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Rivian is a great example of an epic bubble

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Shares of the electric vehicle (EV) manufacturer Rivian Automotive (NASDAQ:BANK) have fallen almost 40% since the start of the year, and about 50% in the past three months, while they are down 20% from their IPO price ( IPO) of $78 per share in November 2021. This definitely does not improve the case for the RIVN stock.

Source: James Yarbrough/Shutterstock.com

Buying the dive now is like jumping into Antarctic waters without any prior winter swimming experience. You will be shocked for sure.

There are many reasons why I don’t like RIVN stock, and valuation is at the top of the list. Let’s also look at some of the other reasons.

Elon Musk was right about Rivian

A few days after Rivian went public, I wrote an article titled “How Elon Musk Got Rivian Right and His Irrational Assessment.”

Elon Musk said “high production and balanced cash flow would be the ‘true test’ for Rivian.”

One of the highlights of the article was “Ultimately, however, this IPO price and the current price just flirt with irrationality. There seems to be a complete lack of logic here. Investors are missing what they should be focusing on with RIVN stocks. I concluded, “RIVN stock is synonymous with an epic bubble.”

Shares of Rivian hit a 52-week high of $179.47 in mid-November. Why?

I dunno. I can’t find words for it other than speculation is in full force. When you’re playing with fire and danger, chances are things won’t go well.

RIVN Stock Catalysts: Irrational Exuberance Meets Reality

Rivian produced 1,015 vehicles by the end of 2021, missing its target of 1,200 cars.

The Q3 2021 Letter to Shareholders is packed with valuable performance, expectation and risk information that investors should be aware of.

Rivian said it has 71,000 net pre-orders of R1 in the United States and Canada as of December 15, 2021. It intends to invest capital to improve battery technology, electric drive system and increase the production capacity of its Illinois plant of 150,000 to 200,000 vehicles per year. In other words, capital expenditures and total operating expenses are expected to increase significantly in the coming quarters.

The second manufacturing plant in Georgia is expected to begin construction in the summer of 2022 to develop the next generation of vehicles.

Rivian expects production at this plant to start in 2024 with up to 400,000 vehicles per year.

This is a dilemma for Rivian’s management. Should they invest in the future now and risk missing out on two years of transformation and breakthroughs not just in the EV industry, but rather the wider automotive industry? Or should they focus more on the here and now?

There is also the expansion of the service network to be able to offer the best customer service. This brings me to another point. We are not yet aware of any issues or complaints that may arise related to quality, range specifications and/or endurance. It’s too early in Rivian’s model life cycle to be certain, and owners have only just begun to form a community.

Expect no surprises from Rivian fundamentals

I expect the trend that was evident in the third quarter of 2021, net loss, free cash flow, to remain negative in the fourth quarter of 2021 and for the full year of 2021.

There is one statement that I will monitor and, it will be trivial. Rivian in the third quarter shareholder letter said:

The funds we have raised throughout 2021 provide us with the opportunity to achieve our near-term goals. We will continue to seek opportunities to advance investments to further accelerate our strategy.

It’s hard to predict if future stock offerings are in the cards. Even if, for the moment, it is good news. But personally, I don’t think potential stock dilution is out of the question yet. It is too early to have crucial trends in the main financial parameters.

RIVN Stock Rating

Compared to the consumer discretionary sector, Rivian has a forward price-to-sales (P/S) ratio of 864.75 and a forward-to-sales enterprise value (EV/Sales) ratio of 961.51. The industry medians for a Price-to-Sales (FWD) and EV-to-Sales (FWD) ratio are 1.09 and 1.32, respectively.

There is a huge difference in the values ​​of the sector. And that’s no surprise at all as Rivian is expected to increase production volumes, but is still trading at irrational levels for almost all major key financial ratios. Investors can look at the Price to Book (FWD) ratio of 2.55 for Rivian which is below the median value of 3.00 for the sector and find an argument that the stock is a bargain.

At the height of the irrational exuberance, Rivian had a market capitalization greater than Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM).

RIVN stock essentials

In the next quarter, the delivery figures, margins, free cash flow will be analyzed and there will be two sides, the enemies and the supporters of Rivian.

I’m not a fan and not a hater either. I don’t like RIVN stocks because it’s still an epic bubble. The road to profitability will be too difficult and I see it in several years. In the meantime, speculation that Rivian will change the electric vehicle industry will persist.

The numbers do not support this concept at all.

Choose reality-based, fundamental-focused investments over short-sighted investments.

As of the date of publication, Stavros Georgiadis, CFA does not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

Stavros Georgiadis is a CFA charter holder, equity research analyst and economist. He focuses on US stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written various articles for other publications in the past and can be reached on Twitter and LinkedIn.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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