Rivian crashing; Judge Overturns Purdue Pharma's Opioid Settlement; COVID-19 update; Touring NYC yesterday
1) Electric-vehicle ("EV") maker Rivian Automotive (RIVN) went public on November 10. Its stock closed that day at $100.73, giving it a market cap of nearly $100 billion, despite the company having never earned even one dollar of revenue.
As absurd as that market cap was, it quickly became much more ridiculous... The stock soared to close at $172.01 only four trading days later on November 16.
Two days later, with the stock having closed the previous day at $146.07, I wrote in my daily:
While I remain bullish on the rise of EVs – they are a vastly superior product to regular gas-powered cars and, as such, I believe they'll soon dominate new car sales around the world – there isn't a single EV stock I like right now.
In fact, there are two I would consider shorting if I were still in that business: Rivian Automotive (RIVN) and Lucid (LCID) . These are both promising companies, but the former has yet to sell a single vehicle, and the latter just started delivering sedans in a 520-car limited edition last month – yet they are valued at around $113 billion and $75 billion, respectively.
For comparison, Ford Motor (F), which sold 4.2 million vehicles last year, has a market cap of roughly $80 billion...
After the close yesterday, Rivian reported its first quarterly earnings since coming public. The company delivered its first vehicles – 11 R1T trucks – thereby generating its first revenue: $1 million (cue clip of Mike Myers in Austin Powers: International Man of Mystery).
Rivian burned $1.15 billion in cash (a $685 million operating cash flow deficit, plus $469 million in capital expenditures) – at that rate, it won't take much more than a year to burn through its $5.2 billion in cash.
Of course, folks who own this stock aren't concerned about current financial metrics – it's all about the future, baby! On that metric, the company disappointed when it disclosed that "We expect to be a few hundred vehicles short of our 2021 production target of 1,200," which is why the stock is selling off today, trading this morning under $100.
To be clear, I don't think Rivian is a disgusting stock promotion like other EV makers I've warned my readers about, such as Workhorse (WKHS), Lordstown Motors (RIDE), and Nikola (NKLA), which have crashed 89%, 88%, and 69%, respectively, from their peaks.
By all accounts, Rivian is making great vehicles. I checked out its R1T truck at the Consumer Electronics Show in January and was very impressed:
But the company's valuation leaves no room for even the tiniest error. Yes, Elon Musk and his team at Tesla (TSLA) pulled off miraculous feats of engineering again and again, but I think that will prove to be the exception, not the rule.
I agree with the short seller's report that I included in Wednesday's e-mail. Excerpt:
e are short Rivian because we believe even if they pull off the execution story of the century, and we are doubtful they can, we foresee many bumps in this long road between here and nirvana. With an expected delivery estimate of 1,000 cars in 2021, the company sports an almost $100B market cap, more than GM and Ford, despite the fact they will likely generate negative free cash flow for the next 5-10 years. Even Elon Musk commented on how absurd this is when he tweeted: "Maybe they should be required to deliver at least one vehicle per billion dollars of valuation *before* the IPO?" True, Amazon lost money for years on its way to dominance, however making vehicles is a capital-intensive business with incredible operational complexity. And in truth Rivian is trying to build and scale numerous complex businesses simultaneously.
Tesla has generated an industrial miracle before our eyes over the past decade, and that is probably one of the biggest reasons why Rivian can enjoy a $100B valuation before mass producing any cars. That said, Rivian's operational plan is even more ambitious than Tesla's as they seek to produce three new models (commercial, SUV, and pick-up) simultaneously. They are later to market, seek to sell to customers without dealerships, and must execute on an almost impossible operating plan.
I have similar feelings about Lucid.
Just because these stocks are well off their peaks doesn't mean they're cheap. They most emphatically aren't. I think both are likely to fall another 50% from here, so avoid them at all costs.
2) Longtime readers know how closely I've been following the opioid epidemic and the Sackler family, whose company, Purdue Pharma, is most responsible for it. On August 19, I wrote:
What a sick joke this is: Sacklers Threaten to Pull Out of Opioid Settlement Without Broad Legal Immunity.
The Sacklers chose to have their company file for bankruptcy in White Plains, New York, because the only bankruptcy judge there is known to be very corporate-friendly – a bet that has paid off in spades with a disgraceful settlement that allows the most evil family in America to walk away scot-free, keeping the billions they've hidden in offshore accounts.
To understand this total disgrace, I recommend watching this segment (and the prior two) on Last Week Tonight With John Oliver: Opioids III: The Sacklers.
David Sackler's threat to walk away from the settlement is like someone saying, "Stop right there... or I'll shoot myself!"
The settlement should be discarded, every senior executive at Purdue Pharma when it was creating the opioid crisis should be prosecuted, and the Sackler family should be forced to disgorge every last penny of blood money it took out of the company.
So I was delighted to see this news yesterday: Judge Overturns Purdue Pharma's Opioid Settlement. Let's hope higher courts reject the Sacklers' appeal of this ruling and they are then bankrupted... Excerpt:
A federal judge on Thursday evening unraveled a painstakingly negotiated settlement between Purdue Pharma and thousands of state, local, and tribal governments that had sued the maker of the prescription painkiller OxyContin for the company's role in the opioid epidemic, saying that the plan was flawed in one critical area.
The judge, Colleen McMahon of the U.S. District Court for the Southern District of New York, said that the settlement, part of a restructuring plan for Purdue approved in September by a bankruptcy judge, should not go forward because it releases the company's owners, members of the billionaire Sackler family, from liability in civil opioid-related cases.
Although the Sacklers did not file for personal bankruptcy protection, they had made immunization from opioid claims an absolute requirement in exchange for contributing payments amounting to $4.5 billion to the agreement.
But the bankruptcy code, Judge McMahon said, does not explicitly permit a judge to grant such releases, which she called "the great unsettled question."
The Sacklers did not respond to requests for comment on Thursday evening.
Lawyers for a small group of states that had appealed the plan immediately hailed the ruling. "This is a seismic victory for justice and accountability that will re-open the deeply flawed Purdue bankruptcy and force the Sackler family to confront the pain and devastation they have caused," said William Tong, the attorney general of Connecticut.
3) The COVID-19 anecdotes I shared in yesterday's e-mail continue to pile up...
I just learned that one of my closest friends, despite being triple-vaxxed, got a breakthrough infection. Fortunately – thanks no doubt to the vaccine – he's not really sick, just feeling a bit under the weather.
The anti-vaxxers are pointing to the high transmissibility of the new omicron variant and the vaccines' lower effectiveness against it and saying, "You see, the vaccines don't work and everyone's going to get COVID anyway!"
As always, they are precisely wrong.
While it is true that most Americans will likely be exposed to COVID in the next couple of months, those who are fully vaxxed (including, critically, a recent booster) are far less likely to catch it. While the number of breakthrough infections might rise 10-fold from 1% to 2% to 10% to 20% (I'm making up numbers here, but you get the idea...), that still means 80% to 90% of fully vaxxed people will not catch COVID even as it spreads like wildfire during this wave.
More important, even if they do catch the virus, they are far less likely to get really sick, much less be hospitalized, much less die (nearly one American continues to die of COVID every minute, and this number is almost certain to rise even if omicron has much lower severity than delta simply due to the large number of people who will catch it).
So, to repeat: a) if you're not vaxxed, get vaxxed... and b) if you're not boosted, get boosted – RIGHT NOW!
Here's a good summary of the latest developments by Dr. Katelyn Jetelina, a blogger and assistant professor at the University of Texas Health Science Center at Houston: Omicron Update: Dec 17. Highlights:
Well, Omicron cases are growing really fast. Like explosive, skyrocketing, vertical growth fast. If we continue this rate of spread, I would venture to say that there is no modern day virus that has spread this fast and this far ever before.
We continue to see case growth in South Africa, although I'm convinced they'll hit their peak soon due to several indicators (like test positivity rate and acceleration slowing). While previous waves have averaged 2 months, omicron will hopefully result in a shorter wave due to high transmissibility and change of behavior...
In the United States, the latest (Dec. 14) projection is displayed below. Given CDC estimated 2.9% omicron cases on Dec. 11, which was up from 0.4% on Dec. 4, models suggest that omicron will start spiking case rates between Christmas and New Year's. On a national level, we will probably peak in the second week of January.
I do disagree with this graph hitting 1 million cases. We don't have the testing capacity to record this many cases. We will run out of tests, reagents, and plastic. Lab capacity is finite. We would hit a plateau in case reporting, while the "true" cases may continue to increase...
But high case loads from rapid replication and escaping antibodies is only half the story. It's essential that we remain out of the hospital. Immunity has positively and drastically impacted hospitalizations prior to Omicron. Below is a graph from the U.K. showing the fanning effect: cases differentiated from hospitalizations and deaths after vaccines were rolled out.
... We are seeing hospitalizations and deaths increase in South Africa, but they are at lower rates than before. In Gauteng – South Africa's epicenter– hospitalizations are about 45% than what they were for delta. Excess deaths are now gaining speed, but still much lower than before. On a national or global scale, a small percentage can add up quickly when we are talking about an incredibly fast moving virus.
Older adults
I am increasingly concerned about older adults. Earlier this week, the Kaiser Family Foundation released a report describing severe breakthrough cases in the United States. They found that more than two-thirds (69%) of breakthrough COVID-19 hospitalizations occurred among people ages 65 and older. Given that only 52% of Americans 65-plus have a booster, this population is going to have a lot of breakthrough cases. And I really hope they don't also end up at the hospital.
Former FDA commissioner Scott Gottlieb tweeted some good news from South Africa ("missing a lot of subclinical infection" means that many people who get infected have such mild symptoms that they don't even get tested):
Lastly, here's an insightful Twitter thread from scientist Trevor Bedford, which begins:
4) As you read this, my family and I are at JFK airport, about to board a nonstop 13-hour flight to Nairobi, Kenya to spend the holidays with my parents, sister, and nephew.
Unfortunately, my middle daughter can't come – as a recent college graduate, she hasn't earned enough vacation time – but we have two first-time visitors to Kenya joining us: my oldest daughter's boyfriend and my mom's 74-year-old sister, Dorothy.
She flew in from Phoenix on Wednesday and, since she hadn't been to New York City since 1988, I gave her a quick tour that included the Metropolitan Museum of Art, St. Patrick's Cathedral, the Rockefeller Center Christmas tree, a gorgeous sunset, and a ride on the Staten Island Ferry to see the Statue of Liberty (the best bargain in New York – it's free!):
(Dorothy was widowed earlier this year and is a real catch, so if you know any age-appropriate, nice single guys in Phoenix, let me know...)
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.