Rivian Automotive: Buy, Sell, or Hold?

Up-and-coming electric vehicle company Rivian Automotive (NASDAQ: RIVN) went public in 2021 and has steadily fallen 90% from its peak due to concerns about its long-term financial viability. However, there's been a bit of good news lately; Volkswagen recently announced a joint venture with a $5 billion investment in Rivian.

Days later, Rivian's management announced it was reaffirming its full-year production guidance and declared it was on pace to generate positive gross profit in Q4. At about $17 billion in market value today, the company remains a fraction of its former size.

Are these positive developments enough to turn sentiment in Rivian's favor? Is the stock a buy, sell, or hold?

Rivian needs to do more

The challenge for any start-up vehicle company is growing large enough to turn profitable before your money runs out. Automotive factories are expensive to build and operate, requiring a certain volume to build vehicles profitably in a ruthlessly competitive industry.

Rivian produced 57,232 vehicles last year and is on pace (which management reaffirmed) to produce another 57,000 in 2024. That's not enough volume. Rivian has lost $2 billion in gross profit on $5 billion in trailing-12-month revenue. Remember, gross profit only factors in the cost of goods sold , not other expenses like advertising, research and development, and general overhead.

Management believes that launching its more cost-efficient second-generation production models and commodity tailwinds will help the company achieve a gross profit in Q4 of this year. It also believes some expenses, like research and development, will shrink over time and help Rivian reach its long-term financial goals.

Those factors will help, but the bottom line is that Rivian needs more demand for its products. Its affirmed 2024 volume represents zero growth over last year. The pressure is mounting for Rivian to post strong volume guidance for 2025 when the time comes.

The good and the bad of Volkswagen's deal

The joint venture with Volkswagen adds needed cash to Rivian's pockets. The company burned $1.5 billion in the first quarter and has approximately $7.5 billion left before Q2 earnings.

Plus, it always helps when established industry leaders have a financial incentive to help Rivian succeed. Remember, technology giant Amazon is already tied to Rivian's success and holds a significant stake in the business. Volkswagen is providing $5 billion to Rivian in several ways; the breakdown is below:

Image source: Rivian Investor Day event.

Volkswagen will issue between $2 billion and $3 billion as stock depending on what happens with the convertible bond it will issue this year. In exchange for its cash infusion, Volkswagen will gain access to Rivian's vehicle software technology.

The primary downside for investors is the additional equity that will further dilute existing shareholders. Remember that adding shares means existing shares represent less of the underlying business. Based on Rivian's current market cap of $18 billion, the additional $3 billion in equity would dilute shareholders by roughly 16%.

Is the stock a buy, sell, or hold?

Rivian's long-term survival is more likely now, but how should investors feel about the stock?

Management is striving for a high-teens margin of earnings before interest, taxes, depreciation, and amortization ( EBITDA ) over the long term. Interestingly, General Motors sports a margin profile that is close to Rivian's targets. Yet, Rivian's stock is over 3 times more expensive if you compare revenue to enterprise value :

RIVN EV to Revenue (Forward) data by YCharts

Rivian should grow revenue faster moving forward, but it's not clear the stock deserves a premium while the company operates at such significant losses. It seems hard to justify buying the stock before Rivian proves product demand is growing, making it a hold at best.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Tesla, and Volkswagen Ag. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy .