Rivian Stock: Triple Whammy Impact

Rivian's announcement of $1.5 billion in convertible notes has caused concern among shareholders, as it implies a continuing cash burn and lack of future revenue. The company also reported a net loss of around $720 million for the fourth quarter. Rivian stock traded down by about 20%.

Investors have a strong aversion to dilution, which occurs when a company issues new stock and subsequently lowers the price of existing shares. Rivian Automotive Inc. (NASDAQ: RIVN) has not yet issued new stock, but the recent announcement of $1.5 billion in new convertible notes will have a similar effect on existing shareholders. These notes are senior and unsecured obligations of the company, with a maturity date of October 15, 2030. Interest on the notes will be paid semi-annually, but the pricing for the notes has not been disclosed.

What's even more concerning for shareholders is that noteholders have the option to convert their notes into cash or common stock, or even request Rivian to repurchase their notes for cash. Shareholders do not have the same right, which means that if the company fails, shareholders will suffer significant losses.

Adding to the negative outlook, Rivian disclosed in a federal filing that it burned through $1.1 billion in the third quarter, leaving the company with $9.1 billion in funds. While this amount may seem substantial, it will not be enough to sustain operations if the cash burn remains at $1.1 billion per quarter. The issuance of $1.5 billion in convertible notes provides a cushion, indicating that the company expects to continue burning through cash and that future revenue may not be sufficient to cover the shortfall.

Furthermore, Rivian's projected revenue for the fourth quarter is estimated to be $540 million, significantly lower than the consensus forecast of $1.3 billion. This translates to a net loss of approximately $720 million, considering the outstanding shares of Rivian stock. Additional costs related to stock-based compensation and depreciation and amortization are expected to contribute another $400 million to the net loss, bringing the total cash burn to around $1.1 billion once again.

In the second quarter of this year, Rivian reported a loss of nearly $33,000 for every vehicle sold. Although the company saw a 16.5% increase in third-quarter deliveries, with 15,564 units sold, this still pales in comparison to Tesla Inc.'s (NASDAQ: TSLA) performance. Tesla shipped 435,059 vehicles in the third quarter, marking a 6.7% sequential decrease but an 18.9% year-over-year increase. However, Tesla is also facing profitability challenges, with its gross margin falling short of expectations.

Unlike Tesla, Rivian cannot afford to slash prices on its vehicles to increase sales. With a starting price of $84,000, reducing the price to below $50,000 would only exacerbate the company's already significant per-vehicle losses. This means that Rivian's survival for the next nine quarters hinges on the cash it currently has and plans to raise through the new notes offering.

As a result of these concerns, Rivian stock experienced a decline of approximately 20% to $19.09 in Thursday's midday trading. The stock's 52-week trading range is $11.68 to $37.39. In comparison, Tesla shares traded down by about 0.6% at $259.62, with a 52-week range of $101.81 to $299.29.