EV manufacturer Rivian Automotive saw its shares climb 4.8% today to a price of $33.6 -- 43.11% below its average analyst target price of $59.06. The average analyst rating for the stock is buy. RIVN may have outstripped the S&P 500 index by 5.0% so far today, but it has lagged behind the index by 55.0% over the last year, returning -68.2%.
Rivian Automotive is a consumer cyclical company that markets discretionary goods and services, which are non essential items that consumers purchase with their discretionary income. For this reason, consumer cyclical companies have better sales -- and oftentimes stock -- performance during periods of economic growth, when consumers have more of an incentive to spend their money in non-essential industries such as travel, entertainment, automobiles, clothing, and luxury items Conversely, performance can drop off significantly during periods of recession or economic contraction. This is why these companies are called "cyclical."
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer cyclical companies is 24.27, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Rivian automotive does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-5.59 and $-14.53. We can see that RIVN has a forward P/E ratio of -6.0 and a trailing P/E ratio of -2.3.
In contrast to earnings, gross profit margins are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. RIVN has gross profit margins of 0%, which that it is operating in a highly competitive market, where it is unable to raise its prices (and thus increase its margins) without losing customers to its competitors.
Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Rivian Automotive 's levered free cash flow of -$4,035,249,920.
If it weren't negative, the unlevered free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for RIVN, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Rivian automotive has a P/B ratio of 1.8. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Consumer Cyclical sector, which stood at 3.23 as of the second quarter of 2022.
Rivian has negative P/E ratio, dismal profit margins, and negative free cash flows. On the other hand, it has an analyst consensus of strong upside potential and a lower than average P/B ratio. For these reasons, Rivian automotive is likely fairly valued at today's prices. We hope you enjoyed this overview of RIVN's fundamentals. Before you reach your own decision, be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
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