Rivian: Turning The Corner
Contributor since 2023 / 1659 Followers
Summary:
- Rivian Automotive’s stock has fallen by roughly 22% in the last year, but I maintain a bullish stance.
- In Q1 2024, Rivian produced 13,980 vehicles and delivered 13,588 units, in line with expectations.
- I see promising future prospects for Rivian due to their cost-cutting measures, partnerships with companies like Amazon and Google, and favorable government policies.
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Investment Thesis
In the last year, Rivian Automotive’s (NASDAQ:RIVN) stock has fallen roughly 22%. While the market is bearish, I have maintained a bullish stance since last year. Despite the drop in their stock price, I believe the company executed well in the first quarter of 2024. In this first quarter, Rivian produced 13,980 vehicles and delivered 13,588 units from their plant in Normal, Illinois, with total production and delivery in line with their expectations. While these results are underwhelming, as I was hoping for them to beat expectations, I still have high hopes for their future.
My analysis goes beyond a mere review of Q1 2024; it presents a comprehensive assessment of Rivian’s prospects. Despite the underwhelming delivery estimates for the year, I believe the company has a lot going for it. With the launch of the R2 model and a renewed focus on cost discipline, creating a strong foundation for long-term growth and profitability in the electric vehicle (EV) industry, I see a very promising future ahead.
What sets Rivian apart is their approach to addressing challenges head-on. In order to cut costs, Rivian has made efforts to reduce their workforce and optimize expenses. On top of this, Rivian has stated they hope to achieve approximately 25% gross margin, high-teens adjusted EBITDA margin, and roughly 10% free cash flow margin.
On top of this, their partnerships with Amazon and Galehead Development, along with opportunities with Google and Apple, grow my confidence in their future. Adding to this, the Biden administration’s recent support for American EVs through Chinese EV tariffs and the continued consumer demand for more affordable and accessible electric vehicles align well with Rivian’s plans to introduce the R2 lineup, potentially qualifying for federal tax credits. These factors collectively contribute to my continued recommendation that Rivian is a strong buy. I think the market has been too bearish.
Why Am I Doing Follow Up Coverage?
In late February, I article highlighted Rivian as a strong buy, even after their Q4 report where their delivery number guidance for 2024 underwhelmed expectations. As stated in that article, Rivian expected to gate just ~13,500 units in the first quarter of 2024, which is about 10% to 15% below their fourth-quarter 2023 deliveries. Despite this lower than anticipated guidance, I remained bullish on the company’s prospects. Now that the first quarter is completed, we can see that Rivian was able to meet this expectation.
Despite analysts originally predicting in Q4 that Rivian will announce the anticipated production of 80,000 vehicles in 2024, Rivian expects to produce 57,000 vehicles. These lower than predicted numbers were caused by Rivian’s focus on improving profitability in the coming year. In order to become a more cost-effective company, they have implemented workforce reductions. Hopefully, these efforts will be successful, as of right now the company is reportedly losing $38,000 per vehicle.
My continued coverage of Rivian is consistent with my analysis in February following their fourth-quarter 2023 report, where I highlighted the company’s improving execution. The purpose of this follow-up article is to showcase how Rivian is executing better and what this means for their future prospects. I believe Rivian reset their bar in the Q4 report and is now executing better. I think the implications of this are key.
Earnings Review: Strong Execution
Although Rivian missed their earnings per share target by $0.08 with a loss of $1.24/share, revenue of $1.20 billion jumped by 82.15% year-over-year and surpassed expectations by $34.96 million. I believe this demonstrates continued strong demand and sets a positive outlook for future growth. Keep in mind, most of the EV industry has seen their growth slow to something much lower than 82% year over year. In this EV market, I think this is highly impressive.
During the earnings call, CEO RJ Scaringe covered Rivian’s new mid-sized platform, which focuses on the R2, R3, and R3X models. Scaringe mentioned that these new models will help them expand their market reach in the coming few years as the R2 is expected to be available for deliveries by the first half of 2026 starting at $45,000.
As I mentioned above, their increase in revenue demonstrates a strong demand for their products. This strong demand can be seen by the 90% increase in demo drives over the previous quarter (Q1 Call). Scaringe commented on these initiatives:
Building on this, the results of our recently implemented demand generation and brand awareness strategies have been encouraging- Q1 2024 Earnings call
I see these as highly encouraging. Most companies do not see a 90% jump in customer interest in one quarter.
On the same call, CFO Claire McDonough discussed their recent efforts towards profitability. She outlined improvements in the manufacturing process, in return leading to better cycle times and cost efficiencies, stating:
We expect lower variable costs to be the largest driver of gross profit improvement in 2024 -Q1 2024 Earnings call.
I think this is really key. As I mentioned in my previous research, the last call was managing expectations and helping to lower the losses per vehicle to $38,784 from $43,372 in Q4 2023.
Scaringe also emphasized their operational milestones, particularly the production of their 100,000th vehicle and the effective integration of plant retooling upgrades, which have significantly streamlined production and reduced costs. He highlighted the efficiency gains from their new zonal network architecture, noting:
We also recently transitioned to our new zonal network architecture, which reduced the number of electronic control units in our vehicle by approximately 60%, taking substantial costs out of our vehicles -Q1 2024 earnings call.
After this earnings call, I remain bullish on Rivian. What I saw on this call is management showing their commitment to execute from the Q4 call and following through. We are seeing this with lower losses per vehicle and discipline in how they source parts for their vehicles. I am excited to see this discipline.
Ample Opportunities
Getting disciplined is part of what I think is key, but partnerships will be another important factor as the EV maker turns the corner. Although as of now, a potential partnership between Rivian and Apple has been reported on but not confirmed, I am optimistic.
In the past, Apple has made initiatives towards creating their own electric car, but at the start of this year, they canceled Project Titan. Apple’s venture towards electric vehicles does not seem to be over, as rumors state that Apple is looking to team up with an EV company, and Rivian is a likely option. If this partnership were to occur, this would be extremely beneficial for Rivian, not only would they gain tons of attention just by working with a company as popular as Apple, but the combination of Apple and Rivian’s technology could help bolster Rivians brand in a way that consumers could associate it with the luxury and quality standards consumers love from their Apple products (think Beats Electronics once Apple bought them).
While a potential partnership (I believe) could be a game changer for Rivian, their official recent partnerships are allowing the company to accelerate their developments. As of May 15th , Rivian has agreed to collaborate with Galehead Development. This partnership aims to deploy solar projects aligned with Rivian’s 3C Framework: Climate, Conservation, and Communities.
While this partnership helps Rivian align with their values, it’s also helping them source more renewable power. Renewable power for their EV charging stations (as mentioned in the article) has two benefits. First, it helps provide a lower cost renewable power source since they are partnering to build out new resources vs. buying energy from utility companies (and still helps them align with their 3 C’s). Second, it helps Rivian reinforce their brand. In a tougher EV environment, they need to do everything they can to stand out. I think this is a great way to do this.
On top of this, Rivian’s relationship with Amazon continues to remain strong. So far, Amazon has deployed over 13,500 Rivian electric vans nationwide (of their 100,000 order). This expansion is part of Amazon’s broader initiative to achieve net-zero carbon emissions by 2040. As Amazon works towards their goal of reducing their carbon footprint, I believe they will deploy more of Rivian’s vehicles. Amazon’s recent investment in long-haul EV’s for their ocean freight fleet assures me that they are increasing their EV investments while others are pulling back. This has been and will continue to be a great foundation for Rivian to build their commercial vehicle business on. I think this is a corner piece to a company that is turning the corner.
Rivian has also been experimenting with Google technology in their vehicles. At Google’s I/O developer conference on May 14th, Google showcased a Rivian car with their software integrated into the model. With this, Rivian is adding Google Cast and YouTube streaming services into their cars, providing more features to their infotainment system, helping to enhance their value proposition to end consumers.
Broader Dynamics Are Helping Too
The Biden administration’s recent decision to impose 100% tariffs on Chinese EVs, as reported, will likely indirectly benefit Rivian. These tariffs would limit cheaper imports and potentially increase domestic demand for U.S.-manufactured EVs like those of Rivian. Low-cost Chinese EVs have been flooding markets, causing sales of other brands to drop. There are fears these same EVs could soon flood US markets.
Valuation
Despite the 22% drop in stock price YTD, I still remain bullish on Rivian’s future. When looking at their valuation metrics, Rivian’s price to sale FWD ratio is 2.13, 136.56% higher than the sector median of 0.90. But even based on these metrics, I believe Rivian deserves to have a higher P/S valuation.
This price to sales ratio is slightly lower than it was in my coverage from earlier this year, meaning the market’s stance has gotten even more bearish on Rivian as I believe their execution has improved. In my article from February, the price to sales ratio had dropped to 2.23 from 5.14 in December. I really believe with this the market will soon have much more room for a much more optimistic look on their operations assuming they continue to execute better.
When comparing Rivian to Tesla, Tesla’s P/S multiple is 5.57, thus indicating an upside potential of 161.50% if Rivian’s price to sales multiple were to come in line with Tesla’s P/S multiple, valuing the stock at approximately $26.51/share.
This upside potential indicates lots of room for Rivian to grow, which I believe we could see them fill in the coming years.
Where This Fits In With My Previous Analysis
Previously, I thought Rivian’s fair value was somewhere near $44.24/share in my last analysis. To be clear, I think over the long run I think this target is still highly possible. My $26.51/share is a more short run target. This is where I think the stock could be over the next year or so if we see the market appreciate its sales figures as much as it does for Tesla (I think they should be valued about the same, with Tesla being profitable but slower auto growth and Rivian still being high revenue growth).
Risk To Thesis
Although my stance remains bullish on Rivian, there are some risks to consider when evaluating their future. While global EV sales continue to increase, estimated to reach 17 million in 2024, this growth appears to be slowing down. In the first quarter of 2024, electric vehicles made up 7.3% of all vehicle sales, a decrease from the previous quarter.
There is also the risk that at any point the broader EV slowdown could hit Rivian hard, meaning their growth grinds to a halt. For example, Ford has been cutting back on battery orders for electric vehicles. Ford’s response indicates that some companies think it is best to take a cautious approach to this change in EV demand. However, I believe this is mitigated by actions from major players like Amazon, which continues to invest heavily in EVs, particularly in smaller delivery vehicles primarily supplied by Rivian.
Furthermore, the Biden administration’s policies are supportive of the EV market from here. The Inflation Reduction Act, for instance, has introduced new tax incentives for electric vehicles, aiming to make EVs more financially attractive to consumers and stimulate further growth in the sector. While I have been previously concerned about EV credits being phased out for Rivian vehicles because many are above the $80,000 threshold, these new credits that phase in starting January 1st this year do provide some credits to Rivian buyers. I think this will help a lot.
Bottom Line
Looking back on the past year for Rivian, the stock has fallen by 22%, but I still remain bullish.
Rivian’s production and delivery figures for Q1 2024, though modest, align with their projections, meaning they are holding true to their guidance, helping to rebuild investor trust. Looking forward, Rivian’s R2 model and its expected delivery by the first half of 2026, priced at an accessible $45,000, will greatly expand Rivian’s market reach and allow them to appeal to a larger customer base.
As mentioned in the earnings call, one of Rivian’s big focuses for this year is to optimize their workforce and cut costs. I believe the company is well on their way to succeeding with this, with management now guiding for Gross Profits in Q4. I think this is big.
Although EV purchases have slowed down, I do not think this will hurt Rivian, as evidenced by still strong demand through strong revenue growth in Q1. Rivian’s current portfolio of partnerships with companies such Amazon and Galehead, along with experimenting with Google are going to mean that the company has a continued path in scaling their commercial EV presence, while adding new features to their vehicles (through Google) that continue to make the brand compelling for consumers even in an EV slump. Rivian is even rumored to team up with Apple, which I think could provide even more upside. In my valuation estimates, I am not counting on the company to get a partnership with Apple in order for them to see their P/S ratio (FWD) converge on Tesla’s ratio.
These ongoing and potential partnerships combined with their cost-cutting measures significantly redefine their EV market position in my opinion, making it an attractive investment opportunity.
With this, I maintain that Rivian is a strong buy.
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 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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