Rivian: A $100B Strikeout With Much To Prove In 2023

Summary:

• Rivian has lost over $135 billion in valuation since a peak in late 2021 as the EV startup has struggled to scale production in the face of industry headwinds.
• Although shares have shed nearly 50% since December, a lack of a clear line of sight to profitability keeps shares expensive on a tentative FY25 EV/EBITDA valuation.
• For FY23, for shares to find some sort of stability, Rivian likely needs to produce a bare minimum of 60k vehicles and show improvements in quarterly delivery efficiency.
• Cash burn rate is expected to be about $7 billion in FY23, meaning Rivian is likely burning through more than half of its cash on hand next year.

Rivian’s (NASDAQ:RIVN) 2022 saw the former Wall Street IPO darling drop over 80% after pumping to a valuation in excess of $100 billion, which has since been wiped out. After warning to avoid shares in Rivian at $115 due to “unfavorable amounts of risk” and reiterating a short in June at $27 for a nearly 37% gain since, shares are worth another look in 2023. Here’s what the story for 2023 could look like — a tale of no excuses.

Rivian stumbled along through 2022, cutting production guidance and yet still falling short of its annual forecast of 25,000 vehicles, even with production topping 10k units in Q4. Backing out of plans with Mercedes-Benz (OTCPK:MBGAF) to produce electric vans in Europe just three months after signing an MoU was a questionable move, but one that places more emphasis on execution this year.

What’s Needed In 2023

As shares have continued to push lower into the teens, what’s needed in 2023 for shares to find some stability and recover?

• 60k units production, at a minimum — no exceptions: Rivian’s initial production target for 2022 was 50k units, before it was sliced in half in March (and subsequently missed). Q4’s production of 10,020 vehicles, +36% q/q may look strong on the surface, but sequentially, production declined. Rivian produced 2,657 vehicles more in Q4 than in Q3, while Q3 saw a 2,962 unit boost from Q2. This isn’t the dynamic needed for strong growth. Maintaining this trend through 2023 sets Rivian up to produce about 64k units, but with supply chains, logistical challenges, and semiconductor and parts shortages all expected to ease throughout the year, 60k should be the absolute bare minimum target — 2022’s original guidance plus 20% for the year delay.
• Improved delivery efficiency: in Q4, Rivian’s delivery-to-production ratio dropped by 9 percentage points to 80.4%, meaning Rivian delivered 4 out of every 5 cars they produced. However, this is far below that of leading OEMs — Tesla (TSLA) noted an increased amount of vehicles in transit, but still delivered over 92.2% of produced vehicles in Q4, while Toyota (TM) delivered 90% of its production volume in November, even after a large drop from October. In reality, Rivian needs to improve its vehicle logistics, which could increase logistics expenses even as truckload rates slump, to facilitate delivery growth as production scales.

For 2023, Rivian needs to handily exceed its original 2022 target of 50k vehicles in order to demonstrate explicitly that there are no major underlying issues that prevent production and thus deliveries from ramping substantially over the next 48 months. Logistics efficiency also must improve — fulfillment at an 80% rate at 60k production for 48k deliveries is not nearly enough — Rivian needs to bring this rate back up to 90% or higher, similar to most major OEMs, to ensure that it does not disappoint with quarterly revenues by having higher inventories or higher amounts of vehicles in transit.

But why is this important?

With supply chain challenges and chip shortages expected to ease in 2023, hurdles to production are expected to ease in conjunction, allowing constrained OEMs, such as Toyota, to ramp vehicle production up again. Should Rivian continue to show struggles increasing production, it’ll raise serious questions about execution, especially as competitors like GM’s BrightDrop (GM) have kicked off mass production. Rivian is on the verge of rolling out its EDV500 van in Q1 this year, with plans to roll out a larger EDV900 at some point in the future. Handling four different production models at this limited scale could be a challenge.

Financial Glance

With deliveries still limited, Rivian is operating deep in the red — and that will not change anytime soon. With a gross margin of (171%) for Q3, Rivian is in a high-loss, high-cash burn environment, likely persisting another four to six quarters until deliveries can scale to above 25k per quarter.

YTD financials reaffirm the picture that the only item to watch moving forward is cash burn — for the 9mo period, Rivian burnt $5 billion in cash, with cost of revenues and operating expenses both totaling about 3x revenues (about $3 billion v. $994m).

Breaking down costs on a per-vehicle basis (COGS + opex) reveals that during Q3, Rivian was spending about $300k per vehicle. Even with a 30% reduction in these costs — a significant feat while scaling — to $210k per vehicle, Rivian is set to burn about $7 billion in cash during FY23 at a 60k unit target. Even though Rivian is flush with cash from its high-value IPO, this would represent a substantial chunk of its $13.3 billion cash burnt during the year.

Valuation-wise, there’s not much to go on, given that EBITDA is still deeply negative and profitability is not on the table until probably FY27 — for example, valuing Rivian at 35x FY25 EBITDA of $100 million, assuming it can post a positive EBITDA in FY25, simply won’t fly in the market given the current macro conditions.

On an EV/sales basis, Rivian trades at about 0.76x estimated revenues of $4.9 billion based on 60k deliveries with an ASP of ~$81,400, about in line with Q2/Q3 FY22 trends. Compared to other startup EV OEMs who are also struggling to ramp production, such as Lucid (LCID), this valuation is quite attractive, given that Lucid still trades well above 4x 2023 EV/sales. In essence, Rivian is trading at 1.2x cash, and at 3x projected FY23 cash after accounting for ~$7 billion in cash burn for the year.

Outlook

At a share price in the $16 range, Rivian is ripe for bottom picking, given that the company’s valuation is not much more than cash; however, Rivian is expected to burn through over half of that cash in FY23 as it works to scale up production.

For FY23, Rivian’s story is all about execution as auto industry headwinds ease. As rivals ramp up production and as ICE leaders such as GM and Ford (F) begin to deliver on their extensive EV roadmaps, Rivian has to prove to the market that it is not just a $100 billion flop. Even with a 100k order backlog via Amazon (AMZN), Rivian’s failed partnership with Mercedes is another gray cloud on the horizon. In terms of production, 60k vehicles for 2023 should be the bare minimum expected for shares to find a bottom here — any less, and Rivian is demonstrating that its original roadmap for 50k vehicles in 2022 was far too ambitious. Clearing 60k will ease concerns that logistics issues and parts shortages have dented scalability.

Profitability and operating breakeven are not yet in the picture, and will not be for quite some time, given that Rivian is spending nearly four times its ASP for each unit of production. Positive EBITDA is not expected until FY25 at the earliest, given the costs to scaling production, making Rivian still quite expensive for the losses and time it will accumulate until it is operating in the black.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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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.

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