Like most Western EV startups, Rivian (NASDAQ:RIVN) stock has languished deep in the red for over two years now. While the decline’s pace has slowed, debate still rages over this automaker’s future prospects. Looking at its hefty short interest near 16%, investors clearly remain split on whether Rivian can evolve into a leading EV maker over the long term.
Recent sales figures and shrinking losses seem promising on the surface. However, glaring problems with Rivian’s cash burn rate make the company’s outlook concerning to me. Cash represents the foremost hurdle for EV startups as they torch billions annually, chasing market share growth. This can give shareholders headaches, since they ultimately foot the bill through dilution or rising interest costs over time.
There’s no doubt Rivian has reined in its cash burn pace. Even so, losses still exceeded $5.6 billion over the past four quarters. And despite an impressive $9+ billion cash pile today, I don’t believe that’s nearly enough to sustain Rivian until it turns profitable. Based on projections, the company won’t generate positive earnings until 2028, which is an eternity in financial terms.
Therefore, in my view, significant further dilution seems inevitable to keep Rivian afloat over that lengthy timeline. Frankly, the company lacks the resources to weather so many years of losses. Rivian will surely issue more shares over time, which will massively water down existing shareholders if the company’s trajectory stays unchanged.
Rivian Sales Growth Fails to Offset Losses
Admittedly, Rivian’s recent sales growth seems encouraging on the surface. However, a fundamental difference exists between EV startups like Rivian and established automakers like Tesla (NASDAQ:TSLA). That is, Rivian loses astronomical sums on each vehicle sold, while Tesla books profits even on discounted, competitively-priced models.
Additionally, forthcoming models like Rivian’s own R1S SUV will face intensifying competition soon from entrants like Kia’s capable EV9, which has better specs at lower prices. So, in my view, sales growth alone shouldn’t compel investment in RIVN stock since profitability remains years away.
Essentially, Rivian operates in a cycle where it sells cars at a steep loss and then raises more money to offset losses. This results in further shareholder dilution down the line. This cycle doesn’t seem sustainable to me based on the company’s massive losses per vehicle paired with Rivian’s inherent cash constraints. Thus, buying RIVN stock appears unwise currently based on its economics.
Bleak Profit Outlook and Market Headwinds
Making matters worse, much of the broader EV market has hit soft demand patches lately as bubbles burst across speculative tech sectors. Ongoing economic uncertainty and high interest rates could further hamper Wall Street’s appetite for richly-valued, pre-revenue EV plays like Rivian. After all, rising rates have already battered unprofitable tech sectors. And given the U.S. economy has remained strong of late, interest rates seem unlikely to fall drastically in 2023. That adds downside risk for EV stock valuations.
Additionally, analysts have grown increasingly concerned about eroding demand for consumer discretionary products, given inflation’s bite into disposable income. Those worries sparked Ford’s (NYSE:F) recent decision to cut EV production targets, which bodes poorly for unproven players like Rivian striving to scale manufacturing.
In my personal view, this confluence of factors makes owning RIVN stock a precarious bet, looking five years out. If unfavorable conditions persist, I could envision shares plunging below the Nasdaq’s listing threshold, currently at $1 per share. Absent seismic improvements in its finances, growth trajectory, and end markets, Rivian’s future appears murky at best.
Bull Case for RIVN Stock’s Recovery
However, there exists a bull case wherein inflation keeps moderating, allowing rate cuts sooner than expected. In that environment, raising capital without massive dilution could prove easier for Rivian. Under that rosier scenario, RIVN stock could reasonably eclipse $100 by 2028 on executing its business strategy.
If the economy enters an extended upswing, consumers might flock back to pricier discretionary vehicles like Rivian’s offerings once they turn profitable post-2025. This boom scenario would also incentivize investors to return to speculative assets, including pre-revenue electric vehicle makers.
Additionally, Rivian’s cash reserves could stretch further if cost cuts materialize faster than projected. Alternatively, the startup could form a lucrative manufacturing partnership with a legacy automaker. That would add an extra lifeline along with capital infusion upside.
The Bottom Line
Ultimately, betting on Rivian seems like a poor move, given the company’s questionable fundamentals today. Rivian’s extreme cash burn, uncertain sales outlook, non-existent profits, and other factors make this a company I think investors should be very cautious with. While anything is possible over a timeline of five years, base case projections make survival seem doubtful for Rivian without huge dilution forthcoming or an end-market shift.
Therefore, shareholders must carefully weigh risks versus potential rewards. In my opinion, risks currently appear stacked heavily against RIVN stock. Survival will require flawless execution paired with major external tailwinds. Thus, Rivian seems more likely to flame out than flourish from my perspective. But for risk-tolerant investors, a small position in RIVN stock could pay off enormously if this EV maker defies the odds. Personally, I would not make that gamble.
On the date of publication, Omor Ibne Ehsan 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.