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While Rivian (RIVN) stock has come off its record lows, it is still down about 50% for the year, and trades below $12 per share, with a market cap of less than $12 billion. When the startup electric vehicle (EV) company went public in late 2021, its shares were priced at $78. Within a week, RIVN shares set an intraday high of $179.47, which gave the company a market cap in excess of $150 billion.
Rivian raised $12 billion from its mammoth IPO, which was the biggest on Wall Street since Facebook, now known as Meta Platforms (META). Cut to 2024, and RIVN trades at a fraction of its all-time highs. Why is Rivian stock so low, and can the Fed’s rate cuts help it recover - as higher interest rates were among the reasons RIVN stock plunged? We’ll discuss in this article.
The EV Industry Bubble Peaked in Late 2021
The EV industry bubble peaked in late 2021, around the same time as Rivian’s IPO. In retrospect, a startup EV company commanding a market cap north of $150 billion was quite a red flag that there was a bubble building in the industry. Tesla’s (TSLA) market cap also peaked in Q4 2021, topping out above $1.2 trillion.
A flurry of EV companies went public between 2020 and 2021, capitalizing on the massive appetite for green energy companies. Many companies with unproven products and technologies also went public during that time, and managed to get eye-popping valuations.
Along with the euphoria towards EV stocks, the abundance of cheap money helped almost every green energy company’s share price rise to astronomical levels.
EV Stocks Have Plunged Amid Slowing Growth and Higher Interest Rates
The EV bubble started to burst in 2022 as it became obvious that the green energy transition was not going to be as rapid as markets previously envisioned. Even Tesla has been struggling to sell vehicles, and has all but given up the ambition of growing its deliveries at the previously targeted CAGR of 50%. With slowing demand and production overcapacity came the EV price war, which took a toll on EV companies’ profits – or rather, amplified their losses.
The Fed’s rate hike cycle, which began in March 2022, proverbially nailed the coffin for loss-making growth stocks – which have almost all of the startup EV companies as a subset. As central banks globally tapped the brakes on easy money and U.S. interest rates rose to multi-year highs, investors turned away from loss-making stocks, including those in the EV space.
Why is Rivian Stock So Low?
Rivian’s woes are not much different from its startup EV peers, and the stock has fallen amid the pessimism towards the industry. However, unlike many other startup EV companies that likely won’t survive beyond a couple of years, Rivian is among the quality names in the group.
It has an attractive product proposition, a credible management team, a relatively strong balance sheet, and backing from names like Amazon (AMZN) and Volkswagen (VWAGY). Earlier this year, the German auto giant announced a $5 billion investment in Rivian, which was a testimony to the company's strong intellectual property. Importantly, it brought the much-needed cash that Rivian needs to produce its R2 and R3 sets of vehicles.
Will the Fed’s Rate Cuts Help Rivian?
While the Fed’s rate hikes worked against growth stocks like Rivian, don’t expect the EV stock to go back to its all-time highs anytime soon, even as the Fed has now pivoted to rate cuts. Fed Chair Jerome Powell was quite clear that the larger-than-usual 50-basis point cut handed down last week was not the “new normal,” and ruled out an era of ultra-cheap money that markets were hooked up to between 2020 and 2021. Also, while the Fed’s rate cuts should help support vehicle sales, don’t expect magic, as the EV sector continues to grapple with massive overcapacity.
That said, the Fed’s rate cuts are an incremental positive for Rivian for at least three reasons. First, a normalized rate environment bodes well for growth names like Rivian. Second, lower rates should lead to at least some improvement in EV sales, unless we see a recession. Finally, lower rates will ease capital market conditions, and Rivian should be able to raise capital on more favorable terms.
Should You Buy RIVN Stock While It's Low?
I find Rivian stock to be a good buy at these price levels, given the attractive risk-reward, and the stock's next 12-month (NTM) price-to-sales multiple of 2.25x doesn't look too demanding. Rivian’s deliveries should improve over the next couple of years, which will help in better fixed cost absorption.
Incidentally, RIVN expects to achieve a “modest” gross profit in Q4 - which, if attained, would be a key milestone for the company. While the company will still continue to burn cash and post net losses for the next several quarters, a positive gross margin would be the starting point for building a sustainable business. Overall, while the EV industry still looks strained and the Fed’s rate cuts do not make every name a buy, I would continue to bet on RIVN and hold onto my shares.
On the date of publication, Mohit Oberoi had a position in: TSLA , RIVN , AMZN , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
