California-based electric vehicle (EV) startup Rivian Automotive RIVN has been witnessing deteriorating estimate revisions for its bottom line lately. Over the past week, estimates for Rivian’s loss per share have widened for the remaining quarters of 2024 and for full-year 2024 and 2025. Given these estimate revisions, it seems that analysts are losing confidence in the stock. With concerns regarding Rivian’s near-term outlook growing, is it time for you to sell the stock or stay patient through the downturn? Let’s explore Rivian’s current situation and its prospects.
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RIVN Stock Overvalued Despite Price Decline
Year to date, shares have contracted 40%, underperforming the industry, sector and the S&P 500.
YTD Price Performance
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Despite a sharp drop in its stock price this year, Rivian’s valuation remains stretched. The company is currently trading at a forward sales multiple of 2.51, which is higher than the industry. It holds a Value Score of F, indicating that the stock is expensive at current levels.
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Factors Plaguing Rivian Now
Rivian is grappling with several challenges that have hurt its stock performance and outlook. First, the company is dealing with depleted inventory, which is expected to lead to a sequential dip in deliveries in the third quarter of 2024. This reduction is due to Rivian exhausting much of its Gen 1 R1 inventory.
In a conference held on Monday, the company’s CFO, Claire McDonough, highlighted that Rivian is encountering acute supply-related issues currently. Rivian is having a tough time securing parts for production at the speed and scale it requires. These supply constraints have slowed production and limited the availability of vehicles for consumers. McDonough noted that the company currently has a limited supply of R1Ts available on its website.
In addition, a fire at Rivian’s plant in August further disrupted production, damaging several EVs. Last month, a shortage of parts forced Rivian to temporarily halt the production of its electric delivery vans (EDVs) for e-commerce giant Amazon AMZN. Notably, Rivian has a contract to deliver 100,000 EDVs to AMZN by the end of the decade.
McDonough has also cautioned that Rivian’s production output will face additional pressure in 2025. The company plans to have significant downtime in the second half of 2025 to integrate its new R2 model into its manufacturing facility. This mid-size electric SUV, priced around $45,000, is expected to be launched in the first half of 2026. While R2 represents a growth opportunity, the downtime will impact Rivian’s overall production capacity in 2025.
Rivian has been burning through cash since it began producing vehicles in late 2021. As of the end of the second quarter of 2024, the company had $5.8 billion in cash and cash equivalents, down from $7.9 billion at the end of 2023. Given Rivian’s ongoing expansion efforts and ramp-up of production, the company is expected to continue burning through cash at a significant rate in the near future. It is likely to remain unprofitable in the next few years as it works to scale its production and navigate the increasingly competitive EV market. Investors should be prepared for continued losses and cash burn as the company invests in its growth initiatives.
Key Catalysts to Drive RIVN’s Prospects
Despite the challenges, not all is bleak for Rivian. There are a few factors that could support its long-term growth.
One of the biggest opportunities for Rivian is its partnership with Germany-based auto giant Volkswagen VWAGY, which is investing $1 billion into a new joint venture focused on shared EV technology and software. Once the venture is established, Volkswagen plans to inject an additional $4 billion. This partnership is expected to accelerate Rivian’s production capabilities and provide it with valuable resources to scale its business. The deal is set to close in the fourth quarter of 2024 and could serve as a major growth driver for Rivian in the coming years. The company’s partnership with Volkswagen could also help accelerate R2 production.
In terms of production capacity, Rivian currently has the ability to produce up to 150,000 vehicles per year and is working to increase that to 215,000 units. This increased capacity, coupled with new product launches, could support higher sales volumes in the future.
Another positive for Rivian is its ongoing cost-cutting initiatives. The retooling of its Normal facility has resulted in improved efficiency, including a 30% increase in the production rate of the R1 model. Rivian’s second-generation R1 is expected to reduce material costs by 20%, supporting its goal of achieving positive gross profit by the fourth quarter of 2024. Further down the road, Rivian’s R2 model is expected to lower costs by 45% compared to the second-gen R1. Rivian is targeting positive EBITDA by 2027, with long-term goals of 25% gross margin and 10% free cash flow margin.
Don’t Sell RIVN Stock in Haste
Indeed, Rivian is facing short-term challenges such as supply chain disruptions, cash burn and production setbacks, which are dimming its earnings outlook. However, staying patient with Rivian could be a prudent choice as the company is working through its challenges and aiming to capitalize on future opportunities.
The Volkswagen partnership, cost-cutting measures, and the upcoming R2 model offer growth opportunities. If Rivian meets its target of generating positive gross profits this year, it could improve the company’s 2025 outlook. So, for investors with a long-term investment horizon, holding onto Rivian stock could prove to be a rewarding decision.
RIVN carries a Zacks Rank #3 (Hold) currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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