Increasingly, the already challenging math problem that electric vehicle (EV) manufacturer Rivian Automotive (NASDAQ:RIVN) faces appears to have gotten much more difficult. Yesterday, rival electric vehicle manufacturer Tesla (NASDAQ:TSLA) reported a decline in its margins when it disclosed its first-quarter earnings results. Subsequently, fears of a margin-killing price war hurt RIVN stock, which slipped around 5% on Thursday.
On paper, Tesla’s Q1 report — which came in line against estimates for earnings per share of 85 cents — shouldn’t have been a cause for concern for Rivian. After all, the latter enterprise entered into an amended and restated asset-based revolving credit agreement with JPMorgan Chase (NYSE:JPM). In part, the terms involve doubling the currently undrawn revolving commitments to $1.5 billion.
Unfortunately, Tesla demonstrated with its actions throughout this year that it has no qualms about sacrificing profitability to maximize sales. To that end, Tesla began cutting sticker prices on its desirable EVs several times between January and April. Invariably, this decision directly impacts RIVN stock as the underlying enterprise must respond or risk market share loss.
However, the math simply doesn’t favor Rivian or other EV stocks. Several top automotive firms that pivoted to electrification struggled under Tesla’s recent price cuts. For RIVN stock, the underlying upstart enterprise needs boatloads of capital to stay competitive.
Downgrades and Red Ink Hurt RIVN Stock
Sensing the heat, RBC Capital Markets analyst Tom Narayan downgraded RIVN stock to “hold” from “buy.” Conspicuously, Barron’s reported that Narayan cut his price target in half to $14 a share. Near-term, we see limited catalysts to accelerate profitability and believe margins will remain constrained,” the analyst wrote in his report.
Tellingly, Narayan issued his downgrade late Tuesday. Following Tesla’s Q1 results, the analyst likely has fewer reasons to reverse his assessment of RIVN stock.
Financially, investors have difficulty understanding Rivian’s pathway to profitability in the near term. The company posted revenue of $1.66 billion last year, a dramatic leap from the $55 million generated in the prior year. However, at the same time, operating losses amounted to $6.9 billion in 2022, leading to a net loss of $6.75 billion.
Moreover, the retained earnings line item now shows a loss of over $13 billion. Should Rivian respond to Tesla’s price cuts with its own discounts, the path to profitability — which already looks strained — becomes extraordinarily steep. Therefore, it’s not terribly shocking that investors decided to exit RIVN stock.
Why It Matters
While circumstances don’t appear pleasant for Rivian, not every analyst shares a pessimistic view. According to TipRanks, the consensus assessment for RIVN stock is a “moderate buy.” This view breaks down as 11 “buys,” six “holds” and one “sell.” Overall, Wall Street experts see shares hitting $26.11, implying an upside potential of nearly 113%.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
