Electric vehicle manufacturer Rivian (NASDAQ:RIVN) enjoyed a much-needed positive session on Tuesday, with shares swinging up almost 3.5% in late afternoon trading. Nevertheless, a legal overhang clouds the recovery narrative for RIVN stock, which has been battered this year. In particular, anxieties over high borrowing costs threaten to derail any contrarian optimism.
According to information provided by Stanford Law School, a class-action lawsuit alleges that Rivian made materially false and misleading statements regarding its business, operations and prospects. Specifically, the complaint alleges the following:
Rivian had overstated demand for its products, as well as its ability to withstand negative, near-term macroeconomic impacts; (ii) accordingly, Rivian’s business was experiencing reduced demand and increased customer cancellations as a result of, inter alia, high interest rates; (iii) as a result, Rivian’s order bank had significantly deteriorated; (iv) all the foregoing was likely to, and did, negatively impact the Company’s anticipated earnings and vehicle production targets for 2024; and (v) as a result, the Company’s public statements were materially false and misleading at all relevant times.
One of the biggest concerns with RIVN stock related to the lawsuit is the high interest rate dilemma. Rivian EVs aren’t exactly affordable for the average-income household. Therefore, the target demographic should be wealthier clients. If this demographic is walking away, it points to broader concerns for the industry.
RIVN Stock Is Popular, but Possible Cancellations Hurt the Narrative
While there are always two sides to every legal suit, the allegation that the company has experienced reduced demand due to higher borrowing costs makes plenty of sense. Notably, the sector-wide price war that Tesla (NASDAQ:TSLA) sparked has gravely impacted the ecosystem, including Tesla itself. RIVN stock has not been exempt from the pain, with its market value down almost 57% year-to-date.
Another factor to consider is that relief may be difficult to come by. Earlier, the Federal Reserve hinted at lowering the benchmark interest rate. However, the latest developments suggest that such a move would be unwise. For one thing, the March jobs report came in higher than expected. Ultimately, that implies more dollars are chasing after fewer goods, which is inflationary.
Moreover, energy prices have soared recently, leading to a hotter-than-projected inflation reading. Contributing to the dynamic are geopolitical flashpoints in the Middle East and in Ukraine. Further, with Ukrainian forces launching attacks against Russian energy infrastructure, global prices may continue to rise. That may put the Fed in a policy bind.
Now, while Rivian is quick to showcase its order reservations, it’s much more difficult to find out how many cancellations have materialized. However, a March 2022 Electrek article points out that Rivian buyers have been canceling at “alarming rates” following price increases.
So, precedent exists regarding demand fallout related to financial pressures.
Why It Matters
Although early buzz surrounded Rivian’s public market debut, RIVN stock has fallen off considerably since then. Currently, analysts rate shares a consensus moderate buy with a $16.91 average price target. That implies over 85% upside potential. Still, three experts have weighed in with sell ratings, implying brewing skepticism.
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.
