Money

A Brutal Lesson in Valuation

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Last fall, the highly anticipated initial public offering (IPO) of Rivian Automotive (Nasdaq: RIVN) took place.

Rivian makes eye-catching electric trucks, and investors were clamoring for the chance to own its shares.

I wasn’t.

Prior to Rivian’s IPO in October 2021, my advice was to avoid Rivian shares due to the company’s absurd initial valuation of $80 billion.

Now, that $80 billion number didn’t mean much until we looked at Rivian’s financial statements in its IPO filing…

Chart: Rivian's Financials Are Missing Something...

Those financials revealed not only that Rivian’s business was unprofitable but also that the company had never generated a nickel of revenue!

That meant investors who eagerly gobbled up Rivian’s shares upon its IPO were collectively paying $80 billion-plus for a company without a single sale.

That is why I called buying Rivian at IPO an act of speculation.

Eventually Valuation ALWAYS Matters

In fall 2021, nobody really knew if, when and to what degree Rivian would be able to turn a profit over time.

With a sky-high $80 billion valuation and no earnings or sales to underpin its stock price, Rivian was carrying massive downside risk.

And hapless Rivian investors are now finally realizing the downside of the stock as it materializes.

Chart: Rivian's Share Price Has Fallen

Rivian went public at $120 per share and enjoyed a brief pop on the back of investor frenzy for its “hot” stock.

Then, at first gradually and now rapidly, the gravitational pull of market valuation has dragged Rivian’s shares down to a more realistic price.

Investors who jumped on shares of Rivian at its IPO have now lost more than 75% of their initial investment.

Those who chased the stock up after Rivian’s hot IPO have lost even more.

It’s been a bloodbath.

Meanwhile, Rivian reported a speck of good news…

In the fourth quarter of 2021, Rivian reported $54 million in revenue.

Yes… Rivian has actually started generating revenue!

But don’t celebrate just yet…

Rivian posted an overall loss of $2.5 billion in the same quarter. And for the full year of 2021, it posted a loss of $4.7 billion.

That kind of financial performance doesn’t justify an $80 billion-plus market valuation.

Naturally, the hype around Rivian has since cooled and its shares are certainly much more appropriately valued today.

The market is valuing Rivian’s worth at only $3 billion, excluding the $18 billion in cash the company has in the bank.

Chart: Rivian's Enterprise Value

That’s much more realistic for a profitless company with interesting growth potential.

But even at this level, Rivian shares are not for me.

It’s because I have no idea how profitable this company will eventually be.

I don’t even know if Rivian will eventually be a business that generates a decent amount of earnings.

I have a very clear-cut rule when it comes to investing…

If I don’t know how to estimate how much money a company will make in the future, I don’t own its stock.

Successful investing is about being able to predict the future with some degree of accuracy.

To me, Rivian’s future is completely unpredictable.

Good investing,

Jody

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