In this post, we explore how investing in Electric Vehicle (EV) companies just because EVs are trending doesn’t guarantee success. It is far better to understand how a company makes its revenue and the economics of that business rather than because everyone else thinks it is a good idea:
EV manufacturer Rivian’s (RIVN) share price declined by -8.3% yesterday. Although not part of the S&P 500, it’s worth highlighting the lessons we can learn from this company. (It is always better to learn from others’ mistakes if it helps us avoid our own).
RIVN reported Q3 vehicle deliveries yesterday that were above expectations, but according to one analyst, they didn’t beat by enough. That seems like an unplausible explanation to us, and instead, credit the Wall Street Journal’s (WSJ) article for the share price decline.
As per the WSJ, Rivian sells each premium-priced truck at a considerable loss, evident in the company’s earnings. While the company has only a little debt on its books, it is burning over $4 billion in cash annually (at the current rate). In an environment of increasing competition and a tightening economy, it is unlikely the company will keep sales at the current level, implying even more losses in the future.
Shareholders who invested in the company when it was listed back in November 2021 have lost over 80% of their investment, and based on the current economics, there is no reason the share price cannot retreat further.
EV is a trending investment theme, and investors often buy into such ideas without doing the research. RIVN highlights why it is essential to understand the economics of the businesses you invest in and ensure they can be profitable in the long run.
Lesson: Be Careful Investing In Trends