Rivian Automotive(NASDAQ: RIVN) was one of the hottest IPOs of 2021. The electric vehicle (EV) maker went public at $78, and its shares more than doubled to a record high of $172.01 less than a week later. But today, Rivian’s stock trades at about $19.
Rivian’s stock plummeted as it reined in its production targets, recalled some of its vehicles, and racked up steep losses. Ford Motor Company also liquidated most of its stake in Rivian as rising interest rates drove investors away from speculative EV stocks.
Rivian now trades at just 3 times this year’s sales. Could that low valuation set a floor under its stock and indicate the start of a long-term recovery? Let’s review the four reasons to buy Rivian — as well as one reason to sell it — to decide.
1. Rivian just reiterated its full-year guidance
Rivian produced 24,337 vehicles in 2022, which slightly missed its goal of 25,000 vehicles. At the end of the year, it predicted it would produce 50,000 vehicles in 2023 — but that also missed the consensus forecast of 62,000 vehicles.
In the second quarter of 2023, Rivian management raised its forecast slightly to 52,000 vehicles. In early October, it revealed that Rivian had produced 16,304 vehicles in the third quarter, bringing its year-to-date production total to 39,691 vehicles. Management also reiterated its full-year target, which implies it will produce at least 12,309 vehicles in the fourth quarter.
2. Rivian’s margins will rise as it uses more first-party components
Rivian expects its production to stabilize as it ramps up the production of its in-house Enduro drive unit — which will reduce its dependence on third-party powertrains, streamline its own supply chain, and lower its total production costs.
That’s why its gross margin improved from negative 193% to negative 37% between the second quarters of 2022 and 2023. It’s still a long way from breaking even, but its margins should keep rising as it replaces more of its third-party components with first-party ones. Rivian has also been developing its own chips and operating system to differentiate itself from its competitors and insulate its business from future supply chain disruptions.
3. Rivian could benefit from the UAW strikes
General Motors, Ford, and Stellantis have all been struggling with the United Auto Workers (UAW) strike over the past month. Some analysts believe that once those strikes are resolved, the Big Three automakers will rein in their spending on pricier EVs to offset their higher labor costs. In a recent note to investors, Morgan Stanley‘s Adam Jonas said that if those automakers delay their launches of new EVs, it could open up a market for “Rivian to tap into.”
4. Rivian’s insiders are buying up a lot of shares
Over the past three months, Rivian’s insiders bought over 428,000 shares but only sold about 9,000 shares. That warming insider sentiment coincides with Rivian’s stabilizing production rates and improving gross margins.
There are also two other reasons its insiders might be buying Rivian at these levels: Its stock looks historically cheap at 4 times this year’s sales, and about 16% of its float was still being shorted as of Sept. 14. That low valuation and elevated short interest could limit its downside potential and set it up for a near-term recovery.
The one reason to sell Rivian: Its rising leverage
Rivian’s business seems to be stabilizing, but its leverage is rising. It ended Q2 2023 with $5.5 billion in total liabilities, which included $2.7 billion in long-term debt, compared to $3.3 billion in total liabilities a year earlier.
It still had $10.2 billion in cash, cash equivalents, and short-term investments at the end of Q2 2023, but that represented a 34% decline from a year ago. It expects that figure to drop 11% sequentially to about $9.1 billion in Q3.
Rivian won’t run out of cash anytime soon, but it recently announced a new $1.5 billion convertible notes offering due in 2030 with an annual interest rate of 3.625%. That offering surprised many investors because it had just sold $1.3 billion in convertible notes in March. It had also laid off 6% of its staff and postponed the launch of its smaller R2 vehicle platform from 2025 to 2026 to streamline its spending.
Do Rivian’s strengths outweigh its weaknesses?
Rivian’s latest convertible notes offering raises a few eyebrows, but investors should recall that it still ended Q2 with a low debt-to-equity ratio of 0.5. For now, I believe the reasons to buy Rivian easily outweigh the near-term concerns regarding its leverage — so it could still be a great long-term buy for bold investors.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and Stellantis and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.