Rivian Rally No Longer Justified (Rating Downgrade)

Summary:

• Rivian Automotive, Inc. shares dropped after an unexpected debt deal, but have since rallied over 22%.
• Production downtime may impact Rivian’s progress and continue major losses for the next couple of quarters.
• The valuation argument for Rivian is not as favorable now, and the company may need to consider another capital raise.

A couple of months ago, I was surprised by the large drop in Rivian Automotive, Inc. (NASDAQ:RIVN) shares after a convertible debt offering. While I had been telling everyone that another capital raise was eventually coming, the sooner-than-expected debt deal had investors a bit worried. Since then, Rivian shares have rallied more than 22%, but a series of short-term headwinds has me lowering the name back to a hold today.

When Rivian announced its third quarter results, the overall numbers looked pretty good compared to expectations, and management raised its production forecast for the year. As production and deliveries for Q3 hit new quarterly records, so did total revenues, and the loss numbers narrowed quite a bit from the year ago period. However, on a sequential basis, the company didn’t make as much progress as it had previously, as the table below shows.

Some of that margin progress won’t be sustainable in the current quarter. As management stated on the conference call, there was a higher mix of electric delivery vehicles (“EDVs”) to Amazon (AMZN) in the quarter, and that’s a higher-margin product. Also, Rivian’s factory will be down for a week in Q4 due to upgrades, so production likely won’t come in at a level we saw in Q3. Hopefully deliveries will be able to top production for the first time in over a year, which will help to lower inventory a bit.

As we look into the first half of 2024, Rivian has also warned everyone that there will be major plant downtime in Q2 as the company upgrades the factory and retools its lines for different production capacities. Thus, when combined with normal EV seasonality weakness in Q1, we likely won’t see a tremendous amount of delivery and revenue growth until the second half of next year. Thus, Rivian will likely report another couple quarters of major losses.

When you combine these ongoing losses with the factory changes and the buildout of the new facility in Georgia, Rivian’s cash burn is likely to stay elevated for a few more quarters. Management has said it has enough funds for quite a while, but given some of these near-term issues, another debt or equity raise might not be out of the question, especially with interest rates coming down quite a bit recently. The company should finish this year with around $10 billion in cash, but in this capital intensive industry, you can never have too much available capital.

With shares jumping since my prior article, the valuation argument I made back then does not look nearly as good as it does now. At that time, Rivian went for just 2.5 times its currently expected 2024 revenues, which was a fraction of the more than 6.7 times that Tesla (TSLA) shares were going for. Not only have Rivian shares jumped in that two and a half month period, but analysts have also cut their revenue numbers for next year based on some of the items I discussed above. That means a rise in the price to sales number.

However, there’s another issue at play here that changes the equation in a big way as well. Rivian shares are now well above their early 2023 convertible debt conversion price ($20.13), and shares on Monday morning topped the October debt conversion price of $23.29. If you add in the nearly 150 million potential shares of dilution from those two bond deals and use that higher conversion figure for the current price, Rivian’s price to sales number based on 2024 current revenue estimates jumps to more than 4.1 times, while Tesla is only at 6.8 times. Investors are now getting Rivian at a roughly 40% discount to Tesla, a large difference from the nearly 63% figure seen in early October. For that reason, I am downgrading Rivian shares to a hold at this point, especially given the projected weakness we’re looking at through the first half of 2024.

In the end, it’s time for investors to be a little cautious when it comes to Rivian Automotive, Inc. The company’s Q3 results were not as impressive as they seemed initially, with limited margin improvement despite favorable product mix. The current quarter will see the factory shut down for upgrades, and a major production pause will come in the second quarter of 2024. With the company expected to burn more cash moving forward, another capital raise could be on the horizon, especially with interest rates coming down. The recent rally also puts a dent into the valuation argument, so while Rivian might have a bright future ahead of it, investors looking to buy might want to wait for a better entry point.

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