Rivian Automotive Inc. (RIVN, Financial) has made quite a splash in the emerging electric vehicle space. The upstart EV maker, which specializes in battery-electric trucks and vans, has earned a great deal of attention, both from consumers and from the market.
After suffering at the hands of skeptical investors over the past couple years, Rivian has been making something of a comeback in 2023, as the company has managed to scale up production while scaling back cash burn. With its financial future looking a bit less shaky, investors are starting to take notice once again.
Strong demand, weak margins
The R1T, Rivian’s all-electric pickup truck, was the first of its kind to reach the market, beating out both established automakers and rival EV upstarts. While such a first-mover advantage has been beneficial, it alone is not sufficient to guarantee a sustainable position as market leader. Rivian has added to its vehicle lineup since launch, including the SUV-like R1S and a next-generation EV delivery van.
Rivian has enjoyed strong demand for its still-scaling production, making demand something of a non-issue for the foreseeable future. Rather, the issue is whether it can make money on the vehicles it sells. Rivian currently loses money on every vehicle it sells, something it will have to rectify if it is to achieve sustainable profitability.
Analyst's observation
Thankfully, it is making some progress in this regard, as analyst Gary Alexander observed on Sep. 11:
“Rivian's issue isn't demand: it has a clear backlog of enterprise demand and consumer vehicles often take longer than a month to ship (in contrast to Tesla, where deliveries are finally starting to catch up to production and the company has had to make a series of high-profile price cuts to stimulate demand in regions like China). The company's core mission right now is to scale production and lift its gross margin profile…Rivian has made tremendous progress in scaling gross margins to -37% in its most recent quarter, versus -81% in Q1. Production has also more than tripled from the year-ago levels, and delivery units are keeping pace with production, indicating again that the company's core constraint is manufacturing. The company has guided to reaching positive gross profits in 2024.”
There is no doubt Rivian is making visible progress toward financial sustainability. However, with even positive gross profit still out of reach until at least next year, there is clearly a lot more to be done.
Financial sustainability and cash burn
The automotive industry is notoriously capital intensive, and scaling up production is enormously expensive. Rivian boasted a healthy $10.2 billion in cash on hand at the end of June, which ought to sustain it for some time. However, it is worth remembering the company had cash on hand to the tune of $18.13 billion at the end of 2021.
Cash burn remains a cause for concern
While it has plenty of cash for the time being, Rivian’s cash burn remains high. The company’s own forecast expects an eye-watering full-year adjusted Ebitda loss of $4.2 billion in 2023. Even so, things are already starting to improve, as analyst Stone Fox Capital pointed out in a Sept. 12 research note:
“The Q2'23 per vehicle loss improved by ~$35,000, but Rivian won't greatly increase quarterly production in the 2H to cut these massive ongoing losses. The company produced 23,387 vehicles in the 1H with the guidance only targeting 28,613, or ~14K vehicles produced per quarter, in the 2H of the year. Rivian produced nearly 14K EVs in Q2 alone, so volumes and scale won't help with cost reductions in the 2H. Even though Rivian correctly highlights the gross profit per unit delivered dipped ~$35K, the company is still losing nearly $33K per unit. The EV manufacturer generates about $80K in revenues per unit sold, suggesting costs need to be cut roughly in half to reach the long-term 25% gross margin goal. The R1 line will hopefully see a material reduction in costs when Rivian retools the line in 2024 and increases annual production to 85,000. The company has a 150,000 plant capacity, but due to the Amazon program limiting production on the delivery vans, Rivian is shifting production capacity down on the EDVs from 85,000 to 65,000 vehicles.”
While Rivian Automotive is making some material progress toward reducing cash burn and inching closer to financial sustainability, the road will be long. With the EV maker set to experience negative free cash flow through fiscal year 2027, organic sales may prove impossible to sustain its operations without substantial external cash injections. Those could come at the cost of further dilution if Rivian is unable to secure sufficient debt financing, or if equity financing proves harder to secure on favorable terms.
Final thoughts
While Rivian Automotive has absolutely improved its position and survivability, it still faces a long road to meaningful profitability. Yet even with its much reduced share price, which currently stands at around $21, Rivian’s market capitalization is still a hair over $20 billion. That means there is a rather enormous amount of growth already priced in. Should Rivian’s growth plans falter at all, it could see its recent gains reversed in short order.
