Why Rivian Stock Dropped on Wednesday

Rivian Automotive (RIVN -6.00%) Shares were trading down 4.8% as of 1:20 PM ET Wednesday after Morgan Stanley analyst Adam Jonas downgraded the stock one notch from overweight (i.e. buy) to equal weight (i.e. hold) .

Jonas’ note on Rivian on Wednesday was just one facet in his broader downgrade of the entire U.S. auto industry: He also downgraded I see (F -4.05%) equal weight and reclassified General Motors (GM -5.41%) to underweight (ie sell). But Jonas has specific concerns about Rivian.

What must Rivian do

Broadly, Jonas noted that inflation has driven up the prices of new cars, reducing people’s ability to buy them, so inventories rise as sales stagnate. Adding to the woes of US automakers, many Chinese automakers are selling their EVs at ever-increasing losses due to the price war. In addition, China produces 9 million more cars per year than it can sell locally. Those excess cars are exported, reducing potential sales for Ford, GM and Rivian, among others.

As for Rivian in particular, however, the analyst notes that its future will depend heavily on its partnership with Volkswagen and its ability to contribute “electrical architecture expertise” for use in Volkswagen vehicles. The problem, Jonas says, is that fulfilling that promise will require Rivian to pay an additional $200 million to $300 million in annual capital expenditures — or more — starting in about 2026.

Is Rivian stock a buy?

Rivian already spends $1 billion a year on capital expenditures, so with that additional spending, you might think its capital would now be expected to reach $1.3 billion, at most, in 2026. But Rivian was already forecasting investments of $1.2 billion in 2024 and $1.5 billion in 2025. Assuming these numbers are correct, this suggests that its investments could rise to $1.8 billion in 2026 — as much as Rivian spent annually in 2021 before it started controlling its spending.

In short, Rivian’s cost-cutting program seems to have changed now. Even with financial assistance from Volkswagen, Jonas worries that this level of “capital intensity” could be too much for Rivian.