Rivian: Great New Trucks But Concerning Economics
Contributor since 2012 / 4057 Followers
Summary:
- J.D. Power says the Rivian R1T truck ranks highest overall and highest in the premium BEV segment in owner satisfaction with a score of 794.
- The 2022 gross profit was a frightening $(3,123) million on revenue of $1,658 million.
- Despite substantial cash on the balance sheet, the cash flow burn is distressing.
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Introduction
My thesis is that Rivian (NASDAQ:RIVN) builds great new trucks but their economics are concerning.
Building Great New Trucks
Truck buyers will be switching from ICE vehicles to battery electric vehicles (“BEVs”) in the decades ahead and I believe the Tesla (TSLA) Cybertruck looks a bit strange to many prospective buyers such that there is a wide opening for competitors like Rivian. Despite the fact that it has a short pickup bed, the Rivian R1T truck looks more conventional and I believe it will continue to be appealing to buyers. Showing that current R1T owners are happy, it has earned the J.D. Power award for the most satisfying ownership experience among premium BEVs:
In its first year of eligibility, the Rivian R1T ranks highest overall with a satisfaction score of 794 (on a 1,000-point scale). Owners have high levels of satisfaction with the driving enjoyment and interior/exterior styling factors.
Rivian and Ford (F) have been building electric trucks while others are still in the planning stages. CleanTechnica reports that Ford sold 15,617 Electric F-150 Lightnings in 2022. Rivian’s 4Q22 production & delivery release says they produced 24,337 vehicles in 2022 and delivered 20,332. Rivian released their 1Q23 production numbers saying they produced 9,395 vehicles at their Normal, Illinois facility and they delivered 7,946 vehicles. They believe things are on track for annual production of 50,000 vehicles in 2023. It isn’t clear how many of these vehicles are the R1T pickup truck as opposed to the R1S SUV and the Amazon (AMZN) delivery vans. These numbers are small relative to global BEV sales but they are crucial as the US pickup market starts shifting to electric. The AP reported on April 4th that GM (GM) sold 20,670 BEVs in 1Q23 but 19,700 of these were Bolts. When it comes to electric trucks and SUVs, GM only sold 2 GMC Hummer EV pickups and 968 Cadillac Lyriq electric SUVs in 1Q23.
Concerning Economics
The 2022 10-K shows operating income, gross profit and revenue of $(6,856) million, $(3,123) million and $1,658 million, respectively. Tesla was at a similar delivery and revenue level in 2013 when they delivered 22,477 vehicles and these income statement figures were $(61) million, $456 million and $1,998 million, respectively. It is disturbing that Tesla already had a positive gross profit at this stage while a positive gross profit seems to be years away for Rivian.
Rivian’s operating cash flow for 2022 was $(5,052) million and capex was $(1,369) million. In some respects, I treat the $987 million in stock-based compensation like a cash expense such that my adjusted free cash flow (“FCF”) figure is a terrifying $(7,408) million.
Valuation
Given the frightening extent of the negative gross margin and the way Rivian is burning through cash, it is easy to see why some argue that the market cap should be close to zero. There are, however, some bullish arguments if Rivian can get the cash burn under control soon.
CFO Claire McDonough talked about the first-mover advantages at the April 2023 BofA (BAC) Automotive Conference:
Our best advocates are owners, and those are our organic viral salespeople out in the world, giving many more test drives than we could give as a company.
The US truck market has attractive economics where Ford and Rivian are positioning themselves for BEV market share. Citing U of M Flint campus professor Mark Perry, the Washington Post explained that Ford, GM and Stellantis (STLA) have done well in the US truck market for decades, in part because of the chicken tax:
Of course, Toyota and Nissan and other foreign-based automakers build trucks here to avoid the 25 percent chicken tax, but the domestic trucks like the Ford F-Series, Chevy Silverado and Ram pickup have maintained a dominant market share versus the trucks from foreign automakers, which I think is a direct result of the 25 percent tariff that has protected [them] from foreign-built trucks since the 1960s.
If Rivian isn’t acquired then they might run out of cash. Seeing as Ford has sold a majority of their Rivian shares, I don’t think they will be an acquirer. I can see a world where GM or Stellantis acquires Rivian if things can be sorted with Amazon. It’s very difficult to come up with a valuation range for Rivian given their negative gross profit and this range differs from what retail investors would pay as opposed to what a legacy OEM like GM might pay. Given the wide array of possible outcomes, I don’t want to get in arguments with people who have a market cap valuation range of $0 to $15 billion.
Per the 2022 10-K, there were 927,090,013 shares as of February 14th composed of 919,265,013 A shares plus 7,825,000 B shares such that the market cap is $13.4 billion based on the April 6th share price of $14.47. The enterprise value is $3.6 billion which is $9,756 million less than the market cap due to $1,231 million in long-term debt plus $311 million in long-term leases plus $270 million in short-term leases less $11,568 million in cash and equivalents. Cash is what keeps the enterprise value below the market cap right now but Rivian is burning through cash so the enterprise value could go up rapidly in the quarters ahead even if the market cap stays the same! This makes the valuation conversation fairly complicated. Knowing that the cash is disappearing, I can understand why some investors say the market cap is too high.
Rivian is not a buy for me given the concerning economics but I can’t say they are a sell either, especially if there is a decent chance that they get acquired at a premium in the near future.
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