Rivian Q4: I Think There Is A Silver Lining
Contributor since 2023 / 975 Followers
Summary:
- Rivian’s latest earnings call outlines strategic maneuvers for future growth and profitability despite near-term underperformance and lower production guidance for 2024.
- The launch of the R2 model and a renewed focus on cost discipline create a strong foundation for Rivian’s long-term success in the EV industry.
- Despite lower guidance, Rivian remains a compelling investment opportunity with disciplined foresight and a clear path toward gross profitability.
PATRICK T. FALLON/AFP via Getty Images
Investment Thesis
In the rapidly evolving electric vehicle (EV) industry, I believe Rivian’s (NASDAQ:RIVN) strategic maneuvers, as outlined in its latest earnings call, articulate a firm foundation for future growth and profitability despite their near term underperformance and lower than expected production guidance for 2024.
I believe a new key to Rivian’s investment thesis is not only the launch of the R2 model, poised to significantly broaden Rivian’s market appeal, but also a renewed focus on cost discipline. This, combined with the commercial segment which has shown higher margins, creates strong foundations for the EV startup to build on from here.
I still believe the company stands out as a compelling investment opportunity despite the lower guidance. The combination of disciplined foresight, operational resilience, and a clear path towards gross profitability solidifies my view of maintaining Rivian as a strong buy in the dynamic EV sector. The opportunity has become more asymmetric in my opinion.
Combined Background & Earnings Recap
Rivian’s Q4 2023 report paints a picture of a company that finished 2023 strong from a revenue standpoint, but is in need of a retool & regroup to succeed in 2024. Last year saw Rivian more than double its production and deliveries compared to the previous year, surpassing their initial production guidance by over 7,000 vehicles (original estimates were for 50,000 vehicles) (Q4 Conference call).
Despite the challenges presented by ramping production and introducing new technologies across multiple vehicle platforms, the company’s team gained valuable experience that I think will create more cost savings in 2024. This experience is foundational for their 2024 plan. In 2023, Rivian achieved significant efficiency improvements, with gross profit per vehicle improving by approximately $81,000 compared to the fourth quarter of 2022.
Financially, Rivian’s adjusted operating expenses for the fourth quarter stood at $706 million, with full-year expenses reaching $2.7 billion, a growth of 2.5% from 2022. This increase came despite the production and delivery volumes more than doubling.
EPS loss of $1.36/share missed estimates of a loss of $1.32 a share by $0.04. Revenue of $1.32 billion beat estimates compiled by Seeking Alpha by $54 million. In light of continued losses, the company is now taking proactive steps to be even more financially disciplined, reducing their salaried employees by approximately 10% along with a limited number of non-manufacturing hourly employees.
Rivian’s adjusted EBITDA for the quarter was negative $1.1 billion, and for the full year, it was just under their guidance of negative $4 billion. In terms of production, 17,541 vehicles were produced and 13,972 vehicles were delivered in the fourth quarter, contributing to the $1.32 billion revenue figure. This included $39 million from the sale of regulatory credits, a figure expected to vary quarter-to-quarter.
For the full year 2023, Rivian produced 57,232 vehicles, significantly above the initial guidance of 50,000 vehicles and more than double the 2022 production. However, the total gross profit for the quarter was negative $606 million, driven by the gross profit per vehicle that was delivered hovering in the approximately negative $43,000 range.
Silver Lining: Better Margins with Commercial Vehicles, Focus on Costs
Like I mentioned before, Rivian’s commercial vehicles, especially those produced for Amazon, have exhibited improved margins, largely due to lower material costs stemming from technology changes made in 2023. In the fourth quarter of 2023, the proportion of total revenue attributed to Amazon was 8%, a decrease from 30% in the third quarter of 2023. This reduction in deliveries negatively impacted Rivian’s gross margin due to the lower material costs, and higher margins of commercial vans.
Additionally, changes in Lower of Cost or Net Realizable Value (LCNRV) and losses on firm purchase commitments positively impacted Rivian’s fourth-quarter results by $7 million, a significant improvement from the $106 million impact in the third quarter of 2023. This on its own represents a difference of approximately $6,300 per delivered unit on a quarter sequential basis. The cost savings per vehicle are adding up.
Outlook for Rivian
I believe this part of the earnings report is what drove their stock down over 25% on Thursday.
Rivian’s outlook for 2024 emphasizes a focus on greater cost efficiency and a production target of 57,000 vehicles for the year, with an anticipated growth in consumer and commercial vehicle deliveries by low-single digits compared to 2023. However, for the first quarter of 2024, due to changes in the supply chain and the introduction of new materials, Rivian expects to gate just ~13,500 units. This figure is about 10% to 15% below the fourth quarter of 2023 deliveries, acknowledging that there might be additional vehicles built but not gated as they await updated parts expected in April (Q4 Earnings Call).
Analysts had been expecting the company to say they will produce 80,000 vehicles in 2024.
To make the bold adjustments for the much anticipated R2 lineup debuting on March 7th and to get costs under control, Rivian plans to shut down both consumer and commercial lines at their plant for several weeks in the second quarter to introduce cost-saving vehicle technologies. Rivian, by undergoing this, is expected to significantly reduce their material costs and position the EV company for a much-improved margin profile by the end of 2024. Management feels confident that these new supply chain changes, while impacting near-term production, will position Rivian to have better margins and be more competitive over the long term. For 2024, Rivian expects EBITDA to be negative $2.7 billion, as they continue to build out their go-to-market infrastructure and develop the R2, while also optimizing costs through the integration of new engineering technology and design changes, negotiated supplier cost downs, and a more efficient operating expense structure. For example, about 35% of Rivian’s path to improved efficiency in 2024 will come from enhancing production facility operations (Q4 Earnings Call).
Rivian remains confident that their cash, cash equivalents, and short-term investments can fund operations through 2025. The company aims to maintain a strong balance sheet by continuing to drive cost efficiencies, improve vehicle unit economics, and opportunistically evaluate a variety of capital markets available to them.
Over the long term, Rivian continues to target approximately 25% gross margin, high-teens adjusted EBITDA margin, and approximately 10% free cash flow margin, demonstrating their commitment to a sustainable and profitable future.
R2 Will be Big
The Rivian R2, set for a full reveal in early 2024 and launched in 2026, is a key part of Rivian’s strategy to offer more affordable EV options. Priced between $40,000 and $60,000, the R2 aims to be more accessible to a wider customer base. It’s expected to qualify for the full $7,500 EV tax credit, potentially bringing its starting price down to around $32,500. The R2 model, including variants like the R2S, is anticipated to compete with vehicles like the Tesla Model Y, Chevy Blazer EV, and Ford Mustang Mach-E. Rivian’s upcoming Georgia factory, dedicated to the R2 line, will initially have an annual production capacity of 200,000 units, possibly doubling in the future. This move represents Rivian’s effort to broaden its market reach and appeal to a more diverse customer base by addressing cost concerns and leveraging federal EV credits.
Valuation (And How This Has Evolved From My Last Report)
While I think the company has gotten smart about managing expenses, the stock is down 37.76% since I first started writing on Rivian stock in October 2023.
Rivian stock trades at just 2.23 times forward sales. This price to sales multiple is down from my last writeup on Rivian in December when the stock traded at 5.14 times forward sales, and still below Tesla (TSLA) forward price to sales of 5.67.
At the time, I believed that the stock had 88.5% upside from the then share price of $23.47/share. While the stock has significantly slumped since the last time I covered it, I believe that the upside remains the same. With this, I still think the stock still has 88.5% upside from 23.47/share ($44.24/share). At today’s prices, this implies ~430% upside from current share prices. This is incredibly asymmetric in my opinion and justifies the risk.
Why I Still Think This Is A Fair Estimate
I’m aware that management posted lower than expected production guidance numbers for 2024 and I (like anyone that is bullish on this company) would have hoped that they produced more cars. But I think these are production numbers that allow the company to retool the company and focus on building out lean cost structures this year. Rivian committed to 57,000 vehicles being produced this year, but now is guiding for gross profitability in Q4. This tells me margins should continue to improve (keep in mind they brought the loss down per vehicle by ~$81,000 to -$43,000 gross profit per vehicle). Keep in mind other automakers (like Ford (F)) are losing $36,000 per EV. So this is not atypical at this stage, it’s more of an optimization problem.
Keep in mind as well that management on the call noted that many people are still on the waitlist to receive a Rivian EV. This was documented in Forbes last summer as well. They still have a backlog. It’s still a good problem to have.
Risks to Thesis
While I am still very optimistic about the company’s future, Rivian’s path forward is of course fraught with multiple risks that could impact its financial stability (and these risks are higher than they were the last time I wrote about the EV maker. A significant risk comes from the broader economic environment, particularly the impact of high interest rates on consumer affordability for electric vehicles (EVs). Rivian’s recent quarterly deliveries fell short of market expectations, a shortfall attributed in part to the dampening effect of high interest rates on demand for EVs. This trend not only puts pressure on Rivian’s sales volumes but also escalates competition, notably with Tesla engaging in a price war to maintain its market dominance. This scenario underscores the sensitivity of Rivian’s performance to macroeconomic factors that influence consumer spending and financing costs.
Furthermore, Rivian’s ambitious goal to turn gross profitable by the second half of 2024 hinges on several critical factors, including scaling production, reducing costs, and expanding its product lineup with the launch of the more affordable R2 model in 2026. While these strategic moves are designed to position Rivian more competitively in the EV market, they, of course, introduce execution risks.
Tesla CEO Elon Musk recently weighed in as well, estimating that he thinks Rivian only has 6 quarters of funding left. While I agree with him on a lot of topics (and I am bullish on Tesla as a whole) I think his view is a little too pessimistic.
Rivian’s becoming far more disciplined on costs than they have been in the past, and I think this will start to be reflected in Quarterly Earnings. I do believe that the EV maker will probably have to raise more funding to help with financing, but if they can show they are achieving gross profitability, I think the fundraising story becomes easier.
I think most Rivian fans and investors (myself included) recognize the risk of investing in a developing EV automaker. I think the asymmetric upside risk here has become net more favorable in light of this recent quarter, allowing me to still feel good about the company.
Bottom Line
Rivian’s journey in the EV market, while marked by challenges (as shown in this earnings call) such as economic pressures and competitive dynamics, underscores a resilient strategic direction aimed at long-term growth and profitability. Despite the hurdles of high interest rates and a fiercely competitive landscape, Rivian’s production achievements and strategic initiatives, including the introduction of the R2 model and focus on commercial vehicles, demonstrate its potential to navigate through these challenges effectively and reasons for why I am still a believer in the company. The company’s commitment to innovation, supply chain efficiency, and market expansion presents a compelling case for its future success. With a strategic focus on overcoming unnecessary costs, I believe Rivian still stands as a strong buy for investors seeking to capitalize on the evolving electric vehicle sector.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in RIVN over 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.
Noah Cox (account author) is the 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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