Rivian Q3 Deep Analysis: I Was Wrong… They Can Do It Alone (Rating Upgrade)

Summary:

• Rivian’s strong technology, expanding product portfolio, and growing demand make it a compelling long-term investment.
• The company has seen strong preorders for its R1T pickup and R1S SUV, indicating strong consumer interest.
• Rivian’s partnership with Amazon for electric delivery vans provides a massive growth opportunity beyond the initial order.
• With strong production pipeline, Rivian appears cheap on a price to sales ratio (assuming they can pull off production scaling).

Investment Thesis

On November 7th, Rivian (NASDAQ:RIVN) reported earnings after the bell that beat on both the top and bottom line. Despite the stock’s underperformance over the past year, the company’s strong technology, expanding product portfolio, and growing demand make it a compelling long-term investment. While I recently wrote on Rivian being a buy for just the acquisition potential, I now think this company can excel on their own.

Rivian represents an attractive long-term investment opportunity for several key reasons:

1. Rivian has seen very strong demand and preorders for its R1T pickup and R1S SUV, with over 114,000 reservations as of their latest update in November 2023; they are only expected to deliver 47% of this demand by year end, not including the new orders that have been placed. This indicates strong consumer interest in Rivian’s products even before much marketing spend. Rivian’s unique styling and performance features cater to luxury outdoor adventurers looking for an electric alternative. CEO RJ Scaringe addressed fears of Tesla’s Cybertruck taking away demand for Rivian products.

2. The company is rapidly increasing production capacity at its Illinois factory targeting a maximum annual rate of 150,000 vehicles. This ramp should allow Rivian to deliver any of its backlog and drive towards profitability as fixed costs are leveraged across more output. Higher volume is key to getting to economies of scale. Rivian now looks like they’ll be able to pull it off.

3. Rivian has huge growth potential in the commercial vehicle segment through its partnership with Amazon. Rivian recently dropped its exclusivity agreement and plans to open up its electric delivery van to other corporate customers starting in 2024 after initial pilot programs. This provides a massive incremental growth opportunity beyond the initial 100,000 van order from Amazon, which can be viewed as high assurance revenue for many years going forward (Q3 shareholder letter).

4. Rivian has developed robust proprietary technology and software capabilities, including its flexible skateboard platform that allows for multiple vehicle configurations. Rivian vehicles also feature sophisticated driver assistance systems and have the hardware for eventual autonomous driving. These in house engineering feats will allow them to be more nimble than smaller EV rivals that contract out design or manufacturing. Tesla (TSLA) has shown that vertical integration is key in the EV space. Rivian is following their playbook.

With unique products, expanding capabilities, and strengthening delivery fundamentals, Rivian appears poised to pull it off and be one of the winners in the EV space over the next decade. While EV growth is slowing, their better than expected Q3, strong delivery forecasts, and technology integration on the drivetrain should inspire confidence in investors. In the game of running a startup (especially before its profitable) confidence is what you need to inspire investors to hang on. I think they can do it. The stock is a strong buy. High risk, high reward.

Background

Founded in 2009, Rivian is an EV manufacturer based in Irvine, California. The company currently produces the R1T electric pickup truck and R1S electric SUV, which started customer deliveries in late 2021. Rivian also has a contract with Amazon to produce 100,000 electric delivery vans by 2030. With a vertically integrated model, Rivian designs and manufactures its own battery packs, electric motors, infotainment systems and other critical components.

Rivian has emerged as one of the more promising electric vehicle startups, with the potential to become a major force in the rapidly growing EV industry. After a blockbuster IPO in late 2021, Rivian has faced challenges with production ramp-up and macroeconomic headwinds.

Rivian stock has been on a rollercoaster year to date after heavy cash burn and an initial slow ramp up to production indicated that the company would need to tap the capital markets for more cash to run their operations. They confirmed this in October, stating they will tap the markets for a $1.5 billion convertible bond.

Q3 2023 Earnings Recap

Rivian reported mixed third quarter results on November 7, but showed important progress on key initiatives. In terms of key metrics, Rivian produced 16,304 vehicles in Q3, up 121% year-over-year. Deliveries reached 15,564, up 136% versus the prior year, which was the main component of the revenue growth to $1.3 billion (Q3 earnings transcript). However, Rivian posted a net loss of $1.37 billion compared to a $1.7 billion loss for the same period last year. Their adjusted EBITDA loss of $942 million for the quarter was derived from production costs remaining high, however at the same time last year this loss was recorded at $1.3 billion (Q3 shareholder letter). Rivian’s momentum is noticeable as they are making every move in the right direction. Rivian revenue of $1.34 billion topped street estimates of $1.31 billion. Adjusted loss of $1.19/share also beat estimates of a loss of $1.33/share.

Several highlights indicate Rivian is making solid progress increasing production, reducing costs, expanding infrastructure, and preparing for future growth. The company has ramped its year-to-date production at 39,691 vehicles, getting closer to its 54,000 year-end target. Only 14,309 vehicles are needed for production in order to meet their target, which I believe is exceedable based on the past couple quarters. Gross loss per vehicle improved by approximately $2,000, driven by greater manufacturing efficiency and parts cost reductions (Q3 earnings transcript).

The table below illustrates the amount Rivian loses per vehicle produced. Over the past five quarters there has been a gradual decrease in minimizing the loss per vehicle, which simply continues to move in the right direction. In Q3 of 2023, Rivian reported a $30,600 loss per vehicle, which depicted a major, 78% year-over-year decrease; a significant detail showing positive sequential movements.

	Q3 ’22	Q4 ’22	Q1 ’23	Q2 ’23	Q3 ’23
Rivian Loss Per Vehicle	$139,277	$124,162	$67,329	$32,594	$30,600

Click to enlarge

According to management, Rivian is on a trajectory to secure a positive gross profit by 2024, with analyst forecasts suggesting this milestone could be attained by the final quarter of that year, bolstered by an uptick in production volumes. This optimistic outlook is supported by promising electric vehicle sales figures emerging from California, Rivian’s home base, throughout the initial three quarters of 2023.

In the same timeframe, California saw registrations of 291,518 new Battery Electric Vehicles (BEVs). Despite Tesla accounting for the bulk of these registrations, Rivian is notable for having the largest annual growth in registrations, which soared by 176.8% to a total of 6,740 vehicles. This is key because Rivian is outpacing the market for growth, dispelling concerns about EV growth slowing. It may be for other firms but not for Rivian.

Although Rivian has encountered considerable expenditures, there seems to be a more evident path for it to achieve positive cash flow. Conversely, Lucid (LCID) reported in its second quarter earnings conversation a cash burn rate of nearly $1 billion and in its recent third quarter reported a $631 million loss, which equates to losing nearly $430,000 per car sold in Q3 alone. Ultimately, Rivian’s consistent advancements in production efficiency, cost management, and growth preparation, combined with a robust increase in market presence, position it with compelling upside due to an opportune path towards profitability.

Outlook

Management continues to provide positive guidance for the company. Rivian, yet again, raised its delivery estimates by another 2,000 vehicles and is guiding toward a total estimate of 54,000 vehicles produced by the end of the year (Q3 earnings transcript). This is an economies of scale game meaning delivery targets going up is encouraging. The reduction in losses per vehicle is largely due to them being able to hit economies of scale. Further scale will help this more.

Hitting this target could be an important milestone that demonstrates Rivian’s ramp is on schedule. Rivian is rumored to be introducing a high-end “Ascent” trim for its R1T truck and R1S SUV in 2024, featuring aesthetic and aerodynamic improvements and a dual-motor setup rumored to exceed 1,000 horsepower, which has reportedly led to the front wheels lifting during tests.

Rivian is expanding its portfolio with the launch of its new R2 platform, a smaller and more affordable SUV starting production in 2026 at its new facility. The convertible note raised in October is setting a solid stage for the upcoming initiation of the Georgia plant’s construction, projected for early next year (Q3 earnings transcript). This will open Rivian up to a wider consumer base and higher volume production.

An important recent development was Rivian dropping its exclusivity deal with Amazon for its electric delivery vans. Previously, Rivian was restricted from selling vans to other customers until Amazon received its full 100,000 order allocation. However, Rivian now plans to open up its commercial van platform to other corporate fleets starting in 2024 after initial pilot programs (Q3 shareholder letter). Landing additional major fleet customers beyond Amazon would represent a huge upside catalyst for Rivian’s production volumes and revenue.

Rivian’s vehicles have been rated with positive reviews and the company’s delivery vans appear well-suited for last-mile delivery applications; this provides a massive incremental growth opportunity. Opening up to new customers also reduces Rivian’s reliance on just Amazon. Given the hot market for electric commercial vehicles, Rivian could rapidly ink deals with numerous logistics companies and retailers in the next few years. With every secured contract, I believe the stock will only push higher.

Importantly, Rivian has identified major cost savings in its bill of materials and plans redesigns in 2024 that management expects will substantially reduce production costs. This would help drive the company to its ~25% gross margin target (Q3 earnings transcript).

Risks From the Cybertruck & Higher R&D

A main concern for Rivian is directed at its competitor Tesla, where I believe in the consumer pickup and SUV segments, Rivian’s products present compelling alternatives to the category leader Tesla. Rivian’s R1T electric truck is one of the only upcoming viable competitors to Tesla’s delayed Cybertruck.

CEO of Rivian, RJ Scaringe, noted in regards to the Cybertruck:

Personally, it’s not something I would buy, he said. “But I think it’s cool that it exists. I think it’s good that there’s a diversity of products. I think it’s good that there’s cool choices. I’m a car enthusiast at heart. I like to see people putting different things in the world. – Business Insider Report

Having another player in these categories will benefit consumers and accelerate overall EV adoption. Tesla cannot and will not be the only EV giant; there must be a Pepsi to rival Coke. Rivian’s products appeal to a demographic seeking eco-friendly rugged adventure vehicles, differentiated from Tesla’s more futuristic styling and branding.

RJ Scaringe also added:

If you were to think of, like, the Venn diagrams of [Rivian R1T and Tesla Cybertruck] customers, there’s probably not a lot of overlap. – INSIDE EVs

Moreover, it appears that each model caters to distinct use cases. The Cybertruck, with its lack of a conventional truck bed, diverges from traditional design, while the R1T does not offer the bulletproof durability that the Cybertruck boasts. Despite each having ‘truck’ in their name, the aesthetics are noticeably different. Consequently, while they both are indeed competing within the expansive truck market, they appeal to unique customer preferences and requirements.

However, one of the only negatives in Rivian’s earnings report was an increase in R&D expenditures, which I think is a great circumstance to be in. Additionally, Rivian’s management team has deep auto manufacturing expertise from Toyota, Tesla and other OEMs. The company also has strong financial backing, including Amazon (the largest shareholder), providing resources to fuel growth. Rivian is rapidly expanding production capacity, which should allow it to capitalize on the massive market opportunities if executed properly.

Engineering Platform and In-House Capabilities Are The Edge

Like I mentioned in the Q3 preview article I wrote last month, Rivian has a strong supply chain and in house design capabilities. This is championed by their CEO, RJ Scaringe, who has a PhD in Mechanical Engineering from MIT. This form of technical leadership at the top is a key advantage. He understands the product, manufacturing and supply chain acutely meaning he can iterate quickly. Time is of the essence here.

Unlike some EV startups, Rivian has designed and engineered its vehicles completely in-house rather than using an existing car platform or outsourced manufacturing. This gives Rivian full control over the technology and a chance to truly differentiate.

A key enabler is Rivian’s “skateboard” architecture which separates critical components like the battery pack, electric motors, and control systems into a modular platform. This flexible design will allow Rivian to efficiently launch new models like the upcoming R2 SUV that share the same core architecture.

Skateboard platforms are common in the EV industry. But developing its own in-house should give Rivian advantages in optimizing performance and rapidly scaling to new models. The company can also customize its vehicles with unique features suited for Rivian’s brand and target luxury adventurer customer segment.

Financials & Valuation

With around $10.5 billion in cash currently (including the convertible note), Rivian maintains a solid balance sheet to fund its growth roadmap. Management is targeting positive EBITDA by 2025, along with 25%+ gross margins at scale.

Based on 2026 revenue potentially reaching $15 billion and using a conservative 1.5x price/sales multiple, Rivian merits a valuation of around $22.5 billion. This represents significant upside from the current $17 billion market capitalization for nearly 30% potential returns.

Under more bullish scenarios, Rivian could hit 500,000 units of production and $50 billion+ in sales by 2030. A valuation exceeding $100 billion would be justified in this scenario. For reference, Tesla currently trades at 7.26 forward sales. A 2-3x price to sales ratio for an EV maker that (in this scenario) is selling large volumes is reasonable compared to Tesla.

What I’ll be Watching Going Forward (To Keep it a Strong Buy):

If Rivian continues reducing operating expenses as guided, it will move closer to positive cash flow and reduce its cash burn rate. Further updates on Rivian’s next-gen R2 vehicle and any announcements about overseas expansion would also boost investor confidence in the long-term trajectory.

Rivian has projected it will reach EBITDA breakeven by late 2024. Hitting this aggressive timeline would be incredibly fast progress for a new auto manufacturer. Profitability is likely to be a watershed moment for the stock.

Longer-term, if execution goes smoothly, Rivian has potential to deliver 500,000+ vehicles annually by the end of the decade. The company also has massive room to grow software and services revenue over time. It’s reasonable to see Rivian ultimately reaching a valuation above $100 billion based on its share of the broad EV market.

The Bottom Line

In summary, Rivian represents an intriguing electric vehicle investment with massive long-term potential. Despite some near-term uncertainty, Rivian’s strong technology, expanding lineup, and large addressable markets make it a leading contender to become a dominant EV manufacturer over the next decade.

For investors with a multi-year time horizon, Rivian stock offers an appealing opportunity to gain exposure to the future of sustainable transport at an attractive valuation. For short-term investors, there is great risk and reward due to potential catalysts in this volatile industry. As production ramps up and new models launch, Rivian has visible upside to over $100 per share (and a $100 billion market cap). A “Strong Buy” rating is warranted based assuming Rivian can continue moving in the right direction.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIVN 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 (account author) is the Co-Managing partner of Noahs' 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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