What a brutal six months it’s been for Rivian. The stock has dropped 24.3% and now trades at $16.47, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Rivian, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Rivian Not Exciting?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are three reasons you should be careful with RIVN, plus one stock we’d rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.
Over the last two years, Rivian failed to grow its vehicles delivered, which came in at 10,365 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Rivian might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Cash Burn Ignites Concerns
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Rivian’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 120%, meaning it lit $119.80 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Rivian burned through $3.04 billion of cash over the last year, and its $6.58 billion of debt exceeds the $4.83 billion of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Rivian’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Rivian until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Rivian’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at $16.47 per share (or a forward price-to-sales ratio of 2.5×). The market typically values companies like Rivian based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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