,000-unit order. If they’re cost-effective, this could be a huge untapped market for electric vehicles.
From the start, Rivian was built to be a differentiated electric vehicle manufacturer. Now it just needs to execute that plan.
Risk versus reward
I think Rivian is a high-risk, but high-reward stock. The company could come to define electric trucks and SUVs over the next decade, churning out profits and leveraging its stout balance sheet to grow. But if competition picks up and pricing power isn’t what investors hope, the cash will run out quickly.
For now, I think the reward outweighs the risk, but I may update that thesis depending on how earnings look later this month.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Travis Hoium has positions in Rivian Automotive and has the following options: long March 2023 $250 puts on Tesla. The Motley Fool has positions in and recommends Amazon.com and Tesla. The Motley Fool has a disclosure policy.