Rivian: This Is Getting Ridiculous

Summary:

• RIVN collapsed over the past month, falling by nearly 50% as pure-play EV makers were dragged down by TSLA’s downfall.
• Rivian’s updated Q4 production and deliveries report also came in below its previous guidance.
• The market is likely pricing in a highly challenging year for Rivian that delays its profitability ramp even further.
• But with RIVN last trading at just 1x NTM Revenue, is it time for investors to take the plunge?

Rivian Automotive, Inc. (NASDAQ:RIVN) stockholders suffered another blow in December as EV leader Tesla (TSLA) dragged pure-play EV stocks lower.

Accordingly, RIVN fell nearly 50% in December 2022, finishing the year down 82%. TSLA ended 2022 down more than 60% as EV investors headed for the hills, worrying about the impact of a global recession.

Therefore, we believe the market has attempted to price in a weak Q4, corroborated by the recent release of Rivian’s Q4 and 2022 production and deliveries scorecard.

Accordingly, CEO RJ Scaringe explained how the company managed to miss its downgraded outlook of 25,000K vehicles produced, as it reported a final figure of 24,337. Notably, Scaringe highlighted that the company is still reeling from global supply chain headwinds, as “more than 700 vehicles were awaiting parts or other work to be completed at year-end.”

It’s a worrying sign for investors of fledgling EV upstarts. Tesla’s missed deliveries report suggests that the demand outlook for EVs has weakened further as the world copes with the threat of a global recession.

Rivian’s starting price of $73K for its flagship R1T likely isn’t helping either. Moreover, with consumers probably looking to trade down, given the macro headwinds, Tesla could even introduce a short-range version of its Model Y to improve accessibility for consumers.

Hence, Rivian’s lack of a diversified suite of offerings isn’t constructive as competition intensifies, while its production ramp is increasingly at risk.

Hence, the Street will likely focus on management’s production guidance for 2023. However, with Rivian still expected to post negative free cash flow profitability through 2026, it’s imperative for Rivian to ramp toward the designed capacity of 150K for its Normal factory.

NIO (NIO) CEO William Li articulated at a recent conference that pure-play EVs would likely need to weather an unprofitable year in 2023, excluding Tesla. Therefore, we shouldn’t rule out the potential for more price cuts from Tesla, leveraging its profitable operating model to force fledgling EV makers like Rivian to compete more aggressively on price. As such, it could delay Rivian’s path to profitability even further, particularly if the company faces more challenges in FY23 in lifting its production outlook.

Hence, investors need to question whether the hammering in RIVN over the past month has been sufficient to reflect these headwinds to consider a speculative position?

RIVN last traded at an NTM revenue multiple of 1x, way below the 40x multiple seen in January 2022. Hence, it has been a wake-up call for investors of unprofitable growth stocks as they come under assault from the Fed’s record rate hikes in combating escalating inflation rates.

However, with Rivian still expected to lift its production significantly through FY26, its implied FY26 revenue multiple of 0.2x has likely contemplated a significant battering.

But, we believe investors need to assess whether they believe a significant recession could follow or we could escape with a mild-to-moderate recession? Former New York Fed President William Dudley articulated that “a recession is pretty likely just because of what the Fed has to do.” However, he also accentuated that because “it’s going to be a Fed-induced recession,” Jerome Powell and his FOMC also have the tools to mitigate the impact by “easing monetary policy.”

His commentary is consistent with strategist Edward Yardeni, who doesn’t expect a hard landing induced by financial instability risks. Hence, Rivian bulls could infer that the most significant damage has already occurred as RIVN’s valuation crumbled.

As such, we believe it’s appropriate for investors waiting on the sidelines to consider a speculative position in RIVN (but not a core position). Using stop-loss risk management is crucial to mitigate potential downside risks.

Rating: Speculative Buy (Revise from Hold)

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Disclosure: I/we have a beneficial long position in the shares of TSLA, NIO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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