How Elon Musk Got It Right About Rivian and Its Irrational Valuation

Stocks to sell

Rivian (NASDAQ:RIVN) is yet another example of the current retail investing revolution. With hot trends like electric vehicle (EV) stocks still top of mind, there has been a continuous struggle between small-time investors and institutional players. What’s more, Rivian has already delivered a ton of excitement to believers, sporting gains of 120% from its initial public offering (IPO) price of $78 to the Nov. 16 RIVN stock price of $172.o1.

The back of a silver Rivian (RIVN) pick-up truck.

Source: Miro Vrlik Photography / Shutterstock.com

When it comes down to it, though, this IPO price and the current price tag both simply flirt with irrationality. There seems to be a complete lack of logic here. Investors are missing what they should really be focusing on with RIVN stock.

Maybe this will seem out of place, but Benjamin Franklin once said, “An investment in knowledge pays the best interest.” Those are wise words. But what happens when knowledge is given by someone with experience in the EV industry? In my view, investors should be all ears. In this case, I’m referring to Tesla (NASDAQ:TSLA) CEO Elon Musk.

RIVN Stock: For Once, I Agree with Elon Musk

Make no mistake: I am not a fan of Elon Musk. Generally, I find him too eccentric, unpredictable and spotlight-hungry. In my opinion, he also leads a significantly overvalued company — the pioneer of EVs, Tesla.

That said, I will admit that — after all the ups and downs for Tesla — Musk has gained a lot of priceless experience in the automotive business. After all, it is no small achievement to have turned a company profitable after years of struggles.

So, what does the infamous CEO think about Rivian and RIVN stock? Musk recently expressed his opinion on the newly public company’s key challenges — and I almost agree 100% with his perspective. As reported by Reuters, Musk noted via Twitter (NYSE:TWTR) that “high production and breakeven cash flow would be the ‘true test’ for Rivian.” The tweet went on to say this:

“There have been hundreds of automotive startups, both electric & combustion, but Tesla is [the] only American carmaker to reach high volume production & positive cash flow in past 100 years.”

According to Musk, the true test here is Rivian achieving high production and breakeven cash flow. Earlier, I said I almost fully agree. Why? Because positive and consistent free cash flow would be even better than breakeven cash flow.

Maybe Musk sees things more realistically, knowing the auto industry and its difficulties inside. The CEO understands how hard it is for any auto company to survive, make a profit, establish its brand and stand out in a saturated market.

Overall, though, Elon Musk is pretty spot on in his opinion. But there are more factors pointing to the epic bubble territory RIVN stock is playing in right now.

Rivian Has a Massive Market Cap Despite Zero Revenue

As of the close on Nov. 16, Rivian had a larger market capitalization than both Ford (NYSE:F) and General Motors (NYSE:GM). RIVN stock even has a larger market capitalization than Daimler (OTCMKTS:DMLRY).

Why do investors consider Rivian so valuable?

If you want reasons (or excuses), then you have to pick a side in the hot EV market frenzy. Pick the emotional side — the one that has made meme stocks and special purpose acquisition companies (SPACs) perform extremely well in 2021 — and you’ll see a promising new EV name. But choose logic, due diligence and spend time reading its prospectus with the U.S. Securities and Exchange Commission (SEC)? You’ll realize the enthusiasm for RIVN stock is unjustifiable.

With literally no revenue yet and just starting to make a few sales now, what Elon Musk said about mass-scale productivity is far away for the company. Rivian has lost a whopping $2.4 billion from 2019 through the first six months of 2021, according to its prospectus (Page 17). Specifically, in 2020, it reported a loss from operations of $1.02 billion.

Sure, the backing from Amazon (NASDAQ:AMZN) and Ford adds some credibility and excitement to RIVN stock. After all, why would these two established names invest in an EV maker without doing their due diligence and believing it can be a successful business?

The short answer is that both of these companies have large amounts of capital to invest, speculate and be patient with. They also know they have the power to influence retail investors in joining them. And finally — for various reasons — the 100,000 vehicle contract between Amazon and Rivian could always go south.

The Bottom Line on RIVN Stock

Clearly, I have a lot problems with RIVN stock. But my last issue? Rivian has chosen a bit of a niche market.

That is, Rivian has two models, the R1T and R1S — a pick-up truck and an SUV both marketed for adventurous lifestyles. This niche presents tons of risk in comparison to other EV makers that offer a range of vehicles for consumer preferences.

More importantly, though — as I’ve said before — the valuation here is too extreme. Personally, I don’t see why this enthusiasm exists. It’s not justified by any fundamental metric. Regardless, I suppose Rivian will soon announce a stock offering to take advantage of its lofty price.

All told, Elon Musk got it right. The wise move here is to wait and see how Rivian will handle production and deliveries, what margins it will announce and how it will use cash raised. But as it stand right now? RIVN stock is synonymous with an epic bubble.

On the date of publication, Stavros Georgiadis, CFA 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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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