Rivian: Very Aggressive Targets

Summary:

• Rivian’s CFO expects profitability in back half of 2024.
• R1 platform growth seems possible, but R2 seems high.
• Analysts continue to cut their price targets.

One of the more disappointing reports of the last earnings season came from Rivian (NASDAQ:RIVN). The electric vehicle maker missed street revenue estimates for Q4 and provided initial 2023 production guidance that was a bit disappointing. Last week, the company’s CFO laid out a series of targets for the coming years, and it seems that some of these goals may be overly optimistic.

As a reminder, management stated that production this year will be 50,000 vehicles. Rivian says that its gross margin dollar losses should decrease as it continues to ramp production, and expects to reach positive gross profits sometime next year. The adjusted EBITDA loss is expected to improve by about $900 million this year, but still come in well above $4 billion. Recently, CFO Claire Rauh McDonough spoke at the Bank of America Securities Summit, laying out a series of targets for the upcoming years:

• Rivian is on track to become profitable by the second half of 2024.
• Company aims to build 85,000 R1 vehicles next year.
• Rivian anticipates a start of production for the R2 platform as early as 2025-2026, with the aim to manufacture 200,000 R2 vehicles during 2026 and 400,000 units after that.
• R2 price point to be in the neighborhood of the Tesla (TSLA) Model Y.

Let me start with R1 production as this target seems the most plausible. If the company can get to 50k units this year, or even its internal goal that’s more than 20% higher than that, the 85k number for next year seems rather doable, barring any major issues. Supply chain issues have been the major problem to date, with the company’s Illinois plant having a current annual capacity maximum of 150,000 units per year. Eventually, that capacity could be increased to 200,000, but like many electric vehicle startups, that kind of growth is not expected anytime soon.

The second item that’s somewhat reasonable is the potential price point. The InsideEvs article states that Rivian wants the base R2 trim to rival the Tesla Model Y at $40,000, but that Tesla currently starts around $50,000. Rivian likely wants to be at an attractive price point that can compete with the Tesla Cybertruck and the Ford (F) F-150 Lightning, both of which were initially announced to have roughly $40,000 starting points. Ford has been raising its EV truck prices due to inflation costs in recent quarters, while we have not gotten updated pricing on the Cybertruck yet, which is expected to launch later this year. The higher volume R2 platform should allow for a lower cost base, which will help Rivian bring a more affordable vehicle to market.

However, it’s the other two goals / targets I really wonder about. First, let me start with the profitability one. In Q4 2022, Rivian reported revenues of $663 million and a GAAP loss of more than $1.7 billion. I’m guessing that the CFO is talking about potential non-GAAP profitability in late 2024 or maybe only gross profitability, as even the most bullish analysts out there are calling for significant losses through the end of next year and into 2025.

To illustrate the point on GAAP losses, for example, the street average for Q4 2024 Rivian revenues is $2.70 billion currently. Let’s assume that the company gets its gross margins to 20%, which is roughly where Tesla is expected to be currently after tremendous price cuts. That itself would be a tremendous result from Rivian’s negative 151% gross margin figure that was reported in Q4 2022, which is why I think the comment last week may only have been referencing gross profitability. The InsideEvs article and title only says “profitability,” which probably gives the wrong impression here.

Even at that 20% gross margin level, it would only allow for $540 million in other expenses, and Rivian operating costs were around $800 million in Q4 2022. It’s hard to see the company generating $2 billion in additional revenues while cutting its operating expenses by roughly a third. Non-GAAP profitability could be a different story if you’re excluding stock-based compensation in your calculations, but that’s still a real expense that investors are facing because it is resulting in ongoing dilution by the quarter.

The second thing that seems questionable is producing 200,000 R2 vehicles in 2026. Production may not even start until that year, so we’re talking about a massive ramp. All it takes is one supplier issue or a tiny quality problem to stop production for days or weeks at a time. The R2 platform is designed for higher volume manufacturing, so the production ramp should go smoother than the R1 ramp is currently. However, 200k units in potentially the first year seems like it would take another worldly effort given the uneven history of EV production starts that we’ve seen lately.

As for Rivian shares, they currently sit a little over $14, which is well off its all-time high and just a stone’s throw from its public trading low. The average price target on the street is currently more than $30, so analysts see shares more than doubling from here. However, that average valuation has come down by more than $6 just since my previous article a month and a half ago, and let’s not forget that the street saw this name as worth around $140 when it went public.

In the end, Rivian’s CFO comments from last week suggest the company is expecting some dramatic growth in the coming years. While a couple of these goals seem doable at this point, history suggests that late 2024 profitability (unless it’s just gross profits) and the 2026 R2 plan may be a bit of a stretch. Given how many names in the electric vehicle space have disappointed in recent years when targeting such lofty goals, I would have rather seen a bit more conservatism from the company recently. Setting the bar this high puts even more pressure on Rivian to execute, and could lead to more losses for investors if these targets don’t come to fruition.

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