The stock market is firmly in correction territory. The Nasdaq Composite Index has fallen nearly 19.6% this year as of this writing. With rising uncertainty, growth stocks have corrected more than the broader market. Electric vehicle stocks are no exception.
Rivian (RIVN -3.05%) stock has fallen 65% so far in 2022. The young electric vehicle (EV) manufacturer surely faces some key risks in the very competitive EV space. So, does the recent fall in Rivian's stock present a buying opportunity or not? Let's discuss this next.
Rivian stock faces risks
To begin with, it is important to understand that Rivian stock isn't the surest way to riches, as some early investors believed. The company faces real risks. First, it may not be able to ramp up the production of its vehicles profitably. EV manufacturing is a complex process that requires hundreds of different parts from as many suppliers. Securing supplies at the right prices and at the right time is crucial for smooth production and the company's eventual success.
Image source: Rivian.
Second, Rivian faces stiff competition from other EV manufacturers. Legacy automakers and new EV makers both have either launched or are planning to launch electric pickup trucks, SUVs, and commercial vans -- Rivian's current offerings. Rivian could have a tough time competing, especially with the established brands, which have loyal customer bases and more extensive financial resources. Further, the increased competition could weigh on Rivian's margins in the future.
Investors realized the above risks when Rivian released its fourth-quarter results recently. The company cut its delivery target for 2022 in half, citing supply chain challenges. Similarly, rising costs caused Rivian to announce a price increase on its vehicles on March 1. The company claims the preorder flow wasn't impacted much after the price increase was announced. But that likely will not be the case in the future when customers will have more choices.
In short, Rivian has yet to prove it can make EVs profitably.
But all is not lost
Even though Rivian faces stiff competition and risks related to scaling up operations, these challenges aren't insurmountable. The company is delivering real products that have so far proven to be of top quality. Scaling-up challenges for young EV makers aren't unexpected. As for the competition, the EV market is huge and growing rapidly and has room for several players to operate profitably.
Just like the euphoria that surrounded Rivian stock soon after its initial public offering (IPO), the current pessimism for the stock may be unfounded. Rivian stock has fallen to less than half its IPO price.
Should you buy Rivian stock now?
Rivian stock's market capitalization has fallen to a much less erratic level of $32 billion compared to the ridiculous level of over $150 billion it reached at one point.
RIVN Market Cap data by YCharts.
The current market cap implies a forward price-to-sales ratio of around 5, which isn't super cheap. But Rivian is just starting and has a long runway for growth. Further, EV companies trade at a higher valuation, likely due to their ability to generate higher margins. Tesla, for example, has been generating and growing higher margins than traditional automakers over the last couple of quarters.
TSLA Profit Margin (Quarterly) data by YCharts.
Ford's margin in the chart above includes the impact of the gain on its Rivian investment. The company reported an adjusted EBIT (earnings before interest and tax) margin of 5.4% for the fourth quarter.
Notably, replicating Tesla-like margins isn't easy. However, EV stocks are getting valued assuming a positive impact on margins from recurring software and services revenue. Rivian targets gross margins of 25% in the long term. Looking at it this way, the stock seems appealing.
Overall, Rivian is still in its early stage and needs to prove a lot to establish itself as a serious long-term player in the EV market. The progress that Rivian has made so far doesn't look bad. It has 83,000 preorders for its SUV and pickup truck, along with the initial order of 100,000 delivery vans from Amazon. Its pickup truck has received positive reviews from users. Rivian is also positioning itself for the long term with its own network of charging stations.
In short, Rivian stock looks like a risky but appealing bet right now. Investors should note that it will take some years for the story to play out, and the stock will likely remain volatile in the meantime.
