Since its initial public offering, Rivian Automotive Inc. (RIVN, Financial) has been priced like a growth stock. But it shouldn't be. The futuristic design, the “made in the USA” appeal and the backing from Amazon (AMZN, Financial) are the main arguments in favor of the business case. But in reality, larger, faster-growing and more efficient competitors keep eating Rivian's market share and the company continues to disappoint in deliveries, economies of scale and stock performance.
This is my case on why I think the stock is still overvalued despite a 90% drop from its all-time high and an 80% drop from its IPO price.
Business and stock overview
Rivian Automotive designs, develops, manufactures and sells electric vehicles. It started trading in the stock market in November 2021 at $78 per share, valuing it at around $66.5 billion, 30% more than General Motors' (GM) current market cap and 20% more than BYD's (SZSE:002594, Financial) current total enterprise value. The company attracted millions of investors worldwide with its futuristic brand, at the time being described as the new Tesla (TSLA, Financial), and was backed by Amazon.
The EV manufacturer raised close to $12 billion with the IPO and less than two years later, the company had to issue in October a convertible bond round for $ 1.5 billion, indicating it is running out of cash. The stock is valued like a growth stock, but the business growth is insufficient to justify its stock price.
A growth stock that is not growing
Two key metrics to follow for any automotive company are production and deliveries. They are the base of business performance and growth. And they have been relatively disappointing for Rivian in relation to what you would expect of a growth stock and the valuation at which it currently stands. The following chart may look rosy at first, but it is not.
Indeed, in the last quarter, deliveries have declined by 10% and were below estimates. It delivered 13,972 vehicles in the last three months of 2023, below estimates of 14,430. This is the second quarter in its young history that the company saw a decline in deliveries: the only other time was in the first quarter of 2023. Two quarters of a relative decline in the same year could show the growth is perhaps not as solid as many expected. The existing investors may assume it is a coincidence and the overall deliveries and production have increased over time when zooming out - the question is at what cost?
Interest rates, monetary policy nor supply chains are reason enough to explain the decline. The real cause of the decline in deliveries is competition.
Both Tesla and BYD registered quarter-over-quarter increases in the fourth quarter, with the latter taking over Tesla. This comes at a time when both companies are facing some challenging external factors when it comes to production and shipping. Both Tesla and BYD have production centers in China and shipping from there, while Rivian produces on U.S. soil. Manufacturing in the U.S. seems to be an advantage for shortened production and deliveries, but investors are quickly realizing that producing in the U.S. has become much more expensive in the last two years. Indeed, the Wall Street Journal reported that Rivian has spent about half of its $18 billion cash pile and lost about $33,000 on each truck it sold in the second quarter.
Indeed, while revenue increased, the cost of goods sold also increased significantly, aggravating the net income and burning cash faster.
The situation has worsened to the point that Rivian had to issue a new round of bonds earlier than expected, with a $1.5 billion bond issuance in October causing a 20% crash in the share price on the day of the announcement. Indeed, the notes are convertible, meaning existing investors could see themselves diluted further after an over 80% drop in the share price since its IPO.
On the ratios side, the picture is just as bleak. The returns on assets and on equity, two favoured metrics of a seasoned investor, are not improving.
The company is not on track to becoming more efficient. It needs to spend at least as much money to generate revenue, and this is not an indicator of intrinsic growth. The fundamentals of the business are not improving.
Lastly, the valuation is also hard to sustain over time without real intrinsic growth and improved efficiency of the business. Based on the valuation metrics available, the overvaluation of Rivian in relation to the EV sector median rates the stock at a D and D+. Trailing and forward enterprise value as a multiple of sales are 2 to 2.50 times higher than the sector median.
Based on the fundamentals, lack of intrinsic growth and more efficient competitors with better prospects, the fair value of the stock should be below the median of the sector. With a more conservative approach, one could value the stock at sector median and therefore, the fair value should not exceed $10. I rate it, therefore, as a sell.
What could invalidate my sell case
My sell case could be invalidated by a rapid scale up in operations. A number of new corporate partnerships, after the exclusivity with Amazon was terminated in early November, similar to the already announced AT&T partnership, could further boost sales. The boost in sales could help Rivian to scale up its operations and considerably reduce its costs per vehicle produced. Interest rate cuts and government subsidies to the EV company could further help to increase its sales and reduce costs, but the main factor would be a rapid scale up of operations to reduce the cost per sold vehicle.
Bottom line
Rivian's stock is currently still valued as a high-growth stock, albeit down 90% from its all-time high and 80% from its IPO price. The absence of intrinsic growth leading the company to spend at least as much more as it receives in return is a negative prospect for sustained growth. Without quickly closing on new partnerships and sustainably boosting deliveries, therefore scaling up its operations as soon as possible, it is likely that existing investors will continue suffering from lower stock prices, stronger competition and further dilution with possibly new (convertible) bond issuances. For these reasons, I do not believe the stock is an attractive buying opportunity.
