George Soros (Trades, Portfolio) recently bought shares of Rivian Automotive Inc. (RIVN, Financial). I think he’s wrong.
Shares in Rivian, an electric truck startup backed by Amazon.com Inc. (AMZN, Financial) and Ford Motor Co. (F, Financial), trade for 6,637 times the company’s revenue for the past four quarters. That’s the kind of multiple you see when investors are mentally building castles in the air.
Buying such a stock is like trying to fill an inside straight in poker. You might get lucky, but the odds are against you.
How much against you? Over the past two decades, I’ve written about 78 stocks that sell for 100 times revenue or more. In the 12 months following, 73%% of them posted losses. And 86% did worse than the Standard & Poor’s 500 Total Return Index.
The average stock these days sells for 3.0 times sales, and that figure is way above the historically normal multiple of about 1.5. Why would you pay 33 times today’s bloated average multiple?
Rivian
To understand why I don’t like Rivian, look back a century to the 1920s. Cars were just becoming mass-market items. Dozens of car companies sprung up, and some were hot stocks at the time.
Most of those companies plunged to oblivion. Rivian could share the fate of American Motors (the first one, not the one you might remember), Apperson, Bell Motor Car Co. and Owen Magnetic Car Corp.
Soros, one of the world’s most famous investors and philanthropists, has reason to be confident in his own abilities. But nobody, not even a fellow who has donated $32 billion to various causes, has a crystal ball.
Rivian delivered its first trucks last fall. Analysts think it will hit about $3.6 billion in revenue this year. If they’re right (and Rivian’s stock price stays where it is), the stock will then be at 16 times revenue, which is still high.
Rivian’s market value ($59 billion as of Feb.18) is close to that of General Motors Co. (GM, Financial) ($70 billion) and Ford Motor Co. ($72 billion). Their revenue is 35 times Rivian’s projected revenue in 2022.
Since November, Rivian shares have fallen from about $172 to about $66. Soros, who owns close to 20 million shares, paid from about $114 to $172 a share, according to GuruFocus.
Who will be the survivors in electric trucks? Rivian’s potential competition includes Tesla (TSLA, Financial), Volkswagen (XTER:VOW, Financial), GM, Ford (even though it owns 12% of Rivian) and BYD (BYDDF, Financial) and Lucid Motors (LCID, Financial) in China.
Other high fliers
Here are two other stocks sporting big market caps supported by a slender reed of revenue.
Intellia Therapeutics Inc. (NTLA, Financial) of Cambridge, Massachusetts, is a gene editing company that first issued stock to the public in 2016. Its revenue that year was $6 million. In 2020 it was almost $58 million, but it has tailed off since, to less than $27 million in the four quarters through September.
Intellia shares fetch 217 times revenue. As of January, 18 Wall Street analysts covered the stock and 15 rated it a “buy.”
Arena Pharmaceuticals Inc. (ARNA, Financial), based in Park City, Utah, has a market value of $5.7 billion. Its revenue reached $806 million in 2019, but tailed off to less than $1 million in 2020 and zero in the past three reported quarters.
Arena has a highly ambitious development program, with drugs aimed at a wide variety of diseases, such as ulcerative colitis, dermatitis, acute heart failure and pulmonary arterial hypertension. But none of its drugs is on the market yet.
The record
This is the 18th column I’ve written about stocks selling for 100 times revenue or more. For 12 columns, the stocks on my warning list collectively showed a loss. For two more, they showed a gain but less than the Standard & Poor’s 500 Total Return Index. Three times, they beat the index.
A year ago, I talked about five stocks, and here are the results.
- Workhouse Group (WKHS, Financial) declined 90%.
- Virgin Galactic Holdings Inc. (SPCE, Financial) dropped 80%.
- Blink Charging Co. (BLNK, Financial) fell 51%.
- Marathon Patent Group (MARA, Financial) was down 26%.
- Moderna Inc. (MRNA, Financial) was off 18%.
All of these losses were suffered in a year when the S&P 500 advanced 15.2% (Feb. 15, 2021 to Feb. 15, 2022).
For all 17 columns, the average return on my warning list has been a loss of 27.4%, while the S&P 500 has averaged a gain of 10.6%.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
If you want to gamble, fine. The stock market is at least as much fun as the poker table or the racetrack. But in my opinion, there are far better bets than stocks selling for 100 times revenue.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].
