Key Points
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Rivian is raising more capital through a new stock offering.
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The offering dilutes investors, though Rivian’s persistent losses are the primary problem.
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It’s still hard to justify buying Rivian at nearly 4 times sales.
- 10 stocks we like better than Rivian Automotive ›
July 7 was a rough day for Rivian Automotive (NASDAQ: RIVN) shareholders. The upstart electric vehicle (EV) company saw its stock plunge 18.1%, its largest single-day decline in almost two years. Rivian had announced only days earlier that it topped its second-quarter guidance with 12,194 deliveries, and raised its full-year delivery outlook from 62,000 to 67,000 vehicles to 65,000 to 70,000 vehicles.
The culprit? A new common-stock offering that underlines the reality that Rivian is still losing a ton of money and needs substantial additional capital to continue growing. It can be tempting to buy Rivian stock on this dramatic decline. Here’s why that’s probably not a good idea in this case.
This sell-off was about more than the share dilution
Rivian sold 75 million new shares at $15.50 per share, raising approximately $1.2 billion in gross proceeds. The company also granted the underwriters an option to purchase an additional 11.25 million shares of common stock. The funds are for general corporate purposes and equity contributions for a loan arrangement with the U.S. Department of Energy.
Beyond the share dilution the new shares will cause, the offering priced shares at $15.50, well below the open-market price at the time. Rivian and institutional buyers agreeing to the offering at such a deep discount probably doesn’t send a great message to the market about how the parties involved view the stock. But most of all, the offering is a harsh reminder of how far Rivian still has to go to remain financially viable. The company has burned over $3 billion in free cash flow over the past four quarters alone.
Buy the dip? No thanks
Rivian trades at a valuation that is completely disconnected from most of the automotive industry. The most successful automotive companies broadly trade at under 1 times sales. Rivian trades at 3.8 times sales, even after the stock’s sell-off. Although Tesla is an exception, it’s hardly fair to compare it with Rivian, since Tesla has Elon Musk and has shifted its business focus to autonomous vehicles, artificial intelligence, and humanoid robotics.
The reason why automotive companies trade at such low valuations is the same reason Rivian still needs to raise money. Manufacturing vehicles, whether EVs or regular combustion models, is very capital-intensive. Factories are expensive to build, and they need to operate at nearly full capacity to produce vehicles profitably.
If Rivian continues to sell more vehicles, its margins should improve as volumes rise. Rivian’s just not there yet. It’s probably wise to stay on the sidelines until Rivian’s valuation drops closer to that of other automotive stocks or the company grows enough that it no longer needs additional funding.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
