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Rivian’s Stock Falls on Morgan Stanley Downgrade But Is it a Buying Opportunity?

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Written by Timothy Sykes Reviewed by Jack Kellogg Fact-checked by Ellis Hobbs

Rivian Automotive Inc. is facing challenging times as their ambitious plans to rapidly expand production come under strain due to supply chain setbacks and rising operational costs. The company also grapples with increased competition in the electric vehicle market, further dampening investor confidence. As a result, Rivian Automotive Inc.’s stocks have been trading down by -5.3 percent on Tuesday.

Candlestick Chart

Live Update at 13:31:54 EST: On Tuesday, October 01, 2024 Rivian Automotive Inc. stock [NASDAQ: RIVN] is trending down by -5.3%! Discover the key drivers behind this movement as well as our expert analysis in the detailed breakdown below.

  • Rivian CEO RJ Scaringe mentioned supplier issues affecting motor production at the Morgan Stanley Laguna Conference.

  • Shares of Rivian tumbled 6.1% following a downgrade by Morgan Stanley, citing overlooked international, domestic, and strategic factors.

  • Consumer stocks fell with RIVN shares dropping due to Morgan Stanley’s downgrade of Rivian, Magna International, and Phinia.

Quick Overview of Rivian Automotive Inc.’s Recent Earnings Report and Key Financial Metrics

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In its recent quarterly earnings report, Rivian announced mixed results that garnered significant attention from investors. The company reported operating revenues of $1.16B for the quarter ending June 30, 2024. However, total expenses clocked in at $2.53B, leading to a net loss from continuing operations of $1.46B.

Financial Ratios and Indicators:

  • Profitability: Rivian’s gross margin stands at -41.1%, reflecting high production costs relative to its revenue. An EBIT margin of -87.9% indicates steep operational costs, and the pretax profit margin of -239.9% is deeply below average, alluding to high operating losses.
  • Valuations: With a price-to-sales ratio of 2.26, Rivian’s valuation might be viewed as high relative to its sales, especially for a company that’s not yet profitable. The price-to-book ratio of 1.66 indicates that the market values the company at more than its accounting value.
  • Financial Strength: The company’s total debt to equity stands at 0.86, implying the firm has reasonable leverage though a high leverage ratio of 2.3 could be concerning. The current ratio of 5.3 and quick ratio of 3.9 suggest high liquidity, which can be valuable during times of financial distress or expansion.

Performance Summary:
Analyzing the recent price movements of RIVN stock, there’s clear volatility. For instance, closing at $10.625 on Oct 1, 2024, represents a notable decline from $11.22 on Sept 30, 2024. Further, intra-day patterns indicated rapid changes, such as at 10:00 when the price moved from $10.82 to $10.8999 within minutes on significant trading volumes. These sharp movements underline the market’s sensitivity to any news about Rivian, be it their production capacity or analyst downgrades.

The Downgrade Impact

Morgan Stanley, a leading financial institution, recently downgraded Rivian from Overweight to Equal Weight, slashing the price target from $16 to $13. A report from Sept 25, 2024, highlights several critical issues: constraints with suppliers affecting Rivian’s motor production and growing affordability issues for their vehicles. This downgrade has sent ripples through the stock market.

Market Repercussions:
* Direct Impact: The downgrade led to a 6.1% drop in Rivian’s share price that day, signaling investor concerns about the company’s future. Analysts cited heightened competition, particularly with Tesla, and concerns over Rivian’s ability to manage operating costs effectively.
* Consumer Stocks: Broadly, consumer stocks took a hit, primarily because of fears that Rivian’s challenges are a microcosm of broader industry issues. This sentiment was reflected when shares of Magna International and Phinia also dropped after Morgan Stanley’s downgrades.

More Breaking News

Supplier Struggles

CEO RJ Scaringe’s comments at the Morgan Stanley Laguna Conference on Sept 11, 2024, provide more context. Scaringe highlighted that supply chain issues, particularly for motors, have hampered production. Supply chain inefficiencies are common in the automotive industry but can be catastrophic for a company built around innovation and efficiency.

Earnings and Production Realities

Rivian’s recent earnings report encapsulates both its promise and perils:

  • Revenues vs. Expenses: Despite generating substantial revenue, the company has struggled to keep expenses under control. The ability to scale production efficiently and control costs could be pivotal for Rivian’s market performance.
  • Quick Take on Key Financial Metrics: Rivian boasts robust liquidity ratios partly due to significant cash reserves ($5.76B), ensuring they can weather immediate financial storms. However, long-term debt and continuous high operating losses might put pressure on these reserves.
  • Cash Flow Insights: Rivian’s significant cash burn is a pressing concern. The free cash flow stood at -$1.037B, highlighting extensive outflows, primarily due to heavy investment in production capabilities and research and development. Positively, their balance sheet reflects a healthy $5.76B in cash, ensuring short-term operational stability.

Strategic Moves and Market Position

Considering Rivian’s strategic standing, their ability to navigate component shortages and forge stronger supplier relationships will be vital. Their market strategy often draws comparisons with Tesla. However, their differing scale, supply chain maturity, and market positioning could mean Rivian needs more time for similar operational efficiency.

Competitive Landscape:
Rivian’s direct competition with industry leaders like Tesla proves both a challenge and motivation. Tesla’s established supply chains and economies of scale make it a formidable competitor. Rivian must thus elevate their operational standards rapidly to compete effectively. This pressure from competitors impacts stock volatility, as seen in the recent price trajectories.

Conclusion

Rivian’s market journey echoes the struggles of many high-potential startups. Significant operational and supply chain issues, heavy competition, and analyst downgrades all play critical roles in its market valuation. However, Rivian’s innovative approach and substantial cash reserves provide a cushion and potential for future recovery. Investing in Rivian carries substantial risk and the possibility of high rewards, making it a game for risk-takers with long-term outlooks. As always, continuous monitoring of their financial health, market trends, and strategic directions remains crucial for potential investors.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

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Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”