Rivian Automotive (NASDAQ:RIVN), an electric vehicle company that’s garnered a lot of attention, has been a long-time bearish call for me. In my previous articles on RIVN stock, I wrote that Elon Musk was right about his comments on high-volume production and named RIVN stock an epic bubble. And I think the pain will continue.
A bold statement, sure. But since that latter article, Rivian shares collapsed from nearly $63 a share to $25.74 as of the closing on June 30 after making a 52-week low of $19.25. Here is why I continue to be bearish on RIVN stock.
Rivian Stock Has Many Negatives, Few Positives
What are the main negative factors to focus on now? Elon Musk has said that the real test for Rivian will be high production and breakeven cash flow. I could not agree more. Rivian faces supply chain issues, and its production is gaining momentum just in time to challenge another problem that will not only be new for Rivian but for the broader recent economy. That is, the risk of a recession in the U.S. economy.
Should a recession occur, then it is logical to expect automotive sales to drop. We may even see cancelled preorders fort Rivian. That will be bad news, as Rivian must report sustainable sales growth to convince investors it is a growth stock. And overall, growth stocks are out of favor in 2022 compared to value stocks.
The electric vehicle maker has a huge problem — negative operating income, or EBIT. Unless it can turn this negative number into a positive one, the company will continue to lose money. Why would you want to invest in a money-losing company that may not reach profitability for several more years? I do not see it as logical at all.
As Rivian increases its production, we should expect more net losses and a higher cash burn problem. Neither of them is encouraging for RIVN stock.
Q1 Earnings: Nothing to Get Excited For
Rivian reported a net loss of -$1,593 million in Q1 2022 versus -$410 million for the same period last year. The firm reported also a negative free cash flow of -$1,452 million for Q1 2022 versus -$802 million during the same period in 2021.
There was a revenue miss of $33.7 million as well.
Was the EPS GAAP figure of -$1.77, a beat by 12 cents, a reason to be optimistic for a rebound in the shares of Rivian? Personally, I’d say no. I see it as lacking substance.
Some Good News for Rivian, But Not Enough
The good news is that the firm reaffirmed its yearly production goal of 25,000 vehicles in 2022 and it continues to receive preorders. Rivian wrote that “Since updating our pricing in March, we have received over 10,000 R1 preorders for the US and Canadian market with an average price of over $93,000.” On top of that, it attributed these preorders to organic growth and brand awareness.
Still as of May 9, 2022, Rivian had produced nearly 5,000 vehicles. I consider the goal of 25,000 vehicles in 2022 to be too optimistic.
And is RIVN stock cheap now after a decline of approximately 75% in 2022?
The numbers speak for themselves. The forward price/sales ratio of 13 and forward EV/sales of 4.8 don’t make RIVN stock look all that cheap.
As a recap, you have a firm that will struggle to reach profitability and must deal with its cash burn problem by expanding its production. Is this a bullish scenario? It is not. I remain highly bearish on the shares of Rivian.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.