EV maker Rivian is down $143 Billion, but is still overvalued?

EV maker Rivian is down $143 Billion, but is still overvalued?

Near the end of last year, Rivian was the third most valuable automaker in the entire world only beaten out by Toyota and Tesla. This means that they had a higher valuation than Volkswagen Daimler, General Motors, and Ford. At the time, their market cap stood at an eye-watering $161 billion, and it’s not like they were delivering millions of vehicles every single year.

In fact, they had just started delivering their first production vehicle the R1T. Since then, Rivian has produced and delivered a few thousand vehicles throughout Q1, but this is obviously not enough to justify a $161 billion valuation either. Fortunately, though, the stock market has cooled off quite a bit since the end of last year which has annihilated Rivian stock. In fact, their stock graph is literally just
a downward trend having sold off nearly 90% from the peak.

At the bottom, Rivian stood at a valuation of $17.3 billion which is a far more reasonable valuation for an up-and-coming EV startup. But, Rivian is by no means out of the woods yet, and it’ll likely take years for Rivian to live up to its all-time high valuation. So, here are the biggest issues plaguing Rivian and why the stock remains risky despite it having sold off 90%.

STARTUP:

Rivian has been around for quite some time having been founded in June of 2009. But, don’t kid yourself into thinking that they’re a mature company by any means. Developing, producing, and delivering vehicles is an extremely long and tedious process, so even though Rivian has been around for 13 years, they’re very much still just a startup.

Not to mention, Rivian has taken it pretty slow themselves. For example, Tesla was founded in 2003, and they started delivering their first production vehicle in 2008, so about 5 years later. Meanwhile, it took Rivian 12 years to start delivering their first production vehicle. The bright side is that Rivian has been able to perfect the R1T before launch, but from an investor’s perspective if it took them 12 years to deliver their first vehicle, how long do you think it’ll take them to launch cheaper vehicles and scale up production.

Historically, this wouldn’t have been that big of a problem because it’s not like EV companies were facing that much competition 10 years ago. But, today, legacy manufacturers such as Volkswagen, Ford, and even GM have been taking EVs quite seriously. In fact, Bloomberg is predicting that Volkswagen will overtake Tesla in EV sales by 2024 which is only 18 months away. They also think that GM and Ford will roughly reach 1 million EV sales each by the end of 2025.

So, Rivian is no longer the second-biggest EV company like it used to be. Back in 2018, it used to be Tesla, Rivian, and then some Chinese players, but that was pretty much it. Now, legacy players are not only taking EVs seriously, but they’re even catching up to Tesla. Something else to note is that gas prices are through the roof right now standing at nearly $5 per gallon.

This is no doubt terrible for everyday Americans, but for upper-middle-class Americans who have money, it makes more sense than ever to go electric. And that’s probably what they’ll do over the next few years, but the problem is that Rivian isn’t here to capture all this new demand. I mean, what do you think is more likely. An American family buying an EV that’s already on the market or an American family putting in a pre-order for a Rivian SUV that’ll hopefully be delivered in 4 years.

I think the answer is obvious. Ideally, Rivian would’ve already had a significant scale like Tesla by the time that EV adoption became more prominent. But, it doesn’t look like Rivian is anywhere close to this goal given that they produced just 2500 EVs last quarter. To put that in perspective, Volkswagen produces more cars in 2 hours. I’m not mentioning this to put down Rivian. Rather, I’m trying to show what they’re going up against and why it’s going to be such an uphill battle for them moving forward. They really are just a startup that’s fighting against dinosaurs.

This isn’t to say that Rivian can’t build up its own niche customer base, but it does seem like Rivian missed out on the golden period. A few years ago, if you wanted an EV, you really only had one choice, buy a Tesla. And I suspect that Rivian was hoping for a similar position within the pickup market.

If you want an EV pickup, you have to go with Rivian. This would’ve given them significant exposure and demand, but the F-150 lightning is already here which will likely stifle Rivian’s demand significantly. And as more time goes by, it just becomes more and more likely that the dinosaurs squash Rivian.

SCALING UP:

Having to fight the legacy automakers head-on is already bad enough, but Rivian has to do that while also trying to scale up production. And based on Tesla’s experience with scaling production, I think it’s safe to say that scaling is by no means an easy feat. I mean, scaling model 3 production nearly drove Tesla into bankruptcy. And Rivian is just now starting to scale up production.

Rivian has some pretty ambitious targets when it comes to scaling production. In February, they were hoping to get to 150,000 EVs per year by 2023, but honestly, this isn’t that realistic. At their current rate of 2500 EVs per quarter, we’re looking at an annual production rate of about 10,000 vehicles.

Even if we give them the benefit of the doubt and call it 20,000 vehicles, they’re basically where Tesla was at in 2013. And it took Tesla 4 years to go from that to Rivian’s goal of 150,000 EVs per year. So, realistically, it’ll probably take Rivian till 2025 at the earliest to reach such numbers. A bigger concern, however, is whether Rivian will even have enough demand to produce so many vehicles.

Right now, Rivian has 71,000 pre-orders, and this number will likely only grow as more people start trusting the company. But, these are the easiest orders to get because all of these guys are EV enthusiasts who are willing to wait years to get an EV pickup. As Rivian burns through these orders, however, it’ll likely become a lot harder for them to garner sales given how expensive their vehicles are.

The R1T starts at $67,500 while the R1S starts at $72,500. These prices make their vehicles completely inaccessible to the vast majority of people. Now, of course, Rivian has orders from Amazon, but I don’t think serving Amazon is their long-term goal. Their long-term goal is to become a premium EV company. But, the only reason Tesla is able to sell so many vehicles is thanks to their cheaper Model 3 and Y. Throughout all of 2021, Tesla only delivered roughly 25,000 Ss and Xs.

This means that for it to make sense for Rivian to scale to 150,000 vehicles per year, they would have to sell 6 times as many Model Ss and Xs as Tesla sold last year. I don’t think that’s an impossible goal for Rivian, but that level of demand doesn’t just show up overnight. It takes years of deliveries, brand building, and trust. And to make things worse for Rivian, it looks like we’re heading into a recession meaning that it’s going to be significantly harder to sell luxury vehicles. Even if we don’t enter a recession, it doesn’t really matter because the fear of entering one has already set in. And this will no doubt cause people to think twice before buying a $70,000 pickup truck. Fortunately, Rivian can at least slowly decrease prices with time as their production process becomes more efficient which will hopefully attract more customers.

Wait, never mind, they can’t do that either due to insane inflation and the supply shortage which have made raw materials and semiconductors insanely expensive. They already increased their prices by $12,000 in March and this was likely just the first of many to come. Not only does this make it harder for Rivian to sell their vehicles, but it also makes it harder for them to scale production. Even companies as established as Apple are dealing with supply constraints, so there’s no doubt that supply constraints will carry over to Rivian as well.

ABYSMAL FINANCIALS:

Aside from having to fight against the legacy players and deal with scaling production, Rivian also has to deal with abysmal financials. Now, Rivian’s valuation has come down substantially, and given how much cash they have, the intrinsic value of the vehicles they’ve developed, and their brand value, I don’t think their current valuation of $20 to $30 billion is too crazy.

I mean their total assets currently stand at $21 billion, so they’re basically just trading at book value. So, their valuation isn’t that bad compared to their assets and brand value, but their valuation is still ridiculous compared to their revenue and net income figures. In the first quarter of 2022, Rivian only pulled in $95 million worth of revenue, and to get this revenue, it cost them $597 million meaning that their gross profit was negative half a billion dollars.

Tack on half a billion dollars worth of R&D and another half a billion dollars worth of selling, general, and administrative expenses, and you are left with a net loss of $1.593 billion in a single quarter. At that rate, Rivian would burn through its $16 billion cash reserves within a matter of 2.5 years.

Fortunately, their financials should improve with time, but I doubt they’ll become profitable anytime soon which means that they’ll have to raise money sooner or later. And in the current stock market environment, that’s not exactly an easy task. Rivian does have some notable backers including Ford and Amazon, but they’re not exactly doing well themselves.

In fact, Amazon lost money on their retail business last quarter and their losses on Rivian just made their financial report look even worse. To make things worse, Amazon stock itself is down nearly 50%. Meanwhile, Ford has been straight up cashing out of their Rivian position. In May, Ford sold off tens of millions of shares worth of Rivian which is not surprising given that they themselves are fighting for survival.

Last quarter, Ford lost $3.1 billion mostly because of Rivian, and Ford can’t really afford this given that they already have $207 billion worth of liabilities. This isn’t to say that Amazon and Ford wouldn’t bail out Rivian if they had to, but I don’t think they particularly want to. This means that most of the losses would have to be paid for by public stock investors through share offerings.

If you’re not familiar with what a share offering is, it’s when a company issues new shares of its stock to raise money and continue operations. Not only does this dilute existing shareholders, but it adds significant amounts of selling pressure onto the market. And there’s really no way around this. For Rivian to achieve the economies of scale necessary to become profitable, they have to invest heavily into R&D and factories and scaling production. So, Rivian is in for years of substantial losses which just makes it even harder for the stock to gain any sort of bullish momentum.

FUTURE OF RIVIAN:

But, this isn’t to say that I don’t like the company or that they’re gonna go bankrupt. Rivian’s R1T and R1S are phenomenal vehicles, and it’s crazy to think that a startup was able to produce such high-quality vehicles. In the future, when wait times cool down, I would strongly consider Rivian when purchasing a vehicle for myself. But, while Rivian excites me as a customer, it does not excite me as an investment.

They have several years of hardship ahead of them, and sky-high inflation, the supply shortage, and legacy players just make it even harder for them to scale up and achieve profitability. And in a market where all stocks are getting destroyed, there are plenty of options when it comes to distressed stocks. And personally, Rivian just doesn't strike me as the best of those options, but that’s just what I think.

Would you guys rather buy a Tesla or a Rivian?

Comment that down below.

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