Rivian: I’m Willing To Bet On This Dip; Initiating Coverage At Buy

Summary:

• Rivian is a smaller player in the EV market compared to Tesla, but at only 7% of current U.S. vehicle sales, the EV market is large enough for multiple players.
• The company is ramping up production of its more profitable R1S model, while still also delivering its enterprise delivery vehicles.
• Rivian’s main challenge is scaling production and improving gross margins, but it has made progress and aims to achieve positive gross profits in 2024.
• The stock trades at roughly half of Tesla’s revenue multiple.

One of the things I’ve repeated throughout this year is that the high interest-rate environment is not the right time to invest in speculative plays. At face value, Rivian (NASDAQ:RIVN) looks everything like pure speculation: a heavily unprofitable, second-tier EV vendor that pales in comparison to its giant rival Tesla (TSLA).

But in peeking underneath the proverbial hood since Rivian’s recent tumble from July highs near $30, what I’ve found is a vibrant business with a solid future. I’ll cut to the chase here: I’m bullish on Rivian and am actively looking for a buying opportunity in this stock as it continues to dip.

Rivian may be a smaller player, but it’s a big market

One of the main complaints about Rivian is that it’s no Tesla. This is true: no company stands close to the EV giant’s metrics. For some pure sizing, let’s do a quick compare of Tesla versus Rivian:

• Tesla produced 480k vehicles in Q2; Rivian produced 14k (Tesla production at 34x Rivian’s scale)
• Tesla generated $24.9 billion in revenue in Q2; Rivian did $1.1 billion (Tesla’s revenue is 23x greater than Rivian’s)
• Tesla’s gross margin in Q2 was 18%, whereas Rivian’s was -37%

To use the word “underdog” here may not even do the full comparison justice. But to get onboard the Rivian story, you have to understand where EVs are in the first place. In the first quarter of 2023, electric vehicles claimed a record-high of only 7% of total U.S. auto sales. Within that, of course, Tesla is dominant with over 50% of market share.

But with over 15 million in annual light vehicle sales in the U.S. alone, and with EVs still only occupying a small position in that market (with secular tailwinds such as California’s ban on gas-powered car sales by 2035), Rivian doesn’t need to beat Tesla to be successful – it’s a large enough market for many players!

The Rivian lineup: this company doesn’t have a demand problem

First, let’s get a quick grounding on Rivian’s slate of vehicles.

The R1T is Rivian’s first vehicle, a pickup truck. The company’s base model now starts at $73,000:

The R1S, meanwhile, features a similar design as an SUV, starting at $78,000:

Both are significantly more expensive than Tesla’s entry models 3 and Y, which start at roughly $40k and $48k, respectively; though they are in-line with a Tesla Model S which now starts at $71k. Rivian is planning an entry-level version of its vehicles (similar to Tesla’s Model 3) to launch in 2026, branded “R2”.

The most promising of Rivian’s products, however, is its commercial delivery van. In 2019, as part of Amazon’s carbon pledge, the company committed to ordering 100,000 vans from Rivian. Roughly 5,000 vehicles under this agreement have been shipped and are on the road in major cities. After ordering a bare minimum of 10,000 vehicles from Rivian this year, however, Rivian is seeking to terminate the exclusivity pledge in its Rivian is seeking to terminate the exclusivity pledge in its agreement.

Nevertheless, the scale of Amazon’s initial promise plus Rivian’s confidence in attaining new buyers demonstrates how large the company can be at scale.

Gross margin scaling

Rivian’s issue isn’t demand: it has a clear backlog of enterprise demand and consumer vehicles often take longer than a month to ship (in contrast to Tesla, where deliveries are finally starting to catch up to production and the company has had to make a series of high-profile price cuts to stimulate demand in regions like China). The company’s core mission right now is to scale production and lift its gross margin profile.

As shown in the chart above, Rivian has made tremendous progress in scaling gross margins to -37% in its most recent quarter, versus -81% in Q1. Production has also more than tripled from the year-ago levels, and delivery units are keeping pace with production, indicating again that the company’s core constraint is manufacturing. The company has guided to reaching positive gross profits in 2024.

Mix is also an important driver of increasing gross margins. In Q2, the company reported that 70% of its consumer vehicle production was the R1S model, the first time that R1S production outstripped R1T – which is significant as R1S carries a higher gross margin.

Cost takedowns associated with scale, needless to say, also play a huge part here. Per CFO Claire McDonough’s remarks on the recent Q2 earnings call:

During the second quarter, we improved our gross profit per vehicle by approximately $35,000 as compared to the first quarter of 2023, representing a growth margin improvement of over 4400 basis points. The primary drivers include fixed cost leverage, the change in LCNRV inventory write downs and losses on firm purchase commitments, material cost reduction and increased revenue per vehicle delivered.

Now going deeper into the material cost reduction drivers, after a full quarter of EDV production with the introduction of the LFP battery pack and our in-house Enduro Drive unit, we are now seeing a 35% reduction in material costs for our vans as compared to Q4 2022. Concurrently, we’ve seen and continue to see strong progress on our R1 material cost reduction through commercial cost down efforts and a reduction in short-term premiums.”

Ample liquidity

Time to scale is what Rivian needs to be successful: but of course, it needs the resources to get there.

Fortunately, the company has $10.2 billion of cash and short-term investments on its most recent balance sheet; after netting off $2.7 billion of debt, its net cash position is $7.5 billion.

This compares to an FCF burn rate of about ~$1.5 billion per quarter, which is down y/y aided by two rounds of layoffs.

Nevertheless, we note that the company’s cash is enough to support nearly two years of operations at its current burn rate – and certainly enough to cross Rivian through FY24 when it expects gross margins to tilt positive.

Valuation and key takeaways

Interesting to note is that Rivian trades at a cheaper valuation relative to Tesla: while Tesla trades at nearly 8x revenue, Rivian trades closer to 3x revenue. The spread has widened this year, where Tesla’s stock has more than doubled YTD while Rivian’s has grown only 30% – reflecting less confidence in the former’s ability to execute.

Considering the relative valuation cushion here, however, as well as the prominence of the Rivian-Amazon deal and the fact that Rivian has not yet seen the benefits of launching a mass-consumer model, I’m bullish on Rivian’s prospects and am content to stake a small position on this stock during the current dip.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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