Where Will Rivian Stock Be In 5 Years? R2 Platform Is Key To Volume Ramp-Up
Contributor since 2012 / 10414 Followers
Summary:
- In the short term, higher-than-expected production volume is expected to be one of the key positive re-rating catalysts for Rivian.
- In 5 years’ time, Rivian should see a substantial ramp-up in volumes and an improvement in profitability thanks to its new R2 platform.
- I keep my Buy rating for RIVN unchanged, considering both short-term catalysts and long-term drivers.
Mario Tama
Elevator Pitch
I rate Rivian Automotive, Inc.’s (NASDAQ:RIVN) stock as a Buy.
My earlier update for Rivian written on February 23, 2023, discussed about the near term outlook for RIVN’s financial and share price performance.
With this latest article, I focus on Rivian’s reasonably good prospects for both the short term and the long run, which provide support for my Buy rating assigned to RIVN. On one hand, I identify catalysts that could possibly re-rate RIVN’s shares in 2023. On the other hand, I also take a longer term view and highlight my expectations of Rivian achieving significant volume growth and meaningful profit margin improvement with the R2 platform in the next 5 years.
RIVN Stock Key Metrics
The key metrics for Rivian are its recent stock price performance and the company’s fiscal 2023 production guidance.
Year-to-date in 2023, RIVN’s shares have fallen by -28.8%, while the S&P 500 went up by +8.0% during this period. In the same time frame, Rivian’s consensus forward next twelve months’ Enterprise Value-to-Revenue multiple more than halved from 1.01 times as of January 3, 2023, to 0.41 times at the end of the April 20, 2023, trading day as per S&P Capital IQ data. RIVN’s share price decline and valuation de-rating are most likely attributable to the company’s below expectations production guidance for this year.
Earlier in late February, Rivian guided that that the company’s production is expected to more than double from 24,337 units for 2022 to 50,000 units in 2023. Rivian’s 2023 production guidance appeared to be decent, but this turned out to be -20% below the market’s prior consensus forecast of 62,200 units. As a result of RIVN’s production guidance falling short of expectations, the Wall Street analysts have cut their respective top line estimates for Rivian aggressively; the sell-side’s consensus FY 2023 revenue projection for RIVN was lowered by -20.7% in the past three months. As such, it doesn’t come as a surprise that Rivian’s stock has performed poorly in recent times.
In the subsequent two sections of the current article, I identify potential catalysts for RIVN in the short term, and discuss if these catalysts are likely to be realized.
What Are Catalysts To Watch For?
Rivian is scheduled to report the company’s Q1 2023 financial results on May 9, 2023, after trading hours. RIVN’s management commentary at the first quarter results call, and the company’s other operating and financial disclosures in the future could potentially offer re-rating catalysts for the stock. Specifically, better-than-expected production volume and faster-than-expected gross margin breakeven in the near term could be the potential catalysts to watch out for.
What Is The Short-Term Prediction?
My short-term prediction is that the potential catalysts for Rivian mentioned in the preceding section are likely to be realized.
With regards to production, RIVN’s actual Q1 2023 production volume amounting to 9,395 units, as disclosed in an April 3, 2023, press release, beat the analysts’ consensus estimate of 8,752 units by +7%. At The Bank of America (BAC) Securities 2023 Global Automotive Summit Conference on April 4, 2023, Rivian noted that it expects to “move to more of a surplus position, whereby we’re building excess Enduro (electric motors) drive units” in 2H 2023 which translates into an “upside opportunity” for production volume this year. In other words, there is a good chance that RIVN could get around supply constraints and achieve above expectations production volume in 2023.
In terms of profitability, Rivian previously highlighted at the company’s Q4 2022 results briefing on February 28, 2023, its expectations of registering positive gross profit margins by FY 2024. RIVN indicated at the recent BAC Global Automotive Summit Conference in early April that “two-thirds of that overall (gross profit) bridge is driven by fixed cost leverage” or “having greater levels of volume.” This implies that if Rivian manages to produce vehicles at a faster than expected rate, the company’s path to positive gross profitability will also be shorter as a result of positive operating leverage.
Where Will Rivian Stock Be In 5 Years?
The success of the R2 platform will be the key factor that allows Rivian to reach an inflection point in terms of volume production in five years’ time.
In its FY 2022 10-K filing, RIVN highlighted its plans for “a second manufacturing facility near Atlanta, Georgia” which will accommodate its “next generation consumer vehicle platform, the R2.” Rivian’s Georgia facility is targeted for completion in 2026. I expect Rivian’s consumer vehicle volume to exceed 200,000 units in 2027, when RIVN benefits from a complete year’s worth of production at Georgia. Rivian’s long term goal is to achieve gross margin and EBITDA margins at the mid-twenties percentage and the mid-teens percentage levels, respectively. With the expected increase in RIVN’s production volume by 2027 driven by the new R2, my estimate is that Rivian can turn EBITDA positive by then and its gross margin in the year could reach the mid-teens percentage level.
There are three reasons why I think that Rivian’s new Georgia production facility and its R2 vehicle will be successful paving for the way for a significant volume ramp-up and profitability improvement in 5 years’ time.
Firstly, Rivian needs to expand its presence in new market segments to scale up, and the new Georgia facility offers this opportunity. RIVN had indicated at its prior Q4 2022 results call that the company’s “first mass market vehicle, the R2” will be manufactured at the Georgia facility. As a comparison, Rivian’s R1T vehicle model targeted at the premium market costs at least $73,000 for the cheapest variant as revealed at the recent April 2023 BAC investor event. Therefore, the new R2, which is expected to offer key features of R1 at a more attractive price level, should gain traction with consumers.
Secondly, RIVN is in a position to price the new R2 in a competitive manner without sacrificing too much on profitability. Rivian stressed at the BAC investor summit in early April that it is “building the unit economic model of R2 with a more normalized pricing environment in mind.” The company’s new R2 platform is expected to benefit from greater cost efficiency relating to the manufacturing of Enduro electric motors internally, the utilization of LFP (Lithium Iron Phosphate) battery packs, and leveraging on insights drawn from the prior R1 platform.
Thirdly, Rivian has previously guided at its fourth quarter results briefing that its $13.5 billion of cash and cash equivalents as of end-2022 can sustain its business operations till 2025. This gives RIVN time to wait for the capital markets to become more accommodating while it considers various funding options. Apart from a direct equity raise, Rivian has mentioned about growing “ABL (Asset-Backed Loans) capacity to think about structured finance solutions” and exploring “more debt solutions or equity-linked solutions” at the recent BAC conference as well.
Is RIVN Stock A Good Long-Term Investment?
I deem Rivian to be an attractive investment candidate for the long run which warrants a Buy rating for the stock. In my opinion, the new R2 platform should put RIVN in a good position to scale up and deliver better profitability in five years’ time.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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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