It’s always something. If it’s not one thing, it’s another…
If it’s not fear of a government debt default overshadowing the good good vibes from a surprisingly cool read on inflation, it’s a regional bank mini-crisis sapping the fun out of a better than expected earnings season…
Would a little clarity about where the economy and stock market are headed be too much to ask?
I think you probably know the answer to that – of course it’s too much to ask!
Because who, exactly, is responsible for lighting the signal fire to let us all know that inflation is basically solved, that recession is unlikely, that the regional bank “crisis” is not a contagion and that the stock market really did bottom months ago?
Nobody, that’s who.
The majority of the financial media has their own agenda. The investment “gurus” tells you the market’s gonna crash to scare you into a subscription. Research firms like Hindenburg and Citron put out exaggerated exposes on individual companies that are nothing more than hatchet jobs designed to tank a stock price for a day or two.
Even Warren Buffett tried to throw a little gas on the regional bank bonfire just a couple days ago when he said: "The incentives in bank regulation are so messed up and so many people have an interest in having them messed up — it's totally crazy…So we are very cautious in a situation like that about ownership."
How cautious? Well Buffett went on to say: "We want to be there if the banking system temporarily even gets stalled in some way…”
You think Buffett might be a little jealous of the deal that CEO Jamie Dimon just engineered that let JP Morgan (NYSE: JPM) pick up $165 billion in assets from First Republic Bank for $10.6 billion?
As I suggested in Monday’s article, there are a lot of players out there in investment-land that want nothing more than to keep you guessing.
The Fed plays this game too. The last thing Chairman Powell wants to do is set off a stock market rally by confirming that the Fed is done with interest rate hikes. And in fact, his refusal to admit that the Fed is on “pause” after the last hike has a lot of people convinced that there will be another hike coming in June…
Well, this morning’s Consumer Price Index number should put a stop to that…
The Trend is Your Friend
Most prognosticators were pretty confident that the April CPI number would come in at 5% or higher. Especially after April’s NonFarm Payroll number came in way stronger than expected and the unemployment rate actually fell to 3.4%.
It’s like economists can’t get past the belief that inflation can’t come down if unemployment is low. After all, if more people are getting jobs, it means they have money in their pocket to spend and that pushes prices higher, right? In a general sense this seems reasonable. But this neat formula ignores the fact that many corporations used inflation as cover to hike prices for no other reason than that they could.
I called this trend “Artificial Inflation” and corporations used this variety of AI to push prices up 10%-15% for many of the products we depend on.
The fact is also that these AI price hikes are all done. They’re not going higher. That’s going to keep inflation from spiking higher. And in many cases, prices are actually coming down. Like shipping costs. And have you seen the prices for avocados lately?
Now, costs have been weighing on consumer demand, corporate profits and stock prices. So I wanna share how one Electric Vehicle maker is dealing with its own cost issues. Because I think it means that the share price for this particular EV company is very attractive at its current levels around $14-$15.
Upside for Rivian (NASDAQ: RIVN)
Rivian reported earnings for its first quarter last night. And it did something that no other startup EV maker has managed to do: beat expectations and reiterate production guidance.
In the first quarter of 2022, Rivian hit $95 million in sales revenue. Yesterday, it reported $661 million in revenue. Huge. And it managed to beat revenue expectations by a couple million because it delivered 7,946 of its trucks at a slightly higher selling price than what it was getting last year. (That’s right – Rivian has managed a small hike while Tesla (NASDAQ: TSLA) has had to hack prices to meet its sales volume goals.)
Even better, Rivian actually built 9,395 trucks in the quarter, which is why the company reiterated its promise to build 50,000 trucks this year.
Rivian is the only emerging EV startup that has been able to confirm its production estimates.
Rivian is striving to become an integrated manufacturer. Tooling, robotics, software, electric engines, charging network, battery packs – the plan is to do it all in house. It’s a massive endeavor – very expensive, and with so many moving parts, there’s a lot that could go wrong.
But in a nutshell, the process is going very, very well. And Rivian’s cost structure is about to change dramatically.
The biggest factor is that Rivian started producing its own electric motor (called Enduro) and LFP battery packs. These are going into the delivery vans that Rivian makes for Amazon right now, and will be going into its consumer trucks soon. The Enduro motor and LFP battery pack will cut its cost per vehicle by 25%, which is significant.
Rivian has ~150 of its own super-charging stations deployed now. And the expense of further build-out will benefit from $7.5 billion in government incentives.
Now, it’s important to understand that Rivian loses money on every car it makes – a negative gross margin. And for the first quarter, that loss was $535 million (much better than the $735 million analysts were expecting, but still…). Add another $2 billion in CAPEX spending for the remainder of 2023, and yes, the company is still spending a ton of money…
BUT – it’s nearing the finish line in becoming a fully integrated manufacturer. Gross margins are expected to turn positive in 2024. And that’s because of the investments it’s making now.
Full year 2023 revenue is expected to be just over $4 billion. And it’s going to double to $8.2 billion for 2024. I expect the stock price to at least double over the next year too.
Like almost everything else, sentiment is very negative for electric vehicles right now. But the simple fact is, Rivian looks like a winner and investors should take advantage of the negative sentiment and own the shares while they trade near all-time lows.
That’s it for me today. Take care and I’ll talk to you on Friday…
Chief Investment Strategist
Pro Trader Today