I upgrade my investment rating for Rivian Automotive, Inc.’s (NASDAQ:RIVN) shares from a Hold to a Sell.
My prior March 24, 2022 article for RIVN touched on the de-rating catalysts for the stock, and the company’s shares have fallen by -33.1% since my earlier update as compared to a -7.0% decline for the S&P 500 over the same period. Taking into account both Rivian’s stock price correction and its recently announced Q1 2022 financial results, I provide an update of my thoughts on Rivian in this latest article.
I like what I see of Rivian in recent times. RIVN’s preorders are rising, the company has stuck to its 2022 production target, and it is paying more attention to cash management. This explains why I no longer view RIVN as a Sell. But Rivian still has a long way to go before it can prove to be as successful as Tesla, which implies that it is too early to assign a Buy rating to RIVN.
RIVN Stock Key Metrics
RIVN’s shares have witnessed a recovery in the past few weeks after the company reported its financial performance for the first quarter of the current year. Rivian’s stock price jumped by +18% from $20.60 as of May 11, 2022 to $24.30 as of May 12, 2022. RIVN’s shares increased by an additional +27% in the next couple of weeks to close at $30.96 as of May 27, 2022. As such, it is relevant that one analyzes the key metrics relating to Rivian’s Q1 2022 financial results.
There are two key metrics for Rivian that have impressed investors, which likely led to RIVN’s share price outperformance post-Q1 2022 results announcement.
One metric worthy of note is the company’s full-year 2022 production guidance.
In its Q1 2022 Shareholder Letter, Rivian highlighted that “we reaffirm the annual guidance provided during our fourth quarter and fiscal year 2021 earnings call of 25,000 total units of production.” In my previous late-March update, I had stressed that “there is significant uncertainty over RIVN’s ability to execute on the company’s production plans.” Similar to other investors, I was worried that RIVN will revise its production target for this year downwards during the company’s Q1 2022 results release as a result of supply chain issues. In that respect, Rivian’s commitment towards a 25,000 unit production goal has boosted investors’ confidence in the company.
The other critical metric that investors should pay attention to is pre-orders.
Rivian revealed in the company’s first-quarter Shareholder letter that it had more than 90,000 “R1 net preorders in the U.S. and Canada as of May 9, 2022.” This represents a steady increase in preorders over time as per prior disclosures. Previously, RIVN had disclosed that it boasted approximately 85,000 and 83,000 R1 net preorders in the middle of April and early-March, respectively. In other words, demand for RIVN’s products should be the least of investors’ and management’s concerns, with the growth in preorders being a validation of the strong consumer interest.
In a nutshell, certain Q1 2022 metrics for Rivian are encouraging, and have helped the company’s shares stage a substantial rebound in the last few weeks. In the subsequent section, I evaluate RIVN’s valuations in light of the company’s good share price run in recent weeks.
Is Rivian Stock Undervalued?
In the preceding section of this article, I mentioned that RIVN’s share price has run up by +50% from $20.60 as of May 11, 2022 to $30.96 as of May 27, 2022 following its announcement of Q1 2022 metrics. However, Rivian’s shares are actually still down by -70.1% year-to-date in 2022 despite the excellent stock price performance in the last couple of weeks. This begs the question of whether RIVN’s shares are currently undervalued.
The most suitable valuation peer comparable for Rivian is Tesla (TSLA). A recent May 17, 2022 Seeking Alpha News article cited a Morgan Stanley research report which emphasized that “if Rivian can pace itself on its ambitions for EV growth in the near term”, it has the “long-term potential to be ‘the one’ to challenge Tesla.”
According to valuation data sourced from S&P Capital IQ, Rivian currently trades at 1.9 times consensus forward fiscal 2024 Enterprise Value-to-Revenue. In comparison, Tesla is now valued by the market at a consensus forward FY 2024 Enterprise Value-to-Revenue multiple of 5.3 times. The hefty valuation discount that the market assigns to RIVN as compared to TSLA is no surprise, as Tesla is a proven electric vehicle maker, while Rivian is in the process of scaling up.
In my view, RIVN isn’t overvalued following the substantial pullback in its share price. However, it will also be a stretch to say that Rivian’s shares are severely undervalued, given that RIVN is a high-risk investment (as discussed in the next section) which deserve a degree of valuation discount.
Is Rivian A Risky Investment?
There is no doubt that Rivian is a risky investment.
RIVN is a start-up electric vehicle maker. The company is currently in losses (not unexpected for a start-up with high growth expectations), and it is expected to only turn EBITDA-positive in fiscal 2026 (as per consensus estimates obtained from S&P Capital IQ). Separately, Rivian is also still in the process of ramping up production and it earns minimal revenue. As per S&P Capital IQ data, RIVN has only generated a modest $150 million in revenue for the trailing twelve months period.
Similar to other high-growth start-ups, the biggest risk for Rivian is that it doesn’t have sufficient capital to sustain its future growth. If this particular risk can be mitigated, RIVN has a higher chance of surviving and thriving for the long-term, and this will also help sustain the stock’s current positive share price momentum. This is the topic of the next section of the article.
Is Rivian Stock Expected To Go Back Up?
As mentioned earlier in this article, RIVN’s shares have gone up by +50% in the past three weeks, but its stock price has still corrected by -70% in 2022 thus far. The most important question for investors now is whether Rivian’s shares can recover more lost ground and go back up.
A key factor is Rivian’s renewed focus on cash management as evidenced by the company’s Q1 2022 disclosures.
In its Q1 2022 Shareholder Letter, RIVN stressed that it has “optimized our product roadmap and associated operating expenses” so that it can “launch R2 in Georgia in 2025 with our current cash on hand.” At the company’s Q1 2022 earnings call, Rivian explained that it can derive “CapEx savings” by choosing not to produce “the full 400,000 units (of R2) at once” and focusing instead of manufacturing half that amount of R2 vehicles in the first phase. Separately, RIVN also mentioned at its first-quarter results briefing that its “current priority is ramping the 150,000 units of R1 and EDV (Electric Delivery Van) capacity”, which sends a clear signal that it is optimizing production to conserve cash.
In my opinion, Rivian’s shares should at the very least stay range-bound in the near-term, as capital raising fears and concerns are allayed by the company’s current stance on cash management.
Is Rivian A Good Long-Term Stock?
My view of Rivian’s appeal as a long-term investment is mixed.
On one hand, it is very clear that RIVN has the long-term ambitions to follow in the success of Tesla. Rivian is very much replicating a huge part of TSLA’s playbook in relation to relying on internally-developed software and being vertically integrated. RIVN’s products also have a very unique and distinct positioning: adventure.
On the other hand, Rivian must also clear the same hurdles that Tesla faced in the early days. Some of these challenges could include quality issues, production delays, recalls and consumer acceptance, among others. More importantly, this is also a race, as RIVN will face competition from Tesla and other rivals seeking to grab a share of some of the niche segments that it is currently positioned in.
In conclusion, RIVN is a “show me” story, and it is premature to call RIVN as a good long-term stock now. Instead, one needs to watch the developments and data points closely to assess the probability of long-term success for the company.
Is RIVN Stock A Buy, Sell, or Hold?
RIVN stock is a Hold. Previously, I have rated Rivian as a Sell because of its lofty valuations which were misaligned with its high risk profile. Taking into account its year-to-date share price pullback, its confirmation of its 2022 production guidance and its cash management priorities, I have decided to upgrade Rivian to a Hold. However, Rivian isn’t a Buy yet, as I have reservations regarding the company’s path to becoming another Tesla.