The electric vehicle (EV) revolution is in full swing. Rivian (NASDAQ: RIVN) has emerged as a player with exciting products and bold ambitions. However, despite the potential of the company, I feel there are several compelling reasons why Rivian stock might be a risky investment.
Burning cash
A major concern I have is its lack of profitability. As a young company still in its growth phase, Rivian is burning through cash to ramp up production and develop new vehicles. While this cash burn is somewhat expected in the EV startup world, the sheer speed at which the firm is depleting its reserves is alarming.
Reports indicate a decline from nearly $20bn in late 2021 to under $8bn today. This trend raises questions about whether the company can continue over the long run without additional funding.
Even more concerningly, losses have been accelerating in recent years, increasing at 35% annually.
Competition
The EV market is becoming increasingly crowded. Established automakers like Ford and General Motors are pouring resources into developing their own electric vehicles. Additionally, Tesla continues to dominate the market share, making it difficult for new entrants to gain a foothold.
These newcomers face an uphill battle in convincing consumers to choose its brand over more established players with proven track records, especially in less established regions globally.
Let’s take a look at the numbers, firstly the price-to-sales (P/S) ratio, since the company is unprofitable. The ratio of 2.8 is much higher than the calculated value of 0.3 times. Even with growth expectations of 33% over the coming years, I fear that the market isn’t convinced. With the share price down by over 50% in 2024 alone, I find it hard to disagree.
The company has ambitious plans for the future, with its R1T pickup truck and R1S SUV already generating interest. As many investors in the EV space know, translating those plans into reality is a different story. Manufacturing delays and production hiccups could severely hamper the ability to meet targets and emerge as a reliable brand.
In a period of economic uncertainty and high interest rates, investors should be wary of the inherent risk associated with a young company navigating the complexities of large-scale auto production.
As Tesla CEO Elon Musk has noted many times in recent years, high interest rates and potential economic downturns could dampen consumer enthusiasm for high-priced electric vehicles. In this environment, government incentives for EVs could be scaled back or eliminated, making it even more difficult for newer players to establish themselves.
Friends in high places
Rivian boasts a strong partnership with Amazon, which has pre-ordered a significant number of delivery vans. However, this also creates a situation where success is somewhat tethered to the fortunes of another company. If Amazon changes its delivery strategy or decides to source vans elsewhere, it could be a major blow to Rivian’s production volume and revenue stream.
The bottom line
Rivian holds the potential to be a major player in the EV landscape. The company’s innovative vehicles and strong partnerships are impressive. However, for me, the current picture is far from rosy.
The combination of unproven profitability, a crowded market, execution risk, and economic uncertainty makes this a gamble at best. I’ll be staying well clear of Rivian stock for now.
