A recession would be bad news for Rivian, and the indicators aren’t looking good.
Shares of Rivian Automotive (RIVN -7.89%) fell sharply on Thursday afternoon, after new economic data stoked concerns about a potential recession.
At 2 p.m. ET, Rivian’s shares were down about 6.8% from Wednesday’s closing price.
Rivian’s R2, due in 2026, could carry the company to profitability. But a recession could play havoc with that plan. Image source: Rivian Automotive.
The latest economic indicators don’t look good
Two new points of economic data raised worries about a potential recession.
First, initial jobless claims rose to 249,000 last week, above the Dow Jones forecast of 235,000 and the highest total since August of last year.
Separately, the Institute for Supply Management’s manufacturing index, a measure of manufacturing activity in the U.S., was 46.8% for July. That’s down 1.7% from June and the fourth straight month of decline — a sign that economic activity in America’s manufacturing sector is contracting.
A recession could be a big problem for Rivian.
Automakers’ profits generally shrink or swing to losses during recessions. Because of high fixed costs and big capital commitments, auto factories typically break even at around 80% of full capacity. When demand for new vehicles falls, as during a recession, production goes down — and profits can turn to losses even if the automaker is still shipping thousands of vehicles.
EV start-ups like Rivian are especially vulnerable to a downturn
Big automakers like Ford and General Motors have hefty cash reserves to ensure that they can continue to invest in new products during recessions. But Rivian doesn’t have that luxury: While it had about $9 billion in liquidity as of March 31, it needs that cash to fund operations until it’s profitable. A recession would deepen its losses and burn its cash more quickly
That’s why the stock fell on Thursday.
Rivian will report its second-quarter results and its updated cash balance after the markets close on Tuesday, Aug. 6.
John Rosevear 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.
