Rivian Just Raised Guidance. So Why Is This Stock Falling?

Rivian (NASDAQ: RIVN) is an electric vehicle start-up, trying to build a car company from scratch. That's a difficult, time-consuming, and expensive task. But Rivian has made material strides, including effectively ramping up its production. That success was on full display in the second quarter, when Rivian beat its internal production projection and upped its full-year production target. Here's why the stock has tumbled despite the good news.

Rivian is in the middle of a major product launch

The big story for Rivian today is the launch of its R2 truck, targeted at mass-market customers. Its previous trucks were expensive, high-end products. If the company has any hope of turning a sustainable profit, it needs to materially increase its production numbers so it can spread its costs over more vehicles. If the R2 is a success, Rivian will have a clearer path toward that goal.

Image source: Rivian Automotive.

That said, building cars is a capital-intensive process. Rivian will need a lot of cash to reach a point where it has enough scale to compete with electric vehicle (EV) giants like Tesla (NASDAQ: TSLA), let alone the other major automakers now building EVs. Rivan's production update was good news, but it has to be juxtaposed against the economic realities of the carmaker's finances.

On the finance front, Rivian just announced that it is raising new capital by selling shares. The company has announced plans to sell 75 million shares. The goal is to raise over $1 billion in cash to fund the company's ongoing growth. The new shares will dilute current shareholders, so it's no surprise Wall Street wasn't particularly pleased with the news.

Rivan is dealing with more than just dilution

There's another little wrinkle with the stock sale, because Rivian is a money-losing start-up, it also had to offer a discount. The transaction price was $15.50 per share, roughly 20% below the stock's price at the time the sale was announced. It isn't unusual for investors to push a stock lower when a big equity sale comes out below the current market price. In fact, it kind of makes sense.

That said, Rivian's stock price has risen since the sell-off. And it is above the $15.50 price level, so investors appear to be banking on this cash being put to good use as the company continues to build its business. The truth is, start-ups often have to tap the capital markets for growth capital. That Rivian was able to get this deal done so easily may actually be a sign that Wall Street is increasingly confident it can become a sustainably profitable carmaker... at some point in the not-too-distant future, anyway.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.