A quick note for my inaugural column: Since starting on Wall Street in the early 1990s, I've developed a great admiration for financial journalists and the work they do. While I can never hold a candle to their eloquent writing and investigative or sourced reporting, I have a unique perspective to offer investors based on trading and managing a hedge fund for over 20 years.
I aspire to help readers acquire the knowledge and perspective on approaching the markets in a smarter way. Lastly, I can commit to readers the same integrity I've come to admire in the financial journalists I've known.
Electric vehicle maker Rivian (RIVN) has no better company riding shotgun for its impending IPO than Amazon (AMZN) . Not only does Amazon have a 20% stake but Rivian has an order in hand for 100,000 delivery vans for Amazon's fleet. Some reports suggest Amazon may even buy more shares in the IPO.
In addition, there's no sector of the market hotter than electric vehicle makers. Shares of Tesla (TSLA) have advanced over 50% since the beginning of October, tacking on around $450 billion in market cap. Lucid Group (LCID) rallied over 80% in the last month on enthusiasm for its first car delivery. Indeed, Lucid's market cap, at more than $70 billion, is approaching that of Ford (F) and General Motors (GM) .
Herein lies the problem for Rivian investors in the aftermarket, once the shares are free to trade (Rivian is expected to price Tuesday after the close for trading on Wednesday). In this type of market environment, with the combined halo effects of Amazon and pure-play-EV-makers, there will no doubt be monumental hype with a premium valuation to match.
In the current market where growth is cherished, investors dream of what could be and try to assign a value as astronomical as that vision. This is why Rivian's market value will likely surpass Ford and GM's even though the EV maker has only delivered the first batch of vehicles in September (Ford also owns a 12% stake in Rivian). The company currently has 55,000 reservations with $1,000 deposits for their pickup truck and SUV.
Risks will likely get tossed aside when the shares begin trading, yet these risks become more weighty when buying in at a nosebleed valuation. And there is no shortage of pitfalls when investing in a company like Rivian.
"Manufacturing at scale is extremely hard," to quote Elon Musk, and it's reasonable to take him at his word. Plus, deep-pocketed competitors are investing vast sums in EVs, including producing similar electric delivery vans, pickup trucks, and SUVs. Rivian's premium-priced vehicles, starting at $67,500 for a pickup truck and $70,000 for an SUV, will gain a toe-hold but only fill a high-end niche in a soon-crowded field as EVs become more prevalent.
A lawsuit currently being heard in the California Superior Court adds another dimension of risk. Tesla claims that Rivian poached its employees and stole "highly proprietary" next-generation battery technology.
Rivian will undoubtedly be well funded, selling 135 million shares between $72 and $74, upped from $57 to $62, with all IPO proceeds going to the company -- there are no selling shareholders. The market value will exceed $64 billion (appox 881 million shares outstanding). In the last funding round in January, Rivian was valued at $28.5 billion.
Rivian has bold ambitions to grow aggressively and build an ecosystem of software, services, and energy solutions. The company is on a laudable path of environmental sustainability, yet investors shouldn't lose sight of the challenges and costs incurred as Rivian invests in R&D and continues with its aspirational growth initiatives.
The concern is that investors may not remain on board a growth company such as Rivian, which will burn through cash for years while investing for the future. The estimated $750 million loss last quarter is a reminder that this is currently a cash-consuming business.
Buying in the open market at a considerable premium is buying into a vision of how prosperous Rivian's future can be. While Rivian has excellent potential to become a transformational company with superb execution in years ahead, if investors try to bake in too much success upfront then the risk/reward will skew too far toward risk -- making the stock one to avoid.
Prudent buyers may be best served waiting for a time when the sentiment isn't so euphoric for EV growth at any price.