Rivian: Accelerating Into The Big Leagues (NASDAQ:RIVN) (2024)

While many investors become more pessimistic about the EV market, I think this decreasing demand is a temporary result of high production costs making it unable to enter the general consumer market but is still bullish in the long term. I’ve covered Rivian (NASDAQ:RIVN) multiple times, and last time, I spoke of its high potential and risk-reward potential. Now, I’m more confident than ever that Rivian can survive in the competitive auto industry.

Much Improvements

Last year, for the first time, Rivian was able to exceed its production and delivery goal set at the beginning of the year. Rivian guided a 50,000 production target in the beginning of the year, Rivian produced 57,232 vehicles that year. This is over a 135% YoY growth. At the same time, the company increased its revenue by 167% and was able to cut gross losses by almost $400 million compared to the same quarter last year despite producing and delivering more vehicles, proving that they have improved margins. In addition, Rivian was able to increase revenue per vehicle by 15% showing that demand remains high despite high interest rates. Overall, Rivian was able to improve gross profit by over $80,000 per vehicle.

For next year, Rivian expects to deliver the same amount of vehicles but improve its EBITDA to $(2,700) million in 2024 from $(3,981) million. They also aim to achieve “modest gross profit” in Q4. Stock still fell after earnings as a result of 13,972 in deliveries compared to 15,564 in Q3. This is the EV demand issue that has investors worried.

EV Demand

2023 was an interesting year for EV to say the least. In a year of historically high interest rate, the S&P 500 climbed 24%. In addition, auto companies, led by Tesla (TSLA), continued to slash EV prices. Still, the EV sector experienced a slowing growth and the market as a whole had less demand for EV, on average, EV prices went down 22% compared to a year ago.

While some can blame this on high interest rates, it does not fully explain the story. While EV do cost more than regular cars, programs such as the green auto loan makes financing an EV 25 - 100 basis points less than regular car loans. Along with lower EV prices, the decrease in demand does not correlate with increased costs. Instead, analysts’ say that the EV has fulfilled the market of early adopters and is struggling to enter the market of “mainstream buyers”. In short, EV is still not completely accepted by the general public, and is not a problem that could be solved with a matter of interest rates.

Instead, hybrids have experienced the best year in 2023 and are projected to do even better in 2024. This shows that consumers are willing to move from old-fashioned regular gas cars to alternative types of automobiles with less fuel cost and higher mileage range. Car companies still believe electric is where the market is moving. Ford CEO Jim Farley told investors "the journey on EVs is inevitable, in our eyes."

How Rivian Lines Up in the Market

Given I still maintain a positive outlook for the EV sector, now I shall explain why Rivian remains one of my few favorites to win the “EV startup war”.

It is no surprise that it is very difficult to start an EV start-up. Especially with Tesla and its sophisticated production line, new EV companies have no choice but to lose millions and billions keeping its vehicles competitive with Tesla. And I believe this period is coming to an end for Rivian.

Over the last year, Rivian improved its gross profit per car delivered by over $80,000 and is looking to reach positive gross profit by the end of 2024. As a result, the net loss for the company decreased by 1.3B to 5.4B YoY. In addition, Rivian poured more into its R&D in the 4th quarter compared to the same quarter before. This is a company that’s not afraid to continue deeply investing in the EV sector while its increased margins are a result of the aggressive investments it has made. This stands particularly impressive as many big auto companies' margins decreased during the same period, such as Tesla, YoY. For 2024, Rivian expects to continue to improve its EBITDA from $(3,981) million to $(2,700) million. To put the competitiveness of pricing of the EV sector into perspective, Ford Motor (F) lost 4.7B on EV sales last year, compared to 2.2B in 2022. This makes Rivian’s ability to quickly improve its margins all the more impressive to me.

I think the key to this success comes from that Rivian operates in mainly the truck market currently, which is still filled with early adopters. There are not many comparable vehicles to the R1T, and R1T remains competitive.

Currently, the R1T is still rated as the top electric pick-up truck by Car and Driver. And I believe with the right financial moves, there are big rewards ahead for Rivian.

Risks/Financial Trouble

The biggest reason why EV start-ups cannot really compete with the existing auto-industry is that unlike, for example, Ford, who can afford to take on billions of dollars of losses, start-ups have no other source of income to cover these expenses. As a result of competition, it is very difficult for EV to generate profit. Tesla stands as an exception in this case, as Tesla was allowed to build in an uncompetitive environment until mass production, by which time it already figured out how to reduce production costs. In 2017, when Tesla was still the only prominent EV automobile, the average cost per vehicle was $84,000, it was cut to $36,000 by 2022, and it continues to go down.

This significant improvement mainly comes from making the assembly line more automated, a method that only gives significant payback on investment after mass-production.

Rivian and other EV companies now operate in an environment where its production of goods cost is over twice that of Tesla, while Tesla is cutting its own vehicle prices. Analysts say that Rivian would have to raise its vehicle prices by $20,000 to “make the financials stack up”.

However, according to Rivian, it has already found an effective way to reduce the cost of goods and is expected to break-even within 4 quarters. I believe the first and toughest step of making a profitable EV company is already behind Rivian.

R2 and R3

Now, this is where Rivian leaves me puzzled. I thought I had optimistic views on Rivian being to improve its margins, yet it already unveils 2 vehicles of lower price ranges. Rivian is building a second production plant in Georgia, which should help continue its production and cost, but the numbers Rivian promises is puzzling. The new R2 is a midsize SUV that’s supposed to start at $45,000 while the R3 is a crossover that’s more compact and supposed to be even cheaper. This is a starting price that directly competes with the Tesla Model Y, which has a MSRP of $44,990. It troubles me to imagine that Rivian will be able to decrease its production price to compete with Tesla within 2 years, and I think it once again will be a vehicle sold at massive loss. On the reservation page, there is no option available for customization. In my opinion, this must be like the story of the model 3, where it advertised a starting price of $35,000 but actually had a MSRP of $46,440 when it arrived on the market.

This is not a dealbreaker for me as it shows the confidence the company has in its new production plant, all I’m saying is that the R2 and R3 are over-speculative and difficult to accurately include within the analysis.

Valuation-wise, Rivian is trading at its all-time low at 2.19 P/S, it traded at 6.4x just over a year ago despite significant under performance. For reference, Tesla currently trades at 5.63 P/S. While it is difficult to assess the proper value of Rivian due to its unpredictable future, in my eyes, Rivian has the potential to overcome a lot of its financial troubles within 2 years (before the R2) and now would be good as any to invest low.

Conclusion

While the market remains bearish on EV start-ups, I believe Rivian would have the best chance of “making it to the big leagues”. With its improved margins of $80,000 per vehicle, I believe a turn-around is in sight. In addition, it is beneficial that Rivian has started to target fixing its margins rather than producing more vehicles at a loss. Although I cannot say whether the stock has really hit its lowest, I remain bullish on the future of Rivian.

Li Eason