Why Rivian Stock Slumped on Wednesday

Rivian Automotive (NASDAQ: RIVN) stock was trading down by 4.8% as of 1:20 p.m. ET Wednesday after Morgan Stanley analyst Adam Jonas downgraded the stock one notch from overweight (i.e., buy) to equal weight (i.e., hold).

Jonas' note on Wednesday regarding Rivian was only one facet in his broader downgrade of the entire U.S. automotive industry: He also downgraded Ford (NYSE: F) to equal weight and reclassified General Motors (NYSE: GM) to underweight (i.e., sell). But Jonas has specific concerns about Rivian.

What Rivian needs to do

Broadly speaking, Jonas observed that inflation has driven new car prices higher, reducing people's ability to buy them, with the result that inventories are swelling as sales stagnate. Adding to the problems of U.S. automakers, many Chinese automakers are selling their electric vehicles at ever-greater losses due to a price war. Further, China is producing 9 million more cars a year than it can sell locally. Those excess cars are getting exported, cutting into potential sales for Ford, GM, and Rivian, among others.

Regarding Rivian in particular, though, the analyst notes that its future will depend to a great extent on its partnership with Volkswagen, and on its ability to contribute "electrical architecture expertise" for use in Volkswagen's vehicles. The problem, asserts Jonas, is that delivering on that promise will require Rivian to lay out an extra $200 million to $300 million in annual capital spending -- or more -- starting in about 2026.

Is Rivian stock a buy?

Rivian already spends $1 billion a year on capital expenses, so with those additional outlays, you might think its capex would now be expected to reach $1.3 billion, at most, in 2026. But Rivian was already forecasting capex of $1.2 billion in 2024, and $1.5 billion in 2025. Assuming these numbers are accurate, this suggests that its capex could actually surge as high as $1.8 billion in 2026 -- as much as Rivian spent annually back in 2021, before it started getting its spending under control.

Long story short, Rivian's cost-cutting program now seems to have shifted into reverse. Even with financial assistance from Volkswagen, Jonas worries that this level of "capital intensity" might be too much for Rivian to bear.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.