Long-term investing sometimes means holding on through difficult periods so that you can eventually benefit from the growth of a company's business. Some companies are riskier than others, though, so investors need to be careful, particularly with young companies in relatively new industries.
For example, consider electric vehicle maker Rivian's (RIVN -0.46%). Its recent rapid stock advance has been exciting, but it also highlights how risky it can be to buy into a stock at or soon after its initial public offering (IPO).
What a run
Over the past month, Rivian shares have gained nearly 80%. Most of that rise has come since just June 26. If you had invested $10,000 in Rivian one month ago, it would be worth an eye-popping $17,990 today. That's the kind of return you brag about to your friends at parties.
To highlight just how incredible that number is, compare it to the S&P 500 index, which over the same 30-day span turned a $10,00 investment into... $10,260. But that's a broad market index. Perhaps a better comparison would be another high-profile electric vehicle maker like Tesla. And $10,000 put into Tesla shares a month ago would have grown into $10,940. Clearly, Rivian's stock has been on a rocket.
The problem, of course, is that, if you had bought Rivian stock a month ago, it would most likely have been luck, not investing skill, that led to your big gain. Nobody has a crystal ball on Wall Street. And if you widen your focus on the EV maker's share price performance history, you'll see that the shares have experienced far more downs than ups.
Big losses
Rivian went public in November 2021. The stock surged briefly higher, but then began a fairly steady, persistent descent. The stock at this point is down by roughly 75% from its price when it came public. For comparison, the S&P 500 is down by about 6% over that span while Tesla has lost 30% of its value. If you look at Rivian's decline from the high-water mark it achieved shortly after its IPO, the stock is down by 85%. And remember, the declines highlighted here for Rivian include the massive percentage gains of the past month.
From a dollars-and-cents perspective, if you had invested $10,000 in Rivian at its IPO, you would have a little less than $2,500 today. That's a story you probably wouldn't want to tell at a cocktail party, unless you were commiserating with someone else about your most painful stock losses.
Such wide swings in price are not uncommon with young companies in relatively new industries. Indeed, there are often a huge number of entrants when a technology starts out. But eventually, the weaker names fall away, leaving a small number of winners. Picking those winners is hard, if not impossible, to do consistently.
One big problem is that early-stage companies often bleed red ink at an alarming rate for years. That's exactly the situation at Rivian. It started 2022, its first full year as a public company, with $18.1 billion in cash on its balance sheet, and ended it with $11.5 billion. It lost a dramatic $7.40 per share for the year.
The cash balance fell by another $300 million or so in the first quarter of 2023, with a loss of $1.45 per share. It is highly unlikely that either of these trends will reverse themselves soon. In fairness, the company is young and still building its business. It also has a sizable cash balance on an absolute basis. There's a chance it will manage to turn profitable at some point.
The problem is that, unless and until it does that, investor sentiment is highly likely to be the driving force behind the stock's ups and downs. Investors are mercurial at the best of times, so Rivian's current share price run-up should be taken with a grain of salt. The rally could easily reverse course if this money-losing, cash-burning EV start-up runs into business issues, which could include poor execution, technology shortfalls, or stock sales by major investors (such as Amazon (AMZN -1.61%), which holds a 16% stake), among other things.
Don't get too excited
Wall Street has a bad habit of chasing a story. Sometimes that story is just that a stock is rallying, and the narrative itself can add more wood to the fire. Long-term investors need to step back from the market's ups and downs and look at the bigger picture. In the case of Rivian, the huge advance over the past month is impressive, but given the longer-term share price history here and the company's business results so far, it's probably worth considering the downside risks you face if you buy today.
