Standing out among the Street's worst performers today is Rivian Automotive, a auto manufacturers company whose shares slumped -4.0% to a price of $17.99, 59.99% below its average analyst target price of $44.95.
The average analyst rating for the stock is buy. RIVN lagged the S&P 500 index by -2.9% so far today and by -62.7% over the last year, returning -81.9%.
Rivian Automotive, Inc. designs, develops, manufactures, and sells electric vehicles and accessories. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
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 $-5.64 and $-14.53. We can see that RIVN has a forward P/E ratio of -3.2 and a trailing P/E ratio of -1.2.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the consumer cyclical sector has an average P/E ratio of 24.11, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Rivian Automotive's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.09. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Rivian Automotive's operating margins have averaged -inf% and displayed a mean growth rate of 0.0%. These numbers show that the company may not be on the best track.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Rivian Automotive was $-4,416,000,000.00 as of its last annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In RIVN's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-2,243,333,333.30 and they've been growing at an average rate of -184.9%.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Rivian automotive's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.1, but is still below the average P/B ratio of the Consumer Cyclical sector, which stood at 3.11 as of the third quarter of 2022.
Rivian Automotive is likely overvalued at today's prices because it has a negative P/E ratio, a lower P/B ratio than its sector average, and irregular and negative cash flows with a downwards trend. The stock has moderate growth prospects because of its weak operating margins with a stable trend, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into RIVN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
