Should I invest in shares of the electric vehicle (EV) maker while they’re down?

Lots of promise

Rivian has many of the things I look for when I’m thinking about investing in a growth company. It is founder-led — CEO RJ Scaringe created the firm from scratch. Its products, the R1S (electric SUV) and R1T (electric truck), are high-quality and desirable, according to most reviews. And the market opportunity it’s pursuing is enormous.

Plus, the EV firm has smart backers, notably Amazon. The e-commerce giant invested $700m in Rivian in 2019 when it agreed to purchase 100,000 custom-built electric delivery vans.

This is part of Amazon’s move to electrify its last-mile fleet by 2040. Rivian expects to deliver 10,000 of those vans in 2022.

Beyond partnering with Amazon, the company also appears comfortable working with established automakers. For example, it recently signed a memorandum of understanding with Mercedes-Benz to jointly produce electric vans. This will involve sharing costs to rapidly scale up production.

Of course, it’s possible that nothing comes of this deal. Rivian originally had a partnership with Ford to co-develop an EV, but that deal was scrapped last year. Ford held a 12% stake in Rivian, but has been selling down its position since their partnership was terminated.

Growing pains

The company had originally expected to deliver 50,000 vehicles in 2022, but that estimate has been revised to 25,000. This is due to supply chain disruptions, particularly with semiconductors.

Meanwhile, inflation is having a serious impact on the cost of production. In its recent Q3 report, management noted: “Throughout the quarter, our cost of materials was impacted by inflationary pressures, which we believe will continue to have an impact on our gross margin for the near future”.

These higher input costs have resulted in widening losses. Its operating expenses rose to $857m in the quarter, up from $694m a year ago.

In response to rising costs, Rivian upped the prices on both its models by roughly 20% this year. That decision caused a massive backlash from pre-order customers, who were now having to pay more than they’d originally anticipated.

The company backtracked for those existing customers, but the higher prices remain for all new vehicles. The fact that Rivian is already raising prices is not ideal. Given a starting price of $73,000, any further price hikes could seriously harm demand.

On top of all this, last month the firm announced a recall of nearly all of its 2022 vehicles because of a manufacturing issue.

Will I buy Rivian stock?

Despite its fall in value, Rivian still sports a hefty market cap of $31.5bn. For a loss-making company expected to produce less than $2bn in full-year revenue, I think this valuation is extreme.

Rivian is experiencing the same ‘production hell’ that Tesla faced when trying to rapidly scale up its operations. But it also has rampant inflation and supply chain issues to deal with.

All in all, there are too many uncertainties right now for me to invest in Rivian stock.

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Tesla stock: an industry leader

Tesla has established itself as the leader in the EV industry, and this driven it to major success in the past few years. For example, in the first quarter, Tesla managed to deliver revenues of $18.7bn (a rise of 80% year-on-year) and net income of $3.3bn (a 658% uplift). These smashed expectations and highlighted the quality of the firm. 

But Tesla hasn’t been immune to the uncertain macroeconomic environment in recent months. For example, last week, due to these economic concerns, Tesla boss Elon Musk said he had a “super bad feeling” about the economy and that the firm would have to cut its workforce by around 10%. Although this could help cut costs, it doesn’t bode well for the firm’s growth. 

Further, due to the coronavirus situation in China, Tesla was forced to shut down its factory in Shanghai. This is likely to hurt delivery numbers this month, another sign that growth may be starting to slow. 

Therefore, although Tesla remains the leader in the EV space, and demand continues to outpace production, there are too many risks for me to buy just yet. With a price-to-sales ratio of over 10 and a price-to-earnings ratio of around 100, I don’t believe these risks are fully reflected in the Tesla share price so I won’t be buying. 

Rivian stock: a new and more exciting option? 

It’s very difficult to compare Rivian to Tesla as both companies are at different stages of their life. For example, while Tesla is well-established and profitable, Rivian is only just starting on its revenue journey. But the future looks bright for the company. Indeed, as of May 9, the firm had over 90,000 pre-orders of its R1 model, alongside an order of 100,000 from Amazon. Rivian also has cash of around $17bn, which means it can absorb losses as it starts to ramp up production. 

As with any start-up, there are many uncertainties, however. For example, in Q1, Rivian only generated $95m in revenue and its gross loss $502m. This is because the firm is producing a low volume of vehicles on production lines designed for higher volumes, and this leads to high labour and overhead costs. This means that there’s a lot more risk with Rivian stock than with Tesla. 

But I feel the rewards could also be good. Indeed, the company expects to produce 25,000 vehicles in 2022 and this figure should continue to rise year-on-year. After its 70% decline, I may add a small slice of Rivian to my portfolio.

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With Rivian yet to turn a profit, there is clearly plenty of faith that the electric vehicle (EV) maker will be highly profitable in the future. After all, growth stocks are valued on potential.

So is Rivian right for my portfolio and will this EV newcomer be the next Tesla?

Valuation

Despite the stock’s value falling substantially over the past year, Rivian still looks very expensive to me. In 2021, Rivian generated $55m in revenues. And with that lofty market-cap, this means its price-to-sales (P/S) ratio is over 500. That is absolutely huge. By comparison, China’s EV maker NIO has a P/S ratio of four after the firm generated more than $5bn sales in 2021.

Rivian is expecting revenue to increase to $1.9bn this year, but Q1 was way off track. If it did hit this target, the firm would have a P/S ratio of around 15. Which is certainly a lot more attractive.

Prospects

Rivian is going after a different customer base to Tesla. It currently has two models for sale, a truck and an SUV. The R1T (truck) and R1S (SUV) start at $67,500 and $72,500 respectively, which makes them considerably more expensive than Tesla’s cheapest models (the 3 and the Y start at $46,990 and $62,990).

Rivian’s offer will appeal more to the adventurous consumer rather than Tesla’s core buyers. However, CEO RJ Scaringe plans to launch six models by 2025. To date, nobody knows what these models are going to be.

However, the California-based company is also producing electric vans, and Amazon has already ordered 100,000. With little competition here, Rivian could be well positioned to corner the electric van market.

And we already know that electric vans can work as major delivery vehicles. Ironically, Rivian is not the first company to produce an electric van. In 1967, the UK Electric Vehicle Association said that Britain had more electric vehicles on the roads than the rest of the world combined. Most of these were, of course, milk floats. This time around, it looks like the American firm will have a dominant position in the sector.

Concerns

Valuation is a major issue for me. It’s still a long way from looking like an attractive prospect for my portfolio. There are also supply chain issues, notably as demand for products like lithium outstrip supply. In May, the company reaffirmed its annual production forecast of 25,000 units, halved from 50,000 in March.

Will I buy Rivian stock?

Should I buy Rivian stock? There’s two major issues for me. Firstly, it’s too expensive and secondly, it looks like it will struggle to meet its targets amid supply chain issues. For me, it’s a no.

In the long term, I may be wrong and it may be the next Tesla, albeit targeting a slightly different market segment.

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In hindsight, that was a good call. Since then, the stock has fallen from near $100 to around $24, losing roughly 75% of its value. As a result, it’s now about 70% below its 2021 Initial Public Offering (IPO) price of $78.

Has my view on the shock changed after this enormous share price fall? Let’s take a look.

Rivian shares: time to buy?

Looking at Rivian stock today, I still don’t like the risk/reward proposition on offer. The first issue I’m concerned about is supply chain challenges. I believe Rivian (and a lot of other EV makers) are going to struggle to source lithium for their batteries this year. That’s because demand is far greater than supply right now.

“In the next two years, even though there will be significant growth in supply, it will be less than demand, so the gap will just continue to grow,” Joe Lowry, president of Global Lithium, said recently.

They could also struggle to source semiconductors as we’re still in the midst of a global chip shortage. Many analysts expect this to last until well into 2023.

Given these supply chain issues, Rivian may not meet its production targets. It reaffirmed its annual production forecast of 25,000 units (halved from 50k in March) earlier this week. But I’m a little skeptical here. I think the risk is to the downside, given the supply chain environment.

The valuation is still high

A second concern for me is the valuation. Even after the recent share price collapse, Rivian’s market-cap is around $22bn. Given that the group is expected to generate revenue of $1.9bn this year (Q1 revenue was well below estimates, so it may not achieve this), that puts the price-to-sales ratio at over 10. In the current investment environment, that’s quite high.

It’s worth noting that immediately after the IPO lockup period expired a few weeks ago, major investor Ford offloaded 8m shares. This suggests it was worried about the high valuation.

Short sellers expect the share price to fall

A third issue is the stock’s short interest. According to my data provider, 91m Rivian shares are on loan at present. That means short interest is an eye-watering 57%.

This indicates that the short sellers expect the share price to continue falling. I’ll point out that, so far, the shorters, who were making big bets against the EV stock earlier in the year, have been so right on RIVN.

Better growth stocks to buy

Now, as I’ve said before, there are things to like about Rivian as a company. Not only does it have an excellent product in the R1T truck but it also has about 90,000 pre-orders for its EVs. Additionally, it has the backing of Amazon.

However, from an investment perspective, I continue to see a lot of risk. So I won’t be buying Rivian stock for my portfolio any time soon. I continue to believe that there are better growth stocks to buy.

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It’s been quite a ride for investors, then, since the company listed via an initial public offering (IPO) back in November. In fact, at the time of the IPO, Rivian was valued at $66.5bn, which then rose to $153.3bn in the space of seven days. However, today, the market value has fallen to $52.5bn. To put that into perspective, the loss in Rivian’s market value since November is greater than all but nine of the biggest companies in the FTSE 100.

Which brings me to the question: should I buy the stock now that the share price is far lower? Let’s take a look.

The investment case

Rivian operates in the expanding electric vehicle (EV) industry. Specifically, it designs and manufactures electric vans and pick-up trucks in the US. The growth in this market alone should provide a huge tailwind for Rivian in the years ahead. Indeed, the North American EV market is expected to grow at a compound annual growth rate of 37.2% from 2021 to 2028.

There are some big-name investors backing the company too. For example, Amazon owns over 17% of Rivian shares. Furthermore, Amazon has a contract with Rivian to deliver 100,000 EV vans over the next few years as it looks to electrify its delivery fleet. This is a huge boost of confidence and shows excellent early traction for Rivian’s EVs.

Looking further ahead, and the commercial van segment could be an excellent growth market for it. This targets an area that popular EV maker Tesla doesn’t right now. The shift to online shopping and the need for commercial delivery vans could further boost Rivian’s sales as more e-commerce retailers look to electrify their fleets.

Such sector tailwinds can be seen in Rivian’s revenue forecasts for the years ahead. It’s expected to grow to $3.5bn in 2022, and increase to $8.5bn in 2023. If achieved, this would be a highly impressive growth rate of 145%.

Should I buy at this Rivian share price?

However, I think the volatility in the share price highlights the uncertainties for the company at present, and therefore the risks for me as a potential investor.

One of these uncertainties is the potential for competition. Its flagship pick-up truck, the R1T, is a direct competitor to established brands such as Ford and GM. In particular, Ford is planning to double production of its F-150 Lightning truck due to soaring demand. These large automakers are investing heavily in their pivots to EV models, and have the expertise and capacity to boost manufacturing output to meet rising demand. Rivian is much further behind in its manufacturing capabilities, so it may lose market share as it ramps up its own production.

The valuation is still high too, in my view. On a forward price-to-sales (P/S) ratio, Rivian shares trade on a multiple of 13. This does depend on it achieving its revenue forecast of $3.5bn in 2022, which is a big ask considering revenue was only $61m last year. By comparison, Ford trades on a P/S of 0.5.

So for now, I won’t be buying the shares. I see too many uncertainties ahead, which could mean further falls in the share price.

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Personally, I’m not surprised by the poor performance in this area of the market. One of my stock market predictions for 2022 was that small EV stocks would underperform. Has the recent weakness across the EV sector provided a buying opportunity for me though? Let’s take a look.

What’s next for Rivian and Lucid?

While EV stocks like Rivian and Lucid have all bounced a little recently, I think downside risk remains.

For starters, valuations are still quite high, even after January’s falls. At present, the market capitalisations of these companies are $63bn and $46bn respectively. Meanwhile, the forward-looking price-to-sales ratios of these companies are 18 and 21. Given that both EV companies have only produced a small number of vehicles, I see these figures as very high. If they suffer from operational challenges (like semiconductor shortages), their share prices could take a big hit.

Secondly, both of these companies are generating big losses right now and aren’t expected to turn a profit for years. In 2022, analysts expect Rivian to post a net loss of $4.7bn and Lucid to post a net loss of $1.7bn. Recently, appetite towards the stocks of unprofitable companies has really deteriorated due to the fact that the US Federal Reserve is in a tightening cycle. I think sentiment towards these kinds of stocks could get worse before it gets better.

Look out for the short sellers

Finally, both of these EV stocks have very high levels of short interest right now, which indicates that hedge funds and other sophisticated investors are betting that their share prices will fall. At present, Rivian has short interest of around 23% while Lucid has short interest of around 20%. I tend to view a short interest figure of more than 5% as a red flag because it signals that a lot of short sellers are downbeat on the stock. And that’s not a good thing as short sellers tend to do their research.

Of course, short sellers don’t always get it right. However, they’ve certainly had success with small EV stocks in the last year. Nikola, Workhorse, and XL Fleet are just some of the EV stocks that have been targeted by them. All are down more than 70% over the last year.

Better stocks to buy

I’ll point out that both Rivian and Lucid are exciting companies that have excellent products. I expect these companies to generate strong sales growth over the next few years as EVs go mainstream. Both could potentially capture market share from industry leader Tesla.

However, to my mind, neither EV stock offers a favourable risk/reward proposition right now. So, they’re not on my ‘best stocks to buy’ list at present.

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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.

The post Down 45% this year, is Rivian stock a buy? appeared first on The Motley Fool UK.

Reasons for the slump

Before I get into the stock specifics, I think it’s important to understand why the market has been falling. From this, I can then gauge which stocks I need to stay away from, versus others that have simply been caught up in the negative sentiment. 

The main reason for the slump in January is down to investors expecting a much more hawkish US Federal Reserve. This means that people are expecting the central bank to raise interest rates more than previously expected last year. In the latest update last night, it looks like the Fed is going to raise interest rates in March, and then several times later this year.

These higher rates are needed to combat the high (7%) rate of inflation in the US. However, increasing rates quickly has historically been negative for stocks. This is because it increases the cost of borrowing for large corporations. It also provides less of an incentive for individuals to invest versus holding cash.

The best stocks I’d buy

On the basis of the above reasoning, I’m not looking to buy a tracker fund of the NASDAQ. Some stocks in the index have a lot of debt, which will get more expensive to service with higher rates. However, there are some selective stocks that I do think have been oversold in January.

Take Amazon (NASDAQ:AMZN), as an example. The share price is down 18% over the past month, putting it down 14% over a one-year period. Even though the Q3 results weren’t amazing, this is by the lofty standard that Amazon and the market has set. Net sales still increased 15% year-on-year, to pass the $100bn mark again ($110.8bn). 

It’s also an incredibly profitable company, without high levels of debt. I’d be happy to pick up some Amazon shares as part of this NASDAQ slump. When I look out a year or more, I think that Amazon shares will bounce back. This is because there is a dislocation between the performance of the company and the performance of the share price.

Another one of the best stocks I’m considering to buy is Rivian Automotive (NASDAQ:RIVN). I recently wrote about the reasons why I like the company. Since the IPO last November, the share price had doubled but is now back below the IPO price. I think that electric vehicles are the future, and so I see this dip as a good opportunity to invest in the sector for the long term.

The risk with buying either stock now is the fact that negative sentiment could cause both stocks to continue to fall. There’s nothing to indicate that the sell-off has finished. I need to be aware that even though I think these stocks are good value, I could be holding an unrealized loss for a long period to come.

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Reasons for the recent fall

Rivian performed well straight off the bat from the IPO as investors were optimistic about the future of EVs. In my opinion, it was also heavily bought as an alternative to the main Nasdaq-listed EV giant – Tesla. Given the share price gains during 2021 of Tesla, Rivian allowed investors to diversify.

Unfortunately, this spike only lasted a short time. Over the course of late December and January so far, there have been numerous reasons for the Rivian share price falling. 

Firstly, growth stocks in general have underperformed due to nervy investor sentiment. Part of this concern is due to the tightening of monetary policy going on in the US. Some banks are forecasting as many as four interest rate hikes from the US this year. Added into the mix was the soaring number of Omicron cases in the US earlier this month. It posted a record of over one million cases in a single day.

With Rivian specifically, the release of quarterly results in December also didn’t help. The company generated a negative gross profit of $82m, so it had no hope of making a net profit for the three months. Expenses were also high at $694m, up 141% on the same period in 2020. I get that the firm is gearing up for mass production, but some investors don’t have a long-term mindset. I think the people who bought the shares for speculative short-term gains would have likely sold, contributing to the downward pressure on the share price.

Finding value in the share price

There’s definitely something to be said about the share price being below the IPO level only two-and-a-half months after it went public. In theory, the investment bankers should have set the value at a fair price in November. In fact, usually the IPO is priced slightly below par, in order to show positive sentiment for the share price to rally on the first day.

Therefore, I don’t think the fundamental Rivian value has decreased by almost 15% ($78 vs $68) over this period. In January, the company announced that over 1,000 vehicles were produced during 2021. The business is still in the process of scaling up production and marketing. It’s hard to pin an estimate on sales and profitability going forward. Yet I think the company is well placed to capitalise on the growing EV market. 

From a long-term value perspective, I do think it’s a good buy right now and am considering buying some shares myself. In the short term I think things could be volatile, but I can ride this out.

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Of course, these are not the only companies in the sector, but I reckon they are some of the most promising. As such, I have been evaluating these opportunities to see which one deserves a place in my portfolio. And one company really stands out to me as having a brighter future than its peers. 

The global EV market 

According to analysts, 2021 was a “game-changing” year for global EV sales. In 2019, the number of light EVs globally was only 9% higher than 2018. However, in 2020, the market accelerated. Sales grew by 43% overall. Meanwhile, the global EV industry market share rose to a record 4.6% in 2020. 

The market continued to expand in 2021 too. While the final figures are still not available, projections suggest that 6.4m EVs will have been sold globally last year. That represents an increase of 98% year-on-year. 

As these vehicles capture an even larger market share, sales are only likely to continue. EVs now represent 14% of the new car market in Europe, up from 7% in 2020. 

Considering this opportunity, the outlook for NIO, Rivian and Tesla shares seems incredibly bright. But each of these organisations is targeting a different section of the market. Therefore, I think it is worth considering each company’s competitive advantages before making an investment decision. 

Three qualities

There are three different data points I will consider for each business. The first is the competitive advantage, followed by each company’s growth potential and, finally, the ability to hit targets. 

I think Tesla has the most substantial competitive advantage of the three. The organisation’s brand is virtually synonymous with EVs. Its brand dominates the space in Europe and the US, and it has a first-mover advantage over competitors such as NIO and Rivian. 

That said, NIO’s interchangeable battery system could give the company an edge over Tesla, specifically in the Chinese market. 

As a Chinese business, NIO could have the edge over its US-based peer in this market. Many Western businesses have struggled to break into China and compete with domestic corporations. Tesla is making progress, but there is no guarantee that the company will maintain its advantage when facing competitors like NIO in the region. 

As Rivian is still in the early stages of getting its product to market, I do not believe the company has much of a competitive advantage right now, especially compared to NIO and Tesla. 

All in all, I think Tesla wins this round. 

NIO stock growth potential 

When it comes to growth potential, I think Tesla shares once again have the edge. The company produces nearly 1m vehicles a year and plans to rapidly increase this target over the next decade. 

However, NIO also has big growth plans, and the domestic Chinese market is massive. Suppose it can capitalise on its position in the market and edge out Tesla. In that case, the corporation could outperform its peer, especially as the Western automotive markets are far more competitive. 

Over the next two years, as new manufacturing facilities open, the company is looking to ramp up production to 600,000 vehicles per annum. It is also planning to expand into other markets, mainly Europe, to increase sales. 

Rivian wants to produce and sell 1m EVs per year by the end of the decade. It produced 1,015 in 2021. These figures suggest the company is still years behind its larger peers. 

Once again, I think Tesla wins this round, considering its existing output and delivery volumes. 

Growth ability

Of course, targets are meaningless if a company does not have the resources to hit goals. Over the past year or so, investors have been more than happy to throw money at EV producers. Unfortunately, it is unlikely this trend will last forever. These companies will need to prove that they are self-sustaining and, if they do not, they may struggle to raise additional funding. 

Tesla is by far the closest to being a sustainable business. It has reported a profit for the last few quarters. Although it will need significant capital investment to fund its growth plans in the years ahead, the market currently seems more than happy to provide this capital. 

NIO’s ability to raise funds is not as clear cut. The company has raised money from investors over the past year, but it has had to pay a high price. This could be a sign the market does not trust the outlook for NIO stock as much as Tesla. 

As a newer business, Rivian’s potential is difficult to calculate. Shares in the corporation have fallen rapidly since its IPO, suggesting the market is not entirely convinced in its strategy. However, this could be a side effect of the general shift in sentiment away from growth stocks over the past few months. 

Tesla shares have potential

Considering all of the above, Tesla comes out on top. Compared to NIO stock and Rivian, the company has a more substantial competitive advantage, a clearer growth outlook, and more resources to pursue its ambitions. 

With that being the case, I would be happy to buy this enterprise for my portfolio and avoid the other two EV producers for the time being. 

Still, I could be wrong in my evaluation. NIO could outperform its US-based peer if growth in the Chinese market exceeds expectations. Tesla may also struggle if legacy car manufacturers accelerate their attack on the EV market, which has been building for some time. 

Competition is the biggest threat all three companies face. This is something I will be keeping a close eye on as we advance. 

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