What occurred

Shares of electric-vehicle maker Rivian Automotive (NASDAQ:RIVN) opened decrease once more on Tuesday as merchants and buyers continued to dump auto shares whereas awaiting the outcomes of a Federal Reserve Financial institution coverage assembly.

As of 10:15 a.m. ET, Rivian’s inventory was down about 6.9% from Monday’s closing worth.

So what

It is no secret that U.S. inflation is at ranges not seen in a long time, and it is not a lot of a secret that the Fed is more likely to reply by elevating rates of interest — and doubtless quickly. The Fed’s Open Market Committee is assembly in the present day and tomorrow. Most observers count on the assembly to conclude with a sign that charges will start to rise in March. 

Rising rates of interest can be a problem for automakers. Auto firms from Ford Motor Firm (NYSE:F) to Tesla (NASDAQ:TSLA) have had nice success promoting extremely worthwhile premium fashions and trims in recent times, thanks largely to low rates of interest. Many shoppers set their car-buying budgets by calculating the extent of month-to-month funds they will afford; as rates of interest rise, a smaller portion of these month-to-month funds will go to automakers. That can lead prospects to decide on cheaper fashions, and that will lower into automakers’ revenue margins.

That is the idea, no less than. In observe, it should seemingly take a number of rate of interest hikes earlier than automakers begin to see noticeable margin erosion. However the concern is actual, and that is in all probability placing stress on many vehicle shares in the present day, together with Rivian’s to some extent.

Rivian’s R1T pickup has obtained glowing evaluations because it started delivery final fall. However Rivian’s inventory has had a tough experience over the past couple of months. Picture supply: Rivian Automotive.

Individually — however associated — there’s additionally a broader transfer away from dangerous progress shares unfolding as buyers place themselves for a better rate of interest setting (and as final yr’s overheated meme shares proceed to fall out of favor). That’s placing further stress on Rivian’s shares in the present day.

Now what

Whereas Rivian has stumbled a bit in its first months as a public firm, I proceed to assume that it is a well-managed automaker with a very good likelihood of constructing a sustainable EV enterprise. That mentioned, even with the inventory down over 60% from its post-IPO excessive in November, it is nonetheless very costly relative to its seemingly gross sales over the subsequent couple of years. Warning and endurance will likely be required. 

Buyers may have the prospect to listen to from CEO RJ Scaringe and his crew when the corporate stories its fourth-quarter monetary outcomes, seemingly within the second half of February.

This text represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis — even one among our personal — helps us all assume critically about investing and make choices that assist us turn into smarter, happier, and richer.