Down more than 23% so far this year, could Rivian stock plummet in 2024?

After a 40% surge last December rivian cars (RIVN -1.33%) 2024 is on the decline, falling more than 23% in the first two trading weeks of the year. Stocks have been and will continue to be bullish.

Here’s why Rivian will likely remain a volatile stock for the foreseeable future, what it needs to do to become more stable, and what investors should look for in the electric car company this year.

Image source: Getty Images.

Composition of highly volatile stocks

Rivian’s history in the public markets is rooted in speculation and volatility. The electric car maker’s highly anticipated initial public offering (IPO) took place in November 2021, at a time when the market was extremely optimistic and perhaps misguided. It was “wrong” because the meme stock craze was still happening. Rivian has certainly been influenced by mass speculation.

Shortly after its IPO, on November 16, Rivian briefly reached a market value of over $150 billion. Keep in mind that this is when the company produced a negligible number of vehicles.

Since then, the story has cooled and Rivian has reached a much more reasonable market cap of $17.3 billion. And while its swings aren’t as wild as they were a few years ago, Rivian’s value is likely to remain a very volatile stock because its value is derived from where it could be headed, not where it is today.

Valuation is one of the strangest concepts to wrap your head around in the stock market. There are many companies with such high valuations that make very little profit. netflix It was like this for a while. I did tesla. But what ends up happening is that these companies are able to gain massive market share, gain pricing power, and then become free cash flow positive companies.

For years, investors have valued these companies in the tens and even hundreds of billions of dollars because of their future earnings potential. However, when a company is in a speculative and unproven phase, stock prices can do anything in the short term. This is because value is based on future growth potential, not fundamentals.

Netflix and Tesla were amazing investments that lived up to the hype. But each had its own first-mover advantage. It is unrealistic to expect such explosive growth for Rivian.

on the sign

Rivian inventory It may be an unpredictable whirlwind, but Rivian company It was incredibly consistent. On Jan. 2, the company reported that it produced 57,232 vehicles and delivered 50,122 vehicles for the full year of 2023, exceeding its production target of 54,000 vehicles. We also produced a record number of vehicles during the quarter. Looking at production and delivery data over the past two years, it is clear that Rivian has been growing rapidly and steadily, with 2023 production more than double that of 2022.

Data source: Rivian Automotive.

Another encouraging thing is that Rivian’s losses are shrinking despite increased vehicle production.

RIVN operating profit (quarterly) data from YCharts.

It’s worth mentioning that Rivian covered some of the major costs up front. The company’s nameplate capacity at its Illinois plant is 150,000 units, which exceeds the capacity it expects to produce in 2024 and possibly 2025. Rivian is also investing in another 400,000-capacity plant in Georgia. Rivian’s manufacturing capacity consistently outpaces actual production, which is good because the company won’t be rushing to increase manufacturing capacity if demand is better than expected.

cost management

Rivian’s cash position still stands at $7.9 billion. It will continue to decline until the company reaches positive cash flow. This is unlikely in 2024. The good news is that Rivian is burning less cash now than it did a few quarters ago.

Operating cash flow for the trailing 12 months was negative $5.2 billion. It’s a bit of a guess, but Rivian likely has enough cash on hand to fund operations for at least a year and a half to two years. By then, Rivian will need to reach positive cash flow or raise another capital raise.

If Wall Street viewed growth as legitimate, raising capital wouldn’t be as difficult as it is today. This is especially true if Rivian’s stock price is higher. However, a number of problems could arise between now and 2026 that could take a major toll on Rivian’s profitability. Time is Rivian’s worst enemy. Things are looking pretty good for now. But that could change in an instant. And Rivian doesn’t have much margin for error.

Rivian Game Plan

Despite the superficial excitement of the stock price, what I like about Rivian is that it’s a fairly straightforward investment opportunity. The first step is to expect things to happen in the short term. But once you do, the market noise will die down and your goals will become clear.

Here’s a short list of things to look for. The path to profitability, cash management, increased production, and continued consumer acclaim for Rivian products. Focusing on these factors rather than the stock price makes Rivian a worthwhile investment. However, this is only the part of your portfolio that you can safely afford to lose.

Despite a strong start, Rivian is far from a clear winner. Ten years from now, it might no longer exist, it might be a huge success, or it might be somewhere in between. Until then, there’s no sugarcoating it that it’s a speculative stock and you should only consider it if you have a high risk tolerance.