Where will Rivian stock be in 3 years?

Everyone wants to bet on a busted stock trading at a discount to its long-term potential. Having lost around 90% of its value since hitting the public markets in late 2021, Rivian Automotive (RIVN 8.98%) should certainly attract the attention of value-hungry investors.

But with massive cash burn and an uncertain macroeconomic future, will this struggling automaker have a brighter future? Let’s discuss what the next three years could hold.

Electric vehicles are losing their luster

When Rivian stock became publicly available through a reverse merger with a special purpose acquisition company (SPAC) in November 2021, electric vehicle (EV) stocks were at the top of the world. At the time, industry leaders like Tesla grew significantly faster than traditional automakers, leading many investors to assign high valuations to Rivian and other pure-play electric vehicle companies that aimed to emulate the business model of Tesla.

Image source: Getty Images.

At its height in the same year, Rivian’s market capitalization surpassed $100 billion (up from $13.2 billion today), putting it ahead of established traditional automakers such as General Motors and Ford Motor. In retrospect, this turned out to be overstatement. As time went on, it became more clearly that the EV opportunity may not be as profitable as expected.

With the early adopters reached, companies are now vying for the more discerning mass market, which can be postponed depending on the range of electric vehicles, availability of public charging and repair costs. High interest rates also make it harder for consumers to buy cars in general because of these large purchases are usually financed with credit. With Rivian’s base R1T pickup truck starting at $71,700, affordability is also a big challenge.

Second-quarter earnings were mixed

Rivian’s second quarter earnings give hints about how management is trying to navigate it difficult macroeconomic climate. The company’s revenues increased by only 3.3% year over yesr at USD 1.16 billion. But that anemic growth beat Wall Street expectations of $1.14 billion. Rivian’s bottom line also came in better than expected, with an adjusted loss of $1.13 per share, compared with the analyst forecast of $1.21.

Beating Wall Street’s softball predictions doesn’t matter much now, though, because Rivian has a bigger problem.

Losses are out of control

In early 2024, Rivian’s CEO Ryan Scaringe pledged to make his company profitable in a gross margin by the fourth quarter of this year by unlocking production efficiencies and reducing material costs. However, it is becoming increasingly difficult to see how he promised.

Rivian’s second-quarter gross loss widens 9.4% year after year to USD 451 million. That’s before factoring in operating costs such as research, advertising or office salaries, which take the losses to $1.38 billion in one period.

If Scaringe fails to turn a gross profit this year, it would be a massive hit to management’s credibility. Investors should be asking why Rivian’s management can’t provide accurate near-term projections and what else they could be wrong about. Having said that, The company still has two more quarters to prove the underdogs wrong. And factors like seasonality and product updates could change things dramatically.

What will the future hold?

Over the next three years, Rivian’s operating losses could go from an inconvenience to an existential threat. With just $5.8 billion in cash on its balance sheet, the company will most likely need to raise outside capital through tactics like equity dilution, which could hurt current shareholders’ claim to potential future earnings.

With all that said, bargain-hunting investors should keep a close eye on Rivian stock, as there could be some value here. With a the price-to-sales ratio at just 2.6, the stock is significantly cheaper than Tesla, which trades at 8.2 times sales. And if the automaker can overcome its near-term challenges, its stock could rise significantly. However, it might make the most sense to wait for several quarters of data before taking a position.