The Fed Just Lowered Interest Rates. Is Rivian Stock a Buy Now?
There's a narrative out there that electric vehicle (EV) sales aren't growing, and that's not true. EV sales are indeed growing. Just last week, data came out showing that new EV registrations jumped 18% in the U.S. market during July, compared to the prior year.
The truth is that EV sales are still growing decently, and are still taking market share from traditional gasoline-powered vehicles. They just aren't growing at the explosive rate once anticipated. However, a recent Federal Reserve announcement could provide a boost to automakers such as Rivian (NASDAQ: RIVN).
What's going on?
Last Wednesday, the Federal Reserve announced it would lower the key overnight borrowing rate by 50 basis points, or half a percentage point. The reasoning was driven by a softening inflation and jobs picture. It's the first interest rate cut since the beginning of the COVID-19 pandemic, and outside of that emergency, it was the first time the Fed had cut rates since the 2008 financial crisis.
This move puts the federal funds rate in a range of 4.75% to 5%. While it mainly sets short-term borrowing rates for banks, the ripple effect extends into many consumer products, including big ticket items such as auto loans.
It's also important for investors to note that this might not be the start of a trend. Tom Porcelli, chief U.S. economist at PGIM Fixed Income, said:
This is not the beginning of a series of 50 basis point cuts. The market was thinking to itself, if you go 50, another 50 has a high likelihood. But I think [Federal Reserve Board Chair Jerome Powell] really dashed that idea to some extent. It's not that he thinks that's not going to happen, it's that he's not... pre-committing to that to happen. That is the right call.
How does this help Rivian?
One under-the-radar move Rivian made last November was introducing a leasing program for its R1T. It was the very early stages of a program that it would quickly expand, including adding the R1S to leasing options. Leasing does a few things for customers, including lower up-front costs, lower payments, and new models for less money.
Specifically for Rivian, it gives people who might struggle with a typical auto loan payment the ability to still choose a Rivian. The lower borrowing rate will filter down to leases as well, making them slightly more affordable for consumers.
This is a bigger deal than one might think, considering the high price tags of Rivian vehicles -- they start at around $70,000 and can soar much higher. Rivian is still building out its leasing program. Currently, the EV maker offers leasing in 33 U.S. states and plans to continue expanding. The fed rate cut will only help this endeavor.
Early in the summer, the Rivian R1T and R1S were listed with leasing prices as low as $559 per month and $639 per month, respectively, and even those prices are still fairly lofty. The Fed rate cut should give some relief to this, even if it isn't drastic.
There are also other factors to consider. While Rivian's debt load is in OK shape for a company in its stage of life, with its debt to assets ratio at about 36%, it will almost certainly have to raise capital again at some point. The lower Fed rates will help alleviate some of the pain of its borrowing costs and debt load. Perhaps most importantly, the Fed rate cut will help the economy stave off a recession that would certainly put a dent in sales of the R1T and R1S.
Is Rivian a buy?
Does the Fed rate cut alone make Rivian a buy? In my opinion, it doesn't. However, it absolutely will give people who are on the fence about purchasing a Rivian reasons to consider one, and that could pull some sales from that group of consumers. The Fed rate cut will give a little relief to auto loans and leasing rates, and that will certainly help Rivian to some extent. But this is just a small part of an investing thesis. There are plenty of other reasons to consider Rivian a buy.
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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Fed Just Lowered Interest Rates. Is Rivian Stock a Buy Now? was originally published by The Motley Fool