Rivian's phenomenal debut rally has led the EV maker to achieve a larger market capitalization than traditional American automaker giants such as General Motors (GM) - Get General Motors Company Report and Ford (F) - Get Ford Motor Company Report, even though the company hasn't reported any revenue yet.
From a fundamentals perspective, Rivian has a big challenge ahead in proving that it deserves to be valued as a $100 billion company. But do fundamentals matter much in today’s highly speculative market?
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What to expect for Q3 earnings
Rivian and other big EV names, even though they’re in the automotive industry, are listed as technology stocks. These companies see themselves as technological game-changers – members of a new transportation paradigm that’s free from fossil fuels.
A growth-centric viewpoint goes partway to explaining why companies like Tesla (TSLA) - Get Tesla Inc Report and Rivian, even though they make far fewer vehicles per year than traditional automotive names like Ford and General Motors, have larger market capitalizations. The market is pricing in disruptive technologies that could, potentially, turn the entire automotive industry on its head.
But from a purely fundamentals-based perspective, a $100 billion market cap is almost impossible to justify right now, and it may not even be justified several years down the road.
Rivian has generated zero revenue so far and its actual production capacity is 150,000 units annually. If we assume production reaches peak capacity, Rivian's equity would currently be valued at about $675,000 per electric vehicle produced.
Since Rivian’s vehicles aren’t rolling into dealerships yet, sentiment on earnings day will be primarily (if not purely) speculative. Possible catalysts for movement including rising new orders, the launching of new technologies, or the announcement of another major partnership.
Therefore, even without sales yet, there are plenty of reasons Rivian’s stock could rally to record gains.
Puts or calls? Or maybe both?
Traders willing to join in on Rivian’s “earnings play” may find options to be the best move. Given the high speculation surrounding Rivian, it’s likely that this EV makers’ stock will either jump or plummet post-earnings. A long straddle strategy could see solid gains if this indeed turns out to be the case.
A long straddle strategy involves buying both a call and a put option for the same underlying stock and for the same expiry date. Long straddles will come out ahead as long as there’s a significant move in the price of the underlying stock – the direction of the move doesn’t matter. Such strategies are often used in the context of high-volatility earnings bets.
Of course, a long straddle doesn’t guarantee outrageous profits. Rivian’s post-earnings share price could move far less than anticipated, meaning that the calls and puts could all expire worthless. Also, heavy options buying in anticipation of RIVN’s Q3 earnings could drive up the price of both puts and calls, eating away at potential profit from the trade.
Should investors buy Rivian ahead of earnings?
According to Wall Street experts, Rivian stock is a “moderate buy” ahead of earnings — the consensus suggests that, despite its sky-high market cap, Rivian stock is still undervalued. The current average price target for the company is $135, which implies a 16% upside.
The most bullish rating comes from Bank of America Securities analyst John Murphy, who sees 46% upside ahead for the stock, forecasting a $170 price target. Murphy sees Rivian standing out among other electric vehicle manufacturers with its “extremely comprehensive and well-constructed business strategy, in addition to solid/innovative technology and interesting/attractive product, validated by a key anchor customer (Amazon.com),”.
Baird’s George Gianarikas thinks Rivian is the only EV maker that can truly compete with Tesla. The analyst sees Rivian’s promising approach to the EV market, its robust balance sheet, and its partnership with Amazon as being catalysts for its share price reaching $150 in the next twelve months.
But not everyone on the Street is bullish on RIVN. Goldman Sachs analyst Mark Delainey is skeptical, with a neutral rating on Rivian and a $94 price target, implying a nearly 19% downside. Even though he finds Rivian’s product set attractive and sees the company’s brand presence as growing, Delainey believes that historical automotive industry data show how hard it is for newcomers to scale – even if those newcomers are EV manufacturers. The analyst also projects about $20 billion of cash burn from Q4 of 2021 through the end of 2025.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)