Rising Costs at Rivian Motors and An Overbought Story
Written by Kryptonite, 8-14-2022
Fundamental Thoughts
Rivian’s Losses Nearly Triple to $1.7 Billion
Electric truck and SUV maker reaffirmed production target for 2022, forecast deeper operating loss for the year
https://www.wsj.com/articles/rivians-losses-nearly-triple-to-1-7-billion-11660250045
Rivian is an interesting story. It IPO’d during the frenzy of 2021 at a lofty valuation of ~$100 billion dollars. At the time there were various bombastic discussions floating about that it is the true rival to Tesla. Something that it very well might be as their trucks are widely considered to be fantastic by those who have tried them.
There’s only two problems with that — production and scale. In January 2022 it was reported that:
What we’re looking at is a company that is quickly burning cash in order to scale up. How quickly? 3 times faster than analysts have expected. Tripling a loss is nothing to blink at. If you’re buying assets that can make you money in the future, then it can pay off, but if it doesn’t, you’re setting yourself up for pain.
They have also stated that as they scale they will strive to run more shifts at their factories–yet they are laying off 6% of their workforce to cut costs while also saying they are picking up hiring. Needless to say, this is going to be a difficult time for the company to navigate.
What they have ahead of them is the difficult, careful work of threading the needle of scaling alongside controlling rising costs. All during a time where rates are pushing higher and the company remains unprofitable. With $18 billion on their balance sheet they are far better capitalized than Tesla was at the same point, but they are burning $5.45 billion dollars a year giving them a finite time before needing to raise more funds or achieve profitability. Only time will tell if they can achieve the necessary scale and cost savings, before their cash runs out.
EV maker Rivian’s deliveries supercharged by production ramp-up
https://www.reuters.com/business/autos-transportation/ev-maker-rivians-deliveries-nearly-quadruple-q2-2022-07-06/
On the bullish side, their production has been ramping up as reported by Reuter’s on July 6th 2022. It’s just not enough, in my mind, to justify the company’s lofty $35 billion dollar valuation at this time or over the next 6 months. Will they go out of business? I doubt it. Will they struggle for the next year? I believe so.
In the current environment, I expect traders to be wary of an unprofitable company suffering rising costs at the rate of an unexpected triple. Demand isn’t an issue here. They demand exists. They just can’t meet it. They need more supply and that costs money. Even more so when materials to produce that scale are highly inflated. They can’t take advantage of the juicy EV credits from congress if they don’t have enough trucks to sell.
Charting A Path
So where are we at in terms of the stock itself? Well, let’s take a look and dive in on the 1D and 4Hr periodic charts. My 4 hour chart will focus on what has happened since the Reuter’s report regarding production.
When I look at the 1D chart we’ve got a definite bullish break on July 6th, 2022 (circled in red) which has run up to the earnings report on August 11th, 2022. Since that report, the stock has risen a dramatic ~54% as traders have piled into the trade. It has become so one sided in fact that the bear strength is ~4.6 on the daily. To me, this signals a very crowded trade where the bulls are in complete agreement with one another and might be out numbering the bears by 6 to 1. Likewise, RSI has been steadily rising creating higher lows ever since mid May. However, since entering August we’ve been approaching overbought territory.
Near Term Post ER Price Action
The reaction to the earnings report has been mixed. The overall index for the market has been floating higher and higher. Just this past Friday we saw a surge in stocks that led the $SPY higher by more than 1.5%, strongly led by tech and names such as Tesla. However, $RIVN seems to have been left behind by the market. It was left to close at nearly flat after flirting with both positive and negative gains for the day.
What does this mean? To me, it means that traders are split after the earnings report and having a re-think on the story. The size of the loss is proving harder to digest for some investors while others are still encouraged by the reaffirmed production forecast. Some, it seems, feel that they’ve gained enough and are taking risk off while Rivian works out these production issues would be my guess. There are safer places to put money after all than on a company that has tripled it’s expected loss.
For the stock price itself, in physical terms, this means that there is a new force pushing down on the stock’s price from above. This force, we already know, is rising costs and it is strong enough to put the bulls into a timeout. If this force remains in place, then short term bulls who are making trades–not investments–may not be happy with a stock that is no longer rising. They may, in fact, take their gains and sell out of the stock. We can see on the chart that the $40 a share price point represents significant resistance overhead. If it fails to move above it and turn that resistance into support, then it could end up getting sold down to $32 a share–potentially. Nothing is certain, but the possibility is out there.
Summary – The Roll Over
So here we are, it’s August 14th, 2022. Production costs are rising, the stock has ripped since July 6th, 2022 revealed increased production capability. The earnings report has been released and the stock’s price has jerked to a stop despite good news on the inflation front for the economy. Positive momentum, is flirting with a potential path down. Given where people bought the stock based on the volume profile this looks like a classic setup for a fall. There is support just above and air just below. In the case of a fall, I would expect the 30-32$ range to provide excellent support. I believe that the stock is about to give back some of it’s gains as investors try to pull out before momentum shifts back to the bears. I, am one of those bears. I expect this to be a rough quarter and I am in a trade here.
Trade carefully, trade wisely.
~Kryptonite
As always, please consult the appropriate professionals for any financial decisions. I am not a professional. These are my own personal opinions that I’ve expressed regarding the market and the companies mentioned above. I am not responsible for any decision, trade, or investment you may make. Please see my Disclaimer