During the annual policy speech at Jackson Hole, Jerome Powell’s reiteration of the central bank’s hawkish stance to control inflation warned investors of “some pain” for the economy. Heightened recession fears triggered a broader market sell-off lately.
Furthermore, investors expect more turbulence as Wall Street analysts cut their corporate-earnings expectations. Morgan Stanley lowered its earnings estimates for S&P 500 companies, citing declining profit margins in the upcoming quarters.
This environment of rising interest rates is expected to make the survival of fundamental weaknesses of companies difficult. Cash-strapped firms may struggle to sustain their operations due to the funding drought.
Therefore, we think out-of-favor stocks Rivian Automotive, Inc. (RIVN) and Snap Inc. (SNAP) are best avoided now.
Rivian Automotive, Inc. (RIVN)
RIVN designs, develops, and manufactures electric vehicles (EVs) and sells them directly to consumer and commercial markets. The company’s services include digitally enabled financing, telematics-based insurance, proactive vehicle membership, and software services, charging solutions, a data-driven vehicle resale program, and FleetOS, a centralized fleet management subscription platform.
Recently, reports of significant loss of customer satisfaction emerged after RIVN announced the cancellation of the entry-level version of the R1T, effectively raising the price of its base model electric truck by over $6,000. The company has also discontinued the less expensive trim for its R1S electric SUV, which is expected to start shipping to customers later this year.
For the fiscal 2022 second quarter ended June 30, 2022, RIVN’s total operating expenses increased 73.1% year-over-year to $1 billion. The company’s loss from operations widened 194.5% year-over-year to $1.71 billion. RIVN’s adjusted EBITDA and free cash outflow for the quarter worsened by 133.5% and 69.9% year-over-year to negative $1.3 billion and $1.56 billion, respectively.
In addition, the company’s non-GAAP net loss attributable to common stockholders widened 153.2% to $1.47 billion, translating to a $1.62 loss per share.
Analysts expect RIVN to report a loss of $1.86 in the third quarter, ending September 22, and $6.97 in the whole year, ending December 2022. Shares of RIVN have declined 64.1% year-to-date to close the last trading session at $36.88.
RIVN’s POWR Ratings are consistent with this bleak outlook. It has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It also has an F grade for Value, Stability, and Quality and a D for Sentiment. It is ranked #60 among 65 stocks in the Auto & Vehicle Manufacturers industry. To see the Growth and Momentum ratings for RIVN, click here.
Snap Inc. (SNAP)
SNAP is a global camera and social media global. The company provides Snapchat, a camera application that enables people to communicate visually through images and short videos. The company’s advertising products include Snap Ads and AR Ads.
On August 31, SNAP announced its decision to lay off nearly 20% of its 6,400 employees. SNAP’s CEO Evan Spiegel said in a statement that the company is restructuring to focus on three strategic priorities: community growth, revenue growth, and augmented reality, while sunsetting several projects.
In the fiscal 2022 second quarter ended June 30, SNAP’s operating loss widened 108.3% year-over-year to $400.94 million. During the same period, its adjusted EBITDA declined 93.9% from the year-ago value to $7.19 million.
Furthermore, SNAP’s quarterly net loss worsened by 178.3% year-over-year to $422.07 million, resulting in a non-GAAP net loss per share of $0.02, compared to a $0.10 gain during the same period in the previous year. Its free cash outflow stood at $147.46 million, compared to $115.71 million in the year-ago quarter.
Analysts expect SNAP to report a loss of $0.03 per share during the third quarter of the current fiscal, which indicates a deterioration of 50% sequentially and 117.6% year-over-year. The company has missed the consensus revenue estimates in each of the trailing four quarters.
The stock has plunged 59.9% over the past six months and 83.1% over the past year to close the last trading session at $12.53.
SNAP’s POWR Ratings indicate its poor prospects. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. SNAP has a grade of F for Stability. It has a D grade for Growth, Momentum, Sentiment, and Quality.
Within the F-rated Internet industry, it is ranked #58 of 64 stocks. Click here to see all POWR Ratings for SNAP.
RIVN shares were trading at $37.41 per share on Friday afternoon, up $0.53 (+1.44%). Year-to-date, RIVN has declined -63.92%, versus a -13.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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