After Rivian Automotive (RIVN, Financial) shares surged nearly 18% on July 3 following its second-quarter deliveries report, I believe it has formed a bull trap. The electric vehicle sector is highly volatile Rivian itself is still unprofitable. Moreover, a broader analysis of the company reveals key business risks and weak fundamentals.
Rivian soars on latest deliveries report
According to Rivian's second-quarter deliveries report, it had 12,640 deliveries in the second quarter, beating Wall Street estimates. Analysts had expected deliveries of 11,000 for the quarter. The automaker also reiterated its full-year 2023 target for 50,000 deliveries.
In 2022, Rivian produced 24,337 vehicles and delivered 20,332 vehicles. It fell short of its stated goal of 25,000 for 2022, and now it's expecting double last year's estimates, which will be difficult to achieve. It's already behind schedule - Rivian delivered 7,946 vehicles in the first quarter of 2023. To reach the goal of 50,000, Rivian will need to deliver about 29,400 vehicles during the second half of 2023, or about 14,700 per quarter.
More positive news came when Amazon (AMZN, Financial) announced that it will deploy its first European vans from Rivian in Germany over the coming weeks. Amazon has invested heavily in Rivian and previously placed a massive order of 100,000 vehicles back in 2019, though this massive order is still a long way from being fulfilled. Amazon will initially use 300 Rivian vans in Germany.
Rivian faces several business risks
Rivian is still in a nascent business phase as it started its first deliveries of its vehicles back in 2021. Manufacturing vehicles at scale requires a well-functioning supply chain and production processes. Delays or disruptions in the supply chain, such as component shortages or production issues, can impact the company's ability to deliver vehicles to customers and fulfill orders on time. Managing the supply chain effectively and ramping up production efficiently is critical for Rivian's success.
The EV industry is rapidly evolving, with advancements in battery technology, autonomous driving and other related technologies. Rivian needs to stay at the forefront of these developments to remain competitive. Falling behind in technological innovation could impact on the company's ability to attract customers and meet their expectations.
The widespread adoption of EVs is contingent on the development of charging infrastructure. While the charging network is expanding, inadequate infrastructure can limit the appeal and convenience of EVs, affecting customer adoption rates. Changes in government policies, regulations and incentives related to the automotive industry and EVs can significantly impact Rivian's operations, as can alterations in emissions standards, vehicle incentives, or subsidies.
Fostering a good brand image is also important. Consumer perception of EVs, including factors like range anxiety, charging infrastructure and overall reliability, can influence purchasing decisions. Building and maintaining a positive brand image, addressing customer concerns and ensuring high-quality products and customer service are essential for Rivian's success. Back in 2022, Rivian made a big mistake in this regard as it had to recall nearly all of its 13,000 vehicles on the road to fix a steering defect. Loosened fasteners could cause drivers to lose control of steering.
Rivian’s fundamentals reveal many hurdles
The EV industry is becoming increasingly competitive, with established automakers as well as new entrants vying for market share. Rivian faces competition from companies like Tesla (TSLA, Financial) to Ford (F, Financial) and more. Sustaining market demand and differentiating its products in a highly competitive landscape is a significant challenge. With so much competition, strong fundamentals can be a huge advantage - but Rivian's fundamentals are weak.
Rivian has a GF Score of 19 out of 100, which suggests dismal prospects based on a historical study by GuruFocus. Though, investors should note that the GF Score for this stock is incomplete because there is not enough data to compute anything other than the financial strength and profitability ranks. This is a hallmark of a young and risky company.
The gross margin of -141.91%, operating margin of -301.71% and net margin of -292.63% show that Rivian is losing a lot of money, and also burns cash as it has a negative free cash flow trend.
Rivian will have to invest yet more money in its facilities and spend more cash to achieve its goal of doubling its vehicle production in 2023, despite constantly losing money. This should make the negative free cash flow problem even worse, as the company is not making profits yet selling its vehicles. At some point, a cash injection may be needed, and that will probably mean stock dilution, which will be bad news for the valuation of Rivian shares.
Rivian is a very risky EV stock that popped up on positive news, but the bigger picture is highly uncertain. The path to profitability will be very bumpy in an economic decline. For now, I do not think Rivian makes a compelling opportunity because of these reasons.
