Is Rivian Automotive Stock a Falling Knife or a Buying Opportunity?

Last month, it appeared as though the market was warming back up to Rivian Automotive (NASDAQ:RIVN) stock since it was trending higher.

Largely, because of growing speculation that the electric vehicle maker would report strong production guidance in its then-upcoming quarterly earnings release on Feb. 28.

But just ahead of earnings, shares moved lower. After the release, the pullback gained momentum. Why? While Rivian’s 2023 production outlook (50,000 vehicles) represented a large increase compared to its 2022 vehicle production numbers (24,337), this figure still fell short of Wall Street expectations (60,000-65,000 vehicles).

RIVN has since continued to slide, because of additional negative developments. As a result, the stock has fallen by nearly a third in the past month, hitting a new all-time low. So, following this freefall, what’s the best move? Let’s dive in and find out.

RIVN Stock: One Reason to ‘Buy the Dip’

Rivian trades for around $13 per share, meaning it’s considerably cheaper now than the triple-digit price levels it traded for right after the company’s November 2021 IPO.

Based on current operating results, RIVN still is not a bargain. However, as a Barron’s commentator pointed out on March 15, at current prices, Rivian essentially trades for the cash on its balance sheet.

In short, the market right now has assigned zero value to the electric truck company’s brand name, production, and technology assets.

There is a caveat with this. Rivian probably will to burn through billions of this cash position this year and in the years ahead. It makes sense that this sort of discount is currently being applied. Other types of early-stage companies, such as biotech firms, often trade at a fraction of their cash position for this reason.

Still, if the company could fund its path to profitability with just its current cash position, the result would likely be worth far more than $13 per share. That would in theory make now an opportune time to ‘buy the dip.’

Two Reasons Why It’s Better to Stay Away

Although I laid out a plausible reason to ‘buy the dip’ with RIVN stock, before you run out and do so, keep something in mind. This bullish scenario may be possible, but chances are it’s not probable. At least, that’s the takeaway, when you consider other recent news with the company.

Above, I only hinted at the additional negative developments that have kept Rivian shares on a downward trajectory. Taking a closer look at both of them, staying away from RIVN following the sell-off appears to be the better choice.

First, the company’s plans to raise an additional $1.3 billion, through the sale of convertible notes. The fact that Rivian is raising more cash now may signal that it needs to raise billions more down the road.

The resultant dilution from this and future capital raises could severely limit RIVN’s upside potential. Even if the company finally lives up to expectations and becomes profitable.

Second, news of Rivian and Amazon (NASDAQ:AMZN) possibly ending their electric van exclusivity pact is also a bearish sign. An end to being Amazon’s sole electric van provider may mean greater uncertainty with Rivian’s future growth, and profitability timeline.

My Verdict

Along with the two aforementioned negative developments, there are other good reasons you don’t want to go contrarian on Rivian.

For instance, as Morgan Stanley’s Adam Jonas argued in a research note earlier this week, this EV maker has severe production inefficiencies. While Jonas remains bullish on RIVN, this suggests that getting the company to profitability could be easier said-than-done.

Not only that, as I have argued in past coverage, rising competition from Ford (NYSE:F), ironically enough one of Rivian’s former backers is another big negative. While Ford may not leave Rivian in the dust, it may limit the chances of a comeback for this company, and for the stock.

With all of this in mind, it’s best to err on the side of caution. Assume this is a “falling knife” scenario, rather than a “generational buying opportunity.” Follow the crowd’s lead, and avoid RIVN stock.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.