Rivian Automotive
stock was falling on Thursday after it gave disappointing guidance and announced plans to raise more funds. But investors don’t really have to lose sleep, not over the news, at least.
On Wednesday after the market closed, Rivian said that sales in the current quarter would be slightly lower than analysts estimated. It also said it would issue $1.5 billion in convertible notes.
Rivian (ticker: RIVN) was off 19.4% around 11:45 a.m. Eastern on Thursday, while the
S&P 500
and
Nasdaq Composite
were down 0.7% and 0.8%, respectively. The disappointing guidance comes just days after the company said it delivered more units than expected in the third quarter.
Stocks often drop after convertible sales are announced. There are a couple of reasons for that. For starters, convertible notes are debt that can be turned into shares, which has the potential to dilute the holdings of current owners. Some investors will also go short stock of the convertible notes, borrowing shares they don’t own and selling them. Any selling pressure can drive down the price of any shares.
Short selling is typically a bearish bet. But in the case of convertible notes offerings, it’s a hedge that can, essentially, lock in a bondlike return. If the convertible notes become stock then the noteholders can use those shares to cover their short position, collecting bond interest along the way. If the notes don’t convert then the stock didn’t go up. The short position made money offsetting any losses on the convertible notes.
Along with the notes offering, Rivian announced third-quarter sales would be roughly $1.31 billion. Wall Street was looking for about $1.38 billion. It’s a miss, but not a big one. Deliveries for the third quarter were better than expected so the price realized on each sale was a little worse than expected. Prices for EVs have been falling in the U.S. thanks to price cuts at
Tesla
(TSLA) and
Ford Motor
(F).
Rivian’s vehicles are tempting for American buyers of electric-powered pickup trucks that handle like sports cars. But they sell at about $80,000 on average, and developing them is expensive. The company is burning through cash–it sold trucks at an average loss of $33,000 in the second quarter.
That is a big number, but it isn’t surprising either. The car business is about scale. Most car makers have to deliver hundreds of thousands of cars to make money. Rivian is delivering tens of thousands. What’s more, car makers expense all the platform development as it’s incurred.
Ford Motor
(F), for instance, lost about $1.8 billion in the first half of 2023 selling electric vehicles. It sold about 47,000 units giving the company a per-car loss of roughly $38,000.
It isn’t that bad, explains Benchmark analyst Mike Ward. Ford is spending billions on R&D. Ward estimates that the EVs are profitable at the gross profit margin line of the profit and loss statement. Ford doesn’t report gross profits by division.
Rivian’s stock has seen some big swings. Coming into Thursday trading it was up more than 25% since Jan. 1, but is still 36% lower than 12 months ago. It has burned through about half of its $18 billion cash pile. Shares are down some 70% since it raised $12 billion in a 2021 initial public offering.
The challenge for Rivian now is to reduce costs and streamline production. The company says that the current losses are necessary to get the company growing. It plans to generate positive gross profits on its vehicles in 2024.
Wall Street projects positive gross profits by the third quarter of 2024–and positive net income around 2028, according to FactSet.
Write to Brian Swint at [email protected]
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