Rivian: EV Subsidies Are Ending (Rating Downgrade)
Contributor since 2023 / 3513 Followers
Summary:
- Rivian faces significant challenges as EV subsidies end, making it difficult to compete with established players like Tesla and Ford.
- Despite a recent 18.76% stock increase since my last coverage, Rivian’s Q3 earnings missed expectations, highlighting ongoing supply chain and demand issues.
- Volkswagen’s investment offers a lifeline, but it’s contingent on Rivian meeting production targets, which remains uncertain.
- I am downgrading Rivian to a sell due to reliance on subsidies, potential shareholder dilution, and a competitive market landscape.
Tasos Katopodis/Getty Images Entertainment
Investment Thesis
While Rivian’s (NASDAQ:RIVN) recent performance has beaten the market, I think the majority of the electric vehicle (EV) industry faces an uphill climb over the next 18 months as smaller EV companies adapt to a new political environment that will likely strip them of their EV subsidies.
Rivian’s stock has moved up 18.76% since my last analysis, but their Q3 earnings report failed to meet market expectations. Rivian’s management has reassured investors that the company will meet their 2024 delivery targets, but the automotive company still operates in a very competitive industry. With EV subsidies ending this will likely be a major setback. I personally am not sure how the company plans to compete against bigger companies like Tesla (TSLA) in an era where they have reached the plurality of market share at 48%. Tesla is now poised to benefit from the end of EV subsidies (smaller competitors who don’t have scale suffer from a less ideal pricing curve).
The subsidies have offered crucial support for emerging companies in the sector, especially for companies like Rivian, which have not yet reached the scale or profitability required to stand on their own in the EV market. The removal of these incentives will likely exacerbate challenges in terms of both cost structure and consumer demand.
This puts Rivian’s partnership with Volkswagen in the spotlight. While a potential boost to their long-term investment size from $5 billion to $5.8 billion is seen as a positive move by some analysts, this does not alter the fact that Rivian remains dependent on external capital and alliances to continue their growth trajectory. As EV subsidies fade, Rivian will unfortunately struggle to maintain momentum without clear market leadership. Keep in mind that the majority of Rivian’s proposed investment from Volkswagen is dependent on the company hitting certain production milestones (implied based on gross profit targets). I am skeptical they will.
With this, I am downgrading my view of Rivian’s stock from hold to sell. While their core EV technology and partnerships with large companies like Volkswagen look promising, subsidy reductions mean they are in a tough spot. I think the company has a steep climb from here.
Why I’m Doing Follow-Up Coverage
Rivian’s Q3 performance was a red flag for me, as I was fearing (and wrote about) in my preview analysis earlier this month. The company is grappling with supply chain issues and ongoing demand problems (as EV demand plateaus in the US), which have affected both the production side of the house and deliveries.
Despite securing a crucial $1 billion cash infusion from Volkswagen over the summer, future funding is performance-based, or contingent on the company meeting specific targets. Given their burn rate, which exceeds $1 billion per quarter, I’m concerned the EV maker may run low on funding before they scale. If we think about this last quarter (when the EV maker lost $1.1 billion), the cash infusion from Volkswagen bought them less than 3 months of runway.
The company’s performance in Q3 shows these ongoing struggles. Rivian missed Wall Street’s revenue expectations by $116 million.
The EV upstart’s disappointing results highlight their consistent supply chain disruptions and production delays, which have forced Rivian to lower their annual production forecast for the second time this year to between 47,000 and 49,000 vehicles.
Rivian’s prospects are tightly bound to the trajectory of the US EV subsidies that I mentioned before. These subsidies are facing a likely existential threat from the incoming Trump administration. The new administration is reportedly exploring plans to eliminate the $7,500 EV tax credit from the Biden administration’s Inflation Reduction Act. Any reduction in support would likely make it even harder for Rivian to compete against established automakers and survive in a market with thinning margins.
Therefore, Rivian’s reliance on external funding, especially from Volkswagen, becomes even riskier if the market conditions worsen under these potential policy changes (and less people buy their vehicles). This follow-up coverage is meant to show how Rivian is set to struggle under this new market regime.
EV Subsidies Are Ending
Boiling it all down, Rivian has to get profitable in order to be viable in this highly competitive EV market (the other larger players like Tesla, Ford (F), and General Motors (GM) all are profitable). Although Rivian’s management reiterated their delivery outlook of between 50,500 to 52,000 vehicles for 2024 on the Q3 call, the company is still far from achieving the critical mass needed for sustainable growth.
CFO Claire McDonough clarified during their earnings call that they are expecting a modest GAAP gross profit in Q4. While she remains optimistic for the year ahead, I still don’t think the EV upstart has what it takes to be long run sustainably profitable in its current form:
We don’t expect that every quarter in 2025 will be positive gross profit in its own right. Our target is to be positive for the year in its entirety. And so as we think about some of the relative impacts that we’ll have next year as a whole, some of that will be driven by the lumpiness of the recognition of our regulatory credits as well that are certainly an enabler of that path to positive gross profit in 2025 in aggregate.
To fuel this gross profit the EV maker needs 2 things: a large volume of vehicle sales, and two, a high enough selling price per vehicle. Personally, I am not sure they are anywhere near the volume they need in order to get GAAP net income profitable (not gross profit). On the selling price/vehicle side of the equation, Rivian is banking on average selling prices increasing. To me, this makes no sense when the tax credits that subsidize higher prices are ending.
The incoming Trump administration aims to cut the $7,500 electric vehicle tax credit. Rivian mentions that the “R1’s [are] one of the strongest market share players for flagship [EV] vehicles over $70,000.”
In my opinion, there are only so many consumers who can afford an EV over $70,000. Their new vehicle (the R2) which will be at $45,000 needs this $7,500 credit in order to entice buyers. Many of Rivian’s targeted buyers are inherently going to be first-time Rivian buyers (since the total volume to date has been far less than the major OEMs). This means the EV company needs incentives to get consumers to jump on a new brand, without the dealer network Americans have come to expect from their automakers, or local service shops to fix their vehicles.
Volkswagen’s investment in Rivian could help the automaker navigate this (and pick up a dealer network that is friendly to them), but this only works if Volkswagen continues to invest. More investment depends on production and delivery milestones. Rivian has been struggling to hit these milestones (hence their guidance cuts).
Without the buffer provided by subsidies, the company may struggle to meet the production goals needed to secure further investment from Volkswagen (and their distribution network).
Valuation
I believe EV credits are the heart of Rivian’s go-to market strategy (consumers tolerating higher selling prices). I don’t think the company should be worth as much as they currently are without them. The company’s forward price-to-sales ratio stands at 2.67, far higher than the sector median of 0.99
For a company whose growth prospects are tied to EV credits that are arguably in question, Rivian’s stock should ideally price in the odds that these credits don’t exist going forward.
The company has seen 14 downward EPS and 18 downward revenue revisions over the last 3 months.
With these more pessimistic assumptions, the company is not supposed to be profitable on an EPS basis till 2030. This is a long time to wait for investors. I think this means more shareholder dilution will come from here.
Given this, I think shares need to be repriced to reflect the risks. Shares should trade at the sector median price to sales ratio to reflect the risks of dilution (and delivery estimates failing to live up to expectations). This would mean a 62.92% downside from here for shares.
Bull Thesis
Despite President-elect Trump’s stance on EV subsidies, Rivian’s relationship with Volkswagen could still provide the EV upstart with access to an extensive distribution network through their US dealerships.
Volkswagen has committed to expanding their EV offerings to compete directly with Tesla in both the US and Europe so they can expand their EV portfolio. As I mentioned before, Rivian could get a crucial lifeline from this, particularly in markets where Volkswagen’s established sales and service infrastructure could drive consumer adoption of Rivian’s electric vehicles.
However, this partnership doesn’t mean Rivian’s stockholders will benefit. Volkswagen’s investments in Rivian come with conditions tied to Rivian meeting certain production and delivery targets. They already have had to cut production estimates for 2024, so the dilution effect of any future investors will likely be more pronounced.
While Volkswagen’s need for Rivian’s EVs could fuel potential growth, there’s just a high likelihood of highly dilutive investments. As I touched on before, the company is looking at roughly 5-6 more years of losses. Long periods of losses often mean unfavorable funding terms. Rivian shareholders likely don’t do well in these conditions.
Takeaway
Rivian’s Q3 performance shows their struggles in a highly competitive and evolving EV market.
And this is before subsidies the company has been reliant on face the chopping block with the incoming Trump administration. Unlike established players like Tesla and Ford, which have already reached critical mass in gas or EV production (and can subsidize new lines of vehicles), Rivian is still in the growth phase and lacks the scale to withstand a reduction of subsidies.
Volkswagen’s recent investments in Rivian provide a potential lifeline for the company, but it shows that Rivian remains heavily dependent on external funding to run its operations. These investments are conditioned on Rivian meeting specific production and delivery targets.
Rivian has to find a way to compete in a market where subsidies are fading. For now, I believe it’s unclear whether Rivian shareholders will benefit, especially in the face of 5-6 years of additional dilution for funding. I’m not sure if shareholders can win in this environment. For now, I believe shares are a sell.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. 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.
Noah Cox (main account author) is the managing partner of Noah’s Arc Capital Management. His views in this article are not necessarily reflective of the firms. Nothing contained in this note is intended as investment advice. It is solely for informational purposes. Invest at your own risk.
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