The automotive industry is witnessing a major seismic shift toward technological advancements. Electric vehicles (EVs) are becoming mainstream at an unprecedented rate, showing no signs of slowing down in the upcoming decade. The U.S. EV sales surpassed the 300,000 mark for the first time in 2023's third quarter.
Despite the turbulence created by widespread price wars throughout 2023, coupled with inflation and surplus inventory, the EV market continues to ascend. Even though the growth hasn't been as vigorous as initially forecasted, companies like Rivian Automotive, Inc. (RIVN) continue to carry momentum into 2024, recently enhancing its prospects with positive news.
Wireless carrier AT&T Inc. (T) has entered into a partnership agreement with RIVN, announcing its decision to receive a range of pilot electric delivery vans (EDVs), R1T pickup trucks, and R1S sport utility vehicles commencing in 2024. The main objectives of this joint venture are to assess cost-efficiency, amplify safety measures, and reduce the carbon footprint.
For many years, T has been progressively converting its commercial fleet into vehicles operating on alternative fuels, including compressed natural gas and hybrid electric vehicles. To meet its ambitious goal of achieving carbon neutrality by 2035, T is leveraging EVs coupled with route optimization and artificial intelligence (AI). Adding to this initiative, T is the exclusive provider of connectivity for RIVN vehicles, facilitating seamless over-the-air (OTA) software updates.
Considering stringent environmental, social, and corporate governance (ESG) goals and emission reduction targets, companies are fiercely competing to transition toward zero-emission fleets. High interest rates have posed affordability challenges for consumers as they increase the already hefty price tags of EVs compared to traditional gas-powered vehicles, leading to raised concerns over softening demands.
RIVN reported considerable interest and demand for its electric vans. In November, the company announced it was in dialogues with other potential customers, reinforcing speculations of additional EDV partnerships on the horizon for RIVN despite not revealing any specific names.
Last month, RIVN ended its exclusivity deal with Amazon (AMZN) for its EDV. This move provides RIVN with the opportunity to market its EDVs to a broader client base, with T reportedly being its first outside customer. The termination doesn’t impact the previously stated commitment from RIVN to fulfill an order of 100,000 vans for AMZN by the end of this decade. Indicative of progressive momentum, AMZN already had over 10,000 Rivian EDVs in operation as of October.
Moreover, RIVN also outlined its production strategy for the near future. The manufacturing plant in Normal, Illinois, is scheduled to cease operations for a single week at the closing of 2023 in anticipation of a more extended shutdown in mid-2024.
This hiatus aims to facilitate extensive line modifications and advancements, including part design changes, component simplification, and optimizations to elements such as the HVAC system and vehicle body structure. While these temporary production halts are expected to reduce output in the short term, they are deemed necessary to enable cost reductions and augment long-term production capacity.
“The impacts of the shutdown are temporary in nature, but the benefits will be there for the future,” said RIVN’s chief financial officer, Claire McDonough.
Outlook
Last month, Irvine, California-based RIVN raised its production forecast for the full year by 2,000 vehicles to 54,000 units on the back of sustained demand for its trucks and SUVs. Management forecasts 2023 adjusted EBITDA of negative $4 billion.
Analysts expect RIVN’s revenue to surge 164.6% year-over-year to $4.39 billion, while EPS is expected to stay negative at $4.92 for the fiscal year ending December 2023.
Moreover, RIVN’s stock is trading above its 50-, 100-, and 200-day moving averages, indicating an uptrend. Wall Street analysts expect the stock to reach $25.63 in the next 12 months, indicating a potential upside of 8.9%. The price target ranges from a low of $15 to a high of $40.
What are the Bumps in the road for RIVN?
Since its IPO two years ago, the automaker has experienced a tumultuous journey due to overall market conditions and operational challenges. Widespread supply-chain disruptions have further exacerbated conditions for the entire automobile industry, with RIVN facing its unique set of complexities during its launch. Some challenges the company encountered included product recalls and price rises that were subsequently required to be reversed.
RIVN’s products remain strong, even with a relatively limited product line. Moreover, it is expected to begin production in 2026 in Georgia on a lower-cost consumer EV called the R2. Given the steady increase in production, it is not anticipated that RIVN will reach profitability imminently.
The company's quarterly cash expenditure is estimated to be approximately $1 billion. Given its significant distance from attaining mass production levels required for improved cost efficiency, RIVN may face additional challenges in the foreseeable future.
Bottom Line
RIVN's operation has seen decent stability in the past year, although its share value contends with apprehensive investors troubled by unmet production benchmarks, expanding debts, and considerable financial losses. So far this year, RIVN shares have appreciated by roughly 28%. Yet, they currently trade 70% lower than its IPO price of $78.
The earlier-than-expected bond issuance in October took shareholders by surprise, triggering a sell-off that significantly undercut the stock's value. However, market analysts foresee possible improvements as the company extricates itself from supply chain predicaments that have plagued recent quarters.
The automaker's upbeat forecast serves as a glimmer of hope for a sector grappling with the adverse effects of inflated costs, sagging consumer interest, and price reductions aimed at stirring demand. In a departure from the norm, RIVN has opted not to lower prices, choosing instead to manufacture its Enduro powertrains in-house, a decision aimed at decreasing supplier dependence and cost overheads.
Despite delivering vehicles for eight consecutive quarters, the company still posts negative gross margins. RIVN's immediate priority is achieving a positive gross margin, which will place it on the path to operating profit. This feat, however, cannot be accomplished until gross profits outperform rising operating expenditures, currently estimated at an average of about $1 billion per quarter.
Following this, RIVN needs to generate sufficient operational profit and cash flow to fund its CAPEX, consequently transitioning RIVN to cash flow positivity. Achieving this landmark will require a minimum of five years, given that sales of R1 and EDV models alone will not secure profitability or positive cash flow. The successful launch and profitable scaling of the R2 model by 2026 is integral to the realization of this goal.
Its primary challenge is attaining positive free cash flow to sustain growth independent of balance sheet reserves. Although the financial outlook has improved, there are enduring concerns over whether its $7.94 billion cash reserve, as of September 2023, would suffice, considering that RIVN postponed previously anticipated CAPEX this year. An initial CAPEX projection of $2 billion in 2023 has been revised to $1.1 billion.
RIVN can leverage capital markets for additional funding. While debt financing may not be the most attractive approach amid the prevailing high-interest-rate climate, interest rates could potentially decrease by the time RIVN finds a pressing need for such resources, likely not before 2026. Another plausible circumstance suggests that an increased valuation for RIVN could render equity financing a more appealing strategy to accrue funds instead of accumulating debt.
In either case, it's noteworthy to mention the company’s commendable efforts toward curbing its cash burn rate. Investors are advised to keep a vigilant eye on RIVN's financial activities in the coming year to monitor whether this trend sustains. An unforeseen increase in cash burn over a span of a few quarters would not necessarily amount to a significant detriment to the firm, given the time it has before the requirement to inject more capital arises.
Keeping these considerations in mind, investors should wait for a better entry point into the stock.
