The Spectacular Failure of Rivian Stock.

I don't know if you've been paying attention to the EV space recently, but things are getting tough out there. Tesla went gangbusters until 2022 and has since struggled. BYD gangbusters until 2022 and has now struggled. VW went well in 2021 and has now struggled, but not quite as bad as the company we're going to be looking at today. That being Rivian. Yes, you've probably seen their EV pickup truck. They actually beat the competition to the electric pickup market, and the reviews of the R1T were actually pretty good. I remember a swath of reviews coming out across the board in 2021 from some really notable names, and they were all singing the praises of the R1T.

But when you look beyond the product to the business itself, things don't look so pretty. In fact, peak to trough since the IPO, investors are down staggering 90%. So, if you invested $110,000 in Rivian back at the peak around their IPO, today you've got just over $11,000 left. It's fair to say that investors are a little bit fed up, particularly when you see just last month the CEO unloading 7,000 shares worth around $820 grand.

But the real problems with this stock date back to 2021, and this is when the company went public. Now, I want to paint the picture for you here because it's a little bit ridiculous. So, on October 1st, 2021, Rivian filed their S-1 form, which essentially tells the SEC they want to go through an initial public offering and sell a big fresh packet of shares to the public for the first time and raise some money. That’s when those shares begin trading on the public exchange.

Now, a lot of companies do that; there's nothing out of the ordinary with that. But the other thing companies talk about in their S-1 filing is their financial data, and this is where the cracks start to emerge. Because despite the company detailing their amazing growth plans and their two revolutionary new EVs and their big partnership with Amazon to provide them with electric delivery vans, well, they also provided the company's income statement, balance sheet, and cash flow statement.

And get this: for the six months ended on June 30th in 2020, they had zero revenue and a net loss of $377 million. Then in 2021, they had zero revenue and a net loss of $994 million. So effectively, around the time of their IPO, they were burning through a billion dollars of cash every six months, and at the time, they had absolutely zero revenue to show for it. But it does get a little bit worse because when you turn to the balance sheet provided in their S-1, they only had $3.66 billion of cash. So they were around 1.5 to 2 years from bankruptcy, assuming nothing changed.

So, it wasn't looking good. Naturally, they had to turn to an IPO to rescue them, just get the investors to bail you out, and that's exactly what happened. Rivian IPOed in November of 2021, selling 153 million shares at $78 per share. So you multiply the two together, and that fresh new sale of shares to the public raised approximately $1.9 billion for Rivian. So, it's not bad, right? Investors forked out $11.9 billion to aid the cash-burning company, which, at the S-1 reported burn rate of $1 billion every six months, gave Rivian an extra six years of cash burn before they'd be closing their doors forever.

But this is where things start to get really wild because raising $12 billion from selling 153 million shares valued the entire company at $66.5 billion. Think about that. The CEO has drawn up a document featuring two cars and an expansion plan; the company has made nothing so far, and investors have turned around and said, "You know what? This has got to be worth at least 60-odd billion." For context, as to just how much $66.5 billion is, for the same valuation, you could have United Airlines, Southwest Airlines, Domino's Pizza, and chuck in Formula 1 while we're at it, and those companies combined would equal the IPO valuation of Rivian.

So this turned out to be one of the largest IPOs in U.S. history. But unfortunately, it gets a little bit worse, of course it does. This is 2021 we're talking about because while the IPO price was $78 per share, just after the first day of trading, the share price had rocketed up to a close of $100.73 per share, giving the company a market capitalization of around $85.9 billion. Fast forward to November 16th, the shares closed at a staggering $172, giving the company a market cap of around $150 billion. That's the same valuation of Comcast or Uber. That's how big we're talking.

So what does this all mean? Well, when you have a pre-revenue company that IPOs and rockets up to a market cap of around $150 billion, it means expectations. Investors expect that while the company might not be generating revenue now, they most certainly will generate a lot of revenue in the near future. Well, let's see how that got along. Trigger warning if you're a Rivian shareholder.

So let's start with revenue. As you can see in the quarters that have passed since their IPO, Rivian's revenue has increased until the plateau and slight fall since the third quarter of last year. But have a look at this: even Rivian's direct costs exceed the revenue they generate, and that hasn't changed over time. Now, this doesn't include the sales teams and the R&D or anything like that; this is just the direct costs of Rivian building their vehicles: the labor, the materials, the machinery, the factory.

Look at the most recent quarter. For example, they brought in $1.2 billion in revenue, but the cost of that revenue was $1.73 billion. Think of it another way: that's essentially me selling you a book for $12, but that book cost me $17 to make. That's bad business. But of course, it gets worse. Once you add in the operating expenses, like research and development as well as selling, general, and administrative, you end up with operating income of negative $1.5 billion per quarter.

Now I want to be very clear that doesn't necessarily mean Rivian is going to be a cash-burning company forever or the stock can't rise. It may turn out to be okay in the long run; we just don't know. But what it does mean objectively is that they're burning money. If you look at their cash flow from operations since their IPO, they have been consistently burning over a billion dollars per quarter.

Also, quick shout-out: if you're actually looking at learning how to read these financial statements or value stocks and you just want a quick explainer on the whole stock analysis process, I would definitely encourage you to check out "Introduction to Stock Analysis" over on New Money Education. I actually got feedback from a professor of valuation at Texas Tech University who said it was the best online valuation course he has ever seen. So if you're interested in learning the process, please definitely check that out in the description.

But as I was saying before, Rivian is burning a lot of money, and that eats away the cash on your balance sheet. So have a look at the chart of Rivian's cash over time. They raised a big chunk of money through their IPO, as you can see, but since then, that balance has just been going down and down, and that's a result of their business eating money. Listen to RJ Scaringi talking about this recently on our podcast: on a cash flow basis, they're burning $470 million a month.

Get this: after the IPO in 2021, they had $8 billion. So they did the IPO, raised some capital, and they had $8 billion in cash. In 2021, it's already down to $6 billion. So they've just obliterated $10 billion of their cash in what—the space of 2.5 years? But what does this mean for the business? Well, in simple terms, running a cash-burning business and watching the cash balance deplete over time means you're getting closer and closer to bankruptcy.

When you run out of cash and can no longer pay for your expenses, that's when you're done. Now, in reality, there are a few steps companies can take to prolong this bankruptcy. However, for example, taking out a loan or raising capital, AKA creating new shares, and hopefully selling them to new investors. But the problem with that is if it comes to that, most potential investors have realized that you're pretty close to bankruptcy, so they'll only accept a cheap price if they were to buy some fresh new shares.

This usually equates to a lot of new shares being issued to raise the same amount of money, which dilutes and angers the pre-existing shareholders. Now, going back to Rivian's balance sheet, as you can see, their business just existing at the moment is burning through at least a billion dollars per quarter, and with a cash balance in March of just $6 billion, it shows that realistically they've only got about a year and a half left before their business is done. And that's a big problem for them because they also know that their next big revenue generation opportunity is the release of their R2 platform, a series of cheaper mass-market electric vehicles now slated to begin production in 2026.

Now, realistically that doesn't give them enough time, as it's highly likely that R2 will instantly fix a $1 billion hole in their pocket every quarter. So this means a heck of a lot of stress for RJ Scaringi, because it doesn't take a genius to figure out some other source of funding needed to be secured.

And enter Volkswagen. So, you may have seen this pop up in the news recently: Volkswagen Group plans to invest up to $5 billion in electric vehicle startup Rivian, starting with an initial investment of $1 billion, with the additional $4 billion expected by 2026. What does this entail? Well, the press release notes that this partnership will have the two work on a joint venture to create next-generation electrical architecture and best-in-class software technology.

But what it really sounds like is that VW is buying the right to use Rivian's in-car software. Rivian founder RJ Scaringi noted that Volkswagen is expected to use Rivian's electrical architecture and software stack for vehicles beginning in the second half of the decade. But he said the joint venture does not include anything with battery technologies, vehicle propulsion systems, high-voltage systems, or autonomy and electrical hardware.

But I'll tell you one thing this deal definitely does include: well, it's a lot of short-term relief for Rivian shareholders, as the proverbial funding can has been kicked down the road. Sure, they might ham up the press release to talk about production synergies and collaborative opportunities and joint architectures, but really this deal gives Rivian a much-needed cash injection for which they will have to give up their software know-how to VW.

RJ Scaringi himself noted the capital is expected to carry the company through the production ramp-up of its smaller R2 SUVs at its plant in Normal, Illinois, starting in 2026, as well as the production of the midsize EV platform at a plant in Georgia, where Rivian paused construction earlier this year.

I said before this was a big sight of relief for Rivian shareholders, but have a look at the movement it caused in the Rivian share price. The stock initially bounced up a whopping 54%. Now, it has settled quite a bit since that initial surge, but even still, since the announcement, shareholders are still up over 10%.

So there might be some light at the end of the tunnel for Rivian shareholders, but that’s the problem with these pre-revenue IPOs. Oftentimes, you need a lot of things to go right for a very long time before the business performance catches up to the valuation. I mean, if you bought Rivian shares at the highs in 2021, you bought in at a $150 billion valuation. If we assume Rivian could hold a PE ratio around 20 in the long run, you'd need the earnings to be around $7.5 billion in a year to make that a fair investment.

Now, in Rivian's first year after their IPO, their trailing twelve-month net income was negative $7 billion, and that's not improving very rapidly. In fact, in the most recent four quarters, they've shown a net income of negative $5.5 billion. So not exactly what you'd hope to see as an investor three years later. Essentially, by buying the shares back at that monstrous $50 billion valuation, you are saying that you are willing to invest in this company, wait for them to work their way to profitability, wait for them to grow to around $7.5 billion in earnings per year.

Then, after you've waited all that time, then you hope they can continue growing, at which time you'll start to make some money. And the whole time you know this company is in the auto industry, known for its capital intensiveness and sensitivity to the spending behavior of consumers. That was the equation.

So as you can see, that's why I personally don't mess around with IPOs. But you know, each to their own. I definitely do want to clarify that by talking about Rivian's business in this video, I do not intend to imply a buy, hold, or sell recommendation on their shares. In this video, I've noted why the company doesn't work for me personally, but of course, that doesn't mean the shares can't go up, down, or sideways.

And of course, I don't know what's right for you, so please remember that any advice is general in nature and it might not be right for you. But with that said, I hope you enjoyed looking at one of the most brutal shareholder roller coaster rides that we've seen in a long while. And for you Rivian shareholders out there, I've got my fingers crossed for you all. But with that said, please leave a like if you enjoyed, and I'll see you all in the next video.