Buying Rivian could be your biggest regret in 2022
Electric vehicle starting Rivien Automobile‘s (NASDAQ: RIVN) November’s debut on Wall Street was one of the most high-profile initial public offerings in recent memory. Its market capitalization already exceeds $ 80 billion, and shareholders are hoping it will become the next You’re here (NASDAQ: TSLA).
With a strong demand for his next vehicles and a big deal to supply vans to Amazon, Rivian could be a winner in the long run. However, based on several short-term red flags, investors could be disappointed with the company in 2022.
Rivian doesn’t have a demand problem, as evidenced by the 71,000 pre-orders he reported for his R1 models and an order of 100,000 vehicles from Amazon for the delivery vans. But its investors must consider how difficult it is to develop the infrastructure necessary to efficiently mass-produce vehicles.
Tesla CEO Elon Musk once tweeted that “the machine that makes the machine is much harder than the machine itself.” In other words, designing and building a car is much easier than setting up assembly lines that can produce hundreds of thousands of them.
In the third quarter, Tesla produced 237,823 vehicles, so its annual vehicle production rate is still less than a million almost a decade after the Model S launch. Rivian may have all the pre-orders and demand it has. he wishes, but these will not be. translate into revenue until it builds and delivers the vehicles. Difficulties in ramping up production could hamper the growth of the electric vehicle business in the coming years.
In Rivian’s letter to shareholders Q3, the company said it had produced a total of 652 R1 vehicles. Management also said that despite the installed capacity to manufacture 150,000 cars per year at its plant, it would fall within “a few hundred” units of its production target of 1,200 vehicles by 2021. Again, the construction of complex systems for automobile production is difficult. It is possible that it will take several years before Rivian dramatically increases his production rate.
Increasing vehicle production will also come at a cost
Rivian’s efforts to increase production could have a significant impact on his finances. At the moment, the balance sheet is well stocked; if you consider all of the proceeds from his initial public offering, he has nearly $ 20 billion in cash. During that time, the company spent about $ 1.5 billion on operating activities in the first nine months of the year. Based on those numbers, one would expect that $ 20 billion would be enough to support Rivian for years to come.
However, it might go through that cash reserve faster than you think. Building vehicles is expensive. Automakers become profitable by eventually reaching a level of production high enough that revenues start to exceed costs. The graph below illustrates how long it took Tesla to achieve this. As the company initially started producing more and more cars, it was spending more money as its free cash deficit peaked in 2017-18.
Now, Rivian is investing heavily in expanding production, including labor, machinery and new factories. It has announced plans to build its second factory, starting in 2022, at an estimated cost of $ 5 billion. Rivian may have to raise more money down the road to cover these expenses, which could dilute his shareholders if he does so by issuing additional shares.
The valuation incorporates a lot of optimism
Tesla has been such an exceptional stock for long-term shareholders, having spent years as an underdog. A lot of people thought the business would fail. As of January 2020, Tesla’s market cap was around $ 120 billion – and it generated $ 31.5 billion in revenue that year.
Rivian may not even have hit $ 100 million in revenue this year, but he’s already valued at $ 85 billion. During this time, he still has to prove that he can execute and successfully reach all the milestones that investors basically give him in advance.
In this high inflation environment where investors are selling speculative stocks in part because of concerns about rising interest rates, Rivian is the type of stock that could be vulnerable. It’s not that it can’t be a big business. It’s not yet, and the market is staring at it as if the war has already been won. In fact, Rivian hasn’t even started the real battles yet. Investors should keep this in mind when considering this action.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.