By: Yourstockresearch September 18th 2022
Is Rivian A Good Stock - Is It A Buy Sell Or A Hold?
Rivian is an automotive company that produces electric trucks, and the automaker has been tapping the market in order to raise capital, as it looks to increase production through the coming years i.e. towards 2025. The stock has been on a downtrend since around September of 2023, as market pressure and investor sentiment turning sour have increasingly pushed the stock down to recent lows. But, things are slowly looking up, as the company moves towards the next stage of production, which has led to the stock rallying.
Rivian currently competes with other truck automotive companies, such as Ford, despite this competition, the company will likely see significant growth with the global pickup truck segment expected to hit a total of $200-220 billion by 2025 according to market analysts. Rivian, which produces its R1T and R1S models, will likely take up a significant chunk of the total market eventually, with a set of products that are more competitive than its competitors.
Regardless, in recent times with inflationary pressures playing spoilsport (at least in the short-term), Rivian has continued to increase prices, as it looks to take hold of supply chain pricing pressures, and is now slowly increasing its total output once again, as it tries to get its business to a point of sustainability.
Management currently projects that Rivian has a backlog that is expected to last through 2024, and therefore Rivian should be able to get to sustainable cash flow production by 2025 provided it can set its manufacturing base. Since the company does compete with the broader EV market, segmentation will play a key role in sales. The likes of Tesla, and other EV companies such as BYD, are not in the same category, and therefore they aren’t competing with Rivian. Although Tesla is looking to release its cyber truck, it will take time to ramp up to market sales, therefore, sales will likely be less affected by any substitution effect.
Rivian is currently projecting 52,000 in 2023 production, and currently, the company has produced over 25,000 vehicles, and then the company has delivered 20,000 vehicles in the first quarter. The significant ramp-up in production in 2023, should help the company improve cash flow, thereby keeping it afloat. Until now sentiment has been positive about Rivian’s ability to deliver its product.
Regardless, a factor that will play on sentiment is investors might question why Rivian is considering further dilution. Currently, it has around $12 billion in cash to meet its manufacturing and production needs, and investors will wonder why diluting stock is necessary, especially if it can move into 2024/2025 where it is likely to see a significant increase in production.
Furthermore, Rivian has gone to the market to try and raise around $1.28 billion in capital, and the dilution comes at a time when many investors are looking to get past that phase. Currently, the company has enough cash on its books to continue funding expansions for potentially another 2 years, at which point it might be profitable enough to not require further dilution. It seems management is keen to strike while there are still investors who are willing to put up the money. This was at a time when revenue for the fiscal year 2022 came in at $1.65 billion with a loss of $6.85 billion.
Second Quarter Review of Rivian
During the second quarter, Rivian produced 13,992 vehicles and delivered 12,640 vehicles. The company produced a total of $35,000 gross profit per vehicle, which was driven by increasing production, lowering material costs, and increasing revenue per vehicle. The gross margin pushes the company towards profitability with most large vehicle makers currently producing similar levels of gross profit margins. The production increase marks a 50-60% increase in QoQ, and Rivian should continue to see a significant ramp-up in production going into the next couple of quarters.
The company has projected that adjusted EBITDA will come in around -$4.2 billion for the year, with a capital expenditure of around $1.7 billion. Furthermore, the company plans to continue to reduce costs, improve the product, and ramp up production as it looks to get its to-market strategy in-line. Capital expenditure in the second quarter came in at $255 million down from $283 million, considering that 50,000 cars are expected to be produced in 2023, expect capital expenditure to be in the region of around $1.7-$1.8 billion in 2023, which is similar to the levels that the company has decided to raise.
A Look Forward to 2023-2025 for Rivian
The company has projected that in 2023 it will start to see increased production, ramping up the R1 and RCV models, which then should help translate into improved productivity for the R2. The total operating expenses continued to fall as well, as economies of scale and improved production costs took hold. This decrease in inventory resulted from mainly lower research and development costs during the quarter. All of this is playing a key part in getting it to a point of sustainability.
By the time we get to 2025, several new models and updates should help continue the strong momentum the company is currently witnessing, and sales will likely come in at 200-300k. Prices are likely to remain similar or slightly higher, and this should in turn see revenue come in at well above $25 billion.
Overview of Rivian Competitive Advantage and Models
Rivian is primarily competing in the utility-truck segment, in which other competitors such as Ford are the primary competitors. Being a utility vehicle, it has a towing capacity of 11,000 lbs., and has a charging range of around up to 400 miles.
Rivian has better off-road capabilities than the Ford F-150, with 5 different types of off-road modes, the payload also is higher with 1750 pounds vs. 1600~ pounds for the Ford. The range is also a significant factor and consumers will look to the shorter comparative range of the F150, which is around 230 miles. Meanwhile, the towing capacity of the Ford is between 5000-10,000 pounds, which makes Rivian superior in this aspect.
Overall, in product, design, brand, and technical aspects, Rivian is clearly ahead of its rivals. This combined with a relatively competitive pricing, which starts at around $73,000 will mean demand will continue to remain strong for a well-made product.
The SUV model is competing with the broader SUV market and is priced significantly higher than rivals, at $91,500, starting from the base model. This put the car in a premium category, competing with the likes of luxury SUV makers such as Porsche. This would likely then affect sales moving forward, as the number of people who are looking to make a purchase in this category remains relatively low. But, there could still be significant demand, with those looking to move up in category.
Valuation and Financials
Projecting out financials, Rivian should continue to see a ramp-up in production, which could see revenue increase significantly to 4.5-$5 billion, which should bring down losses further, as both costs of revenue and operating costs come down.
Projecting-out losses could fall below $5 billion in the coming year, as the pace of expense growth slows. During 2023, Rivian is slated to produce anywhere from 50-60,000 vehicles. The company currently has a backlog of over 100,000 vehicles, showing plenty of demand there. By the time we arrive in 2025, those losses could be significantly lower, and the company could be far closer to profitability than it currently is.
In terms of valuation, this puts Rivian at around 7x sales, which is expensive all things considered, the trajectory of growth should increase significantly in 2023, and this will likely push price-to-sales, down to 4x sales, or even lower at which point the valuation would be a lot more reasonable. The P/S for 2025, would be around 1x, but 2025 is still a while away.
In terms of fair value, assuming that Rivian can increase sales up to potentially 1 million vehicles, over the next five years, this would mean eventually the market cap could rise to around a market cap of $35-$40 billion by 2025, and $60 billion level in 5-years.
Margins in the long-term are likely to be closer to 6-7%, and assuming these levels the stock could grow at around 18-20%, over the next 5 years.
Risks currently stem mostly from the broader economy, and the inability of the company to meet working capital needs to grow their business. Both these are reasonable risks in the short term, as the company looks to expand at a time when rising interest rates are affecting consumption. And the vehicle industry is under pressure with interest rates rising and fewer people taking out loans to fund their purchases.
Should You Invest In Rivian?
Conclusively there is little expectation Rivian fails anytime soon, but it remains to be seen how investors react in the next few quarters. Should production hit management’s expectations, Rivian’s stock significantly increase from here in the future. But currently the stock might be overvalued with a fair price-to-sales closer to 5x, and a forward P/S of 4x. As previously mentioned the stock could grow around 18-20% a year from these levels, which still makes the company potentially quite attractive for the long-term.
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