Heading into 2023, the consensus was that a shakeout was coming in the electric vehicle industry. There were obvious winners like Tesla Inc. (ticker: TSLA), and clearly vulnerable players like Lordstown Motors Corp. (RIDEQ), which filed for bankruptcy in June. There were a bunch of companies in between, their fates harder to read, but Rivian Automotive Inc. (RIVN) has stood out as a highlight. Beating on both top and bottom lines for its second-quarter earnings report on Aug. 8 didn’t hurt its rising star, either.
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Rivian is unique among EV startups because of its big deal to sell 100,000 electric delivery vans, or EDVs, to Amazon.com Inc. (AMZN) by 2030, a deal calculated to help the company achieve scale and attract financing as it also builds out a line of pickup trucks and sport-utility vehicles. The company battled big supply chain and manufacturing problems during and after the pandemic, and only this year scrambled on track to meet its 2023 target of 50,000 vehicles produced.
The slow ramp up has led both Rivian investors and the company itself to lose a lot of money. Shares that went for $78 in the company’s late-2021 initial public offering peaked at nearly $130 and are down more than 80% since, as of Aug. 8. The company lost $6.75 billion last year and has said it will lose $4.3 billion before interest, taxes, depreciation and amortization this year. That being said, its second quarter earnings showed a 70% increase in revenue on a quarter-over-quarter basis from sales of the R1S SUV, the R1T pickup and the Amazon EDVs.
The race is on: Can Rivian get big enough to make money before it runs out of money? If Rivian gets to profitability, the EV opportunity is large enough that it will either thrive or be sold on good terms. Tesla first sold 50,000 vehicles in 2017: Its stock, then worth twice what Rivian is now, has multiplied 15-fold since year-end 2017. If it can’t cut the mustard, equity holders rarely do well in bankruptcy reorganizations. Here are three pros and three cons of investing in Rivian now:
| Pros | Cons |
| Huge opportunity and a popular product line. | No mass-market products yet and competition is waiting. |
| Lots of cash on the balance sheet and access to markets. | Vulnerable to swings in sentiment and interest rates. |
| Valuation is half of Tesla’s at a similar stage. | On pace to run out of money in 2025. |
Pro: Huge Opportunity and a Popular Product Line.
The global electric vehicle market, which generated $193 billion last year, will approach $700 billion by 2030, forecasts Vantage Market Research, and other forecasts are higher. The International Energy Agency says EVs will represent 60% of vehicles sold globally by 2030. The point is, whichever numbers you believe, it’s a lot.
We believe with the Amazon relationship and current cash situation Rivian has a cushion into the next few years to ramp the business model and then start to generate cash flow. – Dan Ives, senior equity research analyst at Wedbush Securities
And Rivian’s product line is set up to hit some of its sweetest spots. The company’s second quarter earnings report showed a 50% improvement in production, from 9,395 units to 13,992, over the first quarter of 2023, and a 60% increase in deliveries, going from 7,946 to 12,640.
The company’s R1T pickup and R1S SUV sold virtually all of the units it made in the first and second quarters, even with price points beginning at $80,000 for the SUV, akin to the low-volume Tesla Model X, which sold 24,099 units in the U.S. and Canada last year. The truck starts at $73,000, consistent with expected Cybertruck prices. Rivian has 114,000 orders for the two R1 vehicles, CFRA Research analyst Garrett Nelson says. Its R1S SUV outsold the Tesla Model X in the second quarter and its R1T pickup outsold Tesla’s aging Model S sedan.
Tesla took off when it introduced the mass-market Model 3 sedan and Model Y crossover, and for Rivian that test won’t come until the expected 2026 introduction of its $40,000-and-up R2T and R2S lines, outfitted with the new in-house Enduro dual-motor system that amps up its torque for off-road performance. Yes, there will be a ton of competition. But those are where the best-selling U.S. light vehicle lines live now — names like Ford, Ram and Chevy trucks, and SUVs from the Model Y to Toyota’s Highlander.
“We believe this is the holy grail for Rivian with 2026 a key inflection point year,” Wedbush analyst Dan Ives said.
Pro: Lots of Cash on the Balance Sheet and Access to Markets
The Tesla bear case always assumed the markets would tire of financing its losses and cut CEO Elon Musk off — and that never happened. Rivian CEO R.J. Scaringe is in at least as good a shape as a loss-making Tesla circa 2017.
The $9.2 billion in cash and equivalents — $10.2 billion when including short-term investments — Rivian had on hand as of June 30 is enough to finance this year’s projected earnings before interest, taxes, depreciation and amortization, or EBITDA, loss of $4.2 billion for a few years. And losses narrowed from Q1 as Rivian cut costs and pushes its gross profit margins into the green, which it has said it should do next year. The company has said its cash will last through 2025, according to Wedbush analyst Daniel Ives.
Rivian’s $1.12 billion in revenue in the second quarter was three times its revenue in the same quarter last year and nearly twice its revenue in Q1 of 2023. The biggest sign of a change in the wind is its gross profit per vehicle, which went from a loss of $124,162 per vehicle in Q4 2022 to $67,329 in Q1 2023 and finally down to $32,595 in Q2, a 50% improvement quarter over quarter.
“We believe with the Amazon relationship and current cash situation Rivian has a cushion into the next few years to ramp the business model and then start to generate cash flow,” Ives said.
The key thing is that Rivian has shown it can access the debt market, as bond buyers and lenders buy into its story. The company has announced both a $1.5 billion green bond issuance this year and a $1.5 billion increase in its bank credit facility. It can clearly go get more money from the market when it can show profitability is close.
Pro: Valuation is Half of Tesla’s at a Similar Stage
If Tesla’s history is at all a model, Rivian stock is super cheap. The first year Tesla sold 50,000 vehicles, as Rivian is set to do this year, was 2017 — and its market value then was double what Rivian’s is now (not including Tesla’s much larger debt). Rivian’s SUV is already on pace to match sales of Tesla’s Model X, with its mass-market cars yet to arrive.
The fact to remember is that Tesla shares have climbed 15-fold since the end of 2017. Rivian’s R2 line may not be as big as Tesla’s Model Y, which didn’t arrive until 2019. It may not have a true analogue yet to Tesla’s Model 3, though it already has the pickup truck Tesla has labored to produce.
But Rivian doesn’t have to be a trillion-dollar company to make investors money from today’s $21 billion market cap. A 15-times gain would only put its value at about $340 billion. And a tenth of even that would represent a 50% gain on today’s stock price. Betting on that by 2026 isn’t irrational.
“We see Rivian as an EV category creator and can follow the path of Tesla in its early days,” Ives said. “Despite the bumpy road we see Rivian as one of the clear winners in this EV arms race.”
Seven analysts increased price targets on RIVN on Aug. 9, with an average price of $27.14, a 9.4% implied upside to its close of $24.80 on Aug. 8. Wedush maintained its “outperform” rating while raising its target from $30 to $32 and called the second-quarter earnings results a “great step in the right direction to regain confidence in the eyes of the Street.” Goldman Sachs increased their price target from $18 to $23, while Wells Fargo increased its target from $14 to $24.
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Con: No Mass-Market Products Yet and Competition Is Waiting
CFRA’s Nelson rates Rivian a sell, and his two main arguments are that the company’s products are expensive and that competition will be waiting for the R2 vehicles when they ship. Plus, three years is a long time to wait for them.
“Trucks and SUVs have become increasingly popular with U.S. consumers over the past decade, but competition in the electric truck/SUV segment is increasing due to new models from Ford, GM, Tesla, and others,” Nelson wrote.
He’s not wrong. Rivian’s pickups will compete not only with Tesla, but with EV models like Ford Motor Co.’s (F) F-150 Lightning, which accounts for about 2% of the top-selling F-series line already, and General Motors Co.’s (GM) Chevy Silverado, which, like Rivian, is starting this year with its most expensive models and working its way toward the middle market. Those are the two best-selling pickup lines in America, period. And gasoline-powered trucks will still be potent competition.
Con: Vulnerable to Swings in Sentiment and Interest Rates
Leaving aside how the company does, Rivian’s stock is vulnerable to swings in sentiment about EVs and tech stocks, and especially to interest rates, which affect everything from the affordability of its products to the cost of capital for the factory Rivian is building in Georgia. (Its current factory is in Illinois.)
That’s why you see big reactions to small hits or misses in earnings, like the 40%-plus drop in December and January, which had a lot to do with a meltdown in shares of its competitor, Tesla. The sentiment is divided on Rivian, with 11 analysts calling it a buy and 10 calling it just a hold — meaning, don’t buy it if you don’t already own it. One rates it underweight and none rate it a sell.
And the Federal Reserve isn’t backing off its rate-hiking stance, at least for now, as inflation flattens out. Markets are assigning about a 13.5% probability (as of Aug. 9) that the Fed hikes rates once more in its September meeting, according to the CME FedWatch Tool, which analyzes 30-day Fed Funds futures.
Con: On Pace to Run Out of Money in 2025
Any swings in sentiment would exacerbate Rivian’s biggest problem: It’s highly exposed to market sentiment if there is a recession, complicating its access to more borrowing if it needs money to get the R2 vehicles to market in 2026.
And that brings us to burn rate. While the company is burning less cash than last year, simple math says it runs into real problems if there is a combination of production delays for the R2 line and a debt market that closes up in response to bad news, either about the company or the economy more broadly.
The company has about two years’ worth of cash, given the pace of its operating cash flow losses. And that doesn’t count capital spending of about $2 billion this year. That risk is manageable if debt and stock markets remain open, as they are now. But a decision to buy Rivian stock has to account for the 50% chance of a recession economists surveyed by the National Association for Business Economics see for this year. Risk tolerance is personal to each investor.
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Should You Buy Rivian? 3 Pros, 3 Cons originally appeared on usnews.com
Update 08/09/23: This story was previously published at an earlier date and has been updated with new information.
