Down 45% this year, is Rivian stock a buy?

Rivian, like many electric vehicle stocks, has crashed in 2022 as valuation has come into focus. Is this a buying opportunity? Edward Sheldon takes a look.

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Shares in up-and-coming electric vehicle (EV) manufacturer Rivian (NASDAQ: RIVN), which went public last year, have taken a big hit recently. Year-to-date, the stock is down a massive 45%.

Has this huge share price fall created a buying opportunity for me? Let’s take a look.

Rivian stock: is now the time to buy?

There’s no doubt Rivian has a good product. Recently, its R1T model won the prestigious MotorTrend Truck of the Year award. That’s a very impressive achievement. It also had 71,000 pre-orders for its EVs as of mid-December. What I want to know however, is whether Rivian has a reasonable valuation. Because if I overpay for the stock, it could turn out to be a poor investment for me.

Now, Rivian doesn’t have a price-to-earnings (P/E) ratio. That’s because, unlike larger EV manufacturers such as Tesla, it’s not yet profitable. This year, it’s expected to generate a net loss of $4.7bn. However, it does have a price-to-sales ratio, so we can look at that to get a feel for the value on offer here.

Currently, the company has a market capitalisation of $51.4bn. Meanwhile, this year, analysts expect Rivian to generate sales of $3.53bn. This means that at the current share price of $57, the price-to-sales ratio here is about 14.6.

I wouldn’t say that valuation is outrageous, given that Rivian is expected to generate huge growth in the years ahead. It is a little too high though. After all, Tesla has a price-to-sales ratio of a much lower 10.6. And supply chain issues could impact the company’s growth rate in the near term. Last week, Tesla told investors that it’s experiencing supply chain issues at present and expects them to last through 2022.

What are the short sellers doing?

One way of determining whether the valuation is too high is to look at what the short sellers are doing. Are institutional investors such as hedge funds betting against the stock? If they are, it could mean the valuation is still too elevated.

Looking at short interest data from 2iQ Research, I can see that, at present, about 33 million Rivian shares are on loan. That represents about 21% of the free float. That’s a high level of short interest. This indicates that lots of sophisticated investors believe the stock is too expensive and see further downside here.

Personally, I see the level of short interest here as concerning. That’s because heavily-shorted stocks generally go on to underperform. We’ve certainly seen this in the EV sector over the last year or so. Heavily-shorted EV stocks such as Workhorse, Lordstown Motors, and Canoo have all tanked. The high short interest indicates to me that Rivian is a risky stock right now.

Better stocks to buy

Of course, after such a huge share price recently, there’s always the chance that Rivian stock could bounce in the near term. I wouldn’t be surprised at all if we do see a bit of a rebound at some stage.

However, given the high level of short interest, I won’t be buying the stock in the near future. In my view, there are much better growth stocks to buy today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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