Rivian (RIVN -6.89%) Bulls should shake off their optimism on electric-car stocks, one analyst said Friday morning. He noted that Rivian’s long-term potential is limited unless the company can raise significant cash, and lowered its 12-month price target from $63 to $15. The problem, of course, is that now is not the perfect time to raise cash. Unsurprisingly, stocks plummeted following the analyst’s report.
Here’s a closer look at why Rivian needs so much cash and where it can be found.
Why Rivian Could Run Out of Cash
Rivian closed the fourth quarter of 2022 with $12 billion in cash, cash equivalents and restricted cash. This may seem like a lot, but the automotive business is very capital intensive. It doesn’t take fancy math to understand how Rivian’s cash is declining so quickly.
Rivian’s free cash flow was negative $1.7 billion in the fourth quarter alone. Worse, the company is consuming cash at a faster pace than he was a year ago. Rivian free cash flow was negative $1.5 billion in the fourth quarter of 2021. Zooming out to full year 2022, negative free cash flow was $6.4 billion, compared to $4.4 billion in 2021.
Considering this, Piper Sandler Analyst Alexander Potter downgraded Rivian’s shares from buy to hold on Friday morning, saying the company’s cash may not be enough to fund its expansion plans. He said the company would need to build millions of vehicles to achieve the scale needed to be successful in the long term. Where is Rivian now? It plans to produce 50,000 vehicles this year.
For context, when Tesla manufactured about 50,000 units a year, it spent $1.6 billion on capital expenditures and $525 million on operating activities. This equates to negative free cash flow of over $2.1 billion.
But Rivian doesn’t seem to be able to produce the same amount for the same level of spending. The company expects capital spending to be about $2 billion this year. Moreover, cash used in operations is not doing well at all. Last year, Tesla spent more than $5 billion on operations, compared to $57 million spent on operations in the year leading up to production volumes of about 50,000.
What raised even more concerns about Rivian’s long-term prospects was that Tesla started generating meaningful free cash flow four years into the year it produced about 50,000 vehicles. Still, free cash flow was only $1 billion.
Rivian alternative
If Rivian determines it needs to raise cash, it can sell its stock or raise debt. Selling shares dilutes shareholders. However, taking on debt to raise cash increases the company’s interest expense and adds debt to the balance sheet. Neither of these options seem like good ideas, but his third option is to wait for funding and risk it to the point where the lack of funding becomes a real risk and threatens the company’s expansion plans. is probably better than
How much more cash does Rivian need? Potter estimates the company needs over $4 billion more in cash to fund its growth plans over the next few years. i think he is right
Daniel Sparks has no positions in any of the stocks mentioned. His clients may own shares in the companies mentioned. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.