Rivian Stock: Why I’m Not Impressed (NASDAQ:RIVN)

Introduction

The history of my coverage of Rivian Automotive (NASDAQ:RIVN) stock began in November 2021 – it was an IPO analysis that concluded that the company was heavily overvalued. Immediately after the IPO, the stock started to grow very strongly and moved away from logically explainable levels – during that growth, I updated my “Sell” recommendation, which remained valid until June 2023, when I upgraded RIVN to “Neutral”. At that time, I had the impression that the company’s situation was beginning to improve: Margins were showing clear signs of growth at the time, but the high valuation and the risk of strong competition did not allow me to assign a “Buy” rating.

Since three months have passed since the last update, I decided today to take another look at what has changed for the company in that time. Has my thesis changed? Let’s take a look.

The Latest Financials And Corporate Events

Rivian’s Q4 FY2023 revenue of $1.315 billion exceeded the Street’s consensus forecast by 4.3%, while on the bottom line we witnessed a ~3.4% miss:

According to Golman Sachs’ note that was released right after RIVN reported (proprietary source), the company’s operating expenses (OPEX), excluding SBC, were in line with forecasts at ~$781 million, with significant allocations to R&D and SG&A costs. What surprised me personally in a negative way was the fact that RIVN’s gross loss started to increase instead of moving towards break-even. This is a pretty important metric for any manufacturing company, showing the viability of the chosen business model. What is the point of continuing production at a loss at the stage of deducting COGS? RIVN may be a young company, but given its production capacity of 17,541 vehicles (last quarter alone), I think it should have already started to break even in terms of gross profit. We saw a move toward that happening before – that’s why RIVN stock was bought so heavily by market participants in November 2023 when the Q3 report came out. But this time the market did not forgive another widening of the gross loss, which dragged the rest of the financials down with it.

As we know from the earnings call, Rivian aims to achieve modest gross profit by Q4 2024, driven by strategies including reducing variable cost per unit, increasing production efficiency, and scaling non-vehicle revenue. The company’s CFO said they have plans to optimize OPEX by reducing salaried and hourly employees. To be honest, I can’t imagine how this could affect production going forward – for me, these words mean an increase in operational risk. Speaking about production: To improve margin profiles, Rivian plans a shutdown of consumer and commercial lines during Q2 FY2024 to introduce cost-saving technologies as they say. In other words, the company has made it clear to analysts that their previous forecasts for production volumes in FY2024 could prove to be unrealistic.

Despite negative adjusted EBITDA of $1.1 billion for Q4 FY2023 (about -$4 billion for the full year), Rivian “remains focused on driving cost efficiency and guiding to produce 57,000 vehicles in 2024.” In case you didn’t know or forgot, let me remind you: the Street predicted that Rivian would produce almost 76 thousand vehicles in FY2024, but now management is talking about producing only 57 thousand.

Among the short-term impacts on production the management expects a 10-15% decrease in deliveries in Q1 FY2024, but again, Rivian is “confident it better positions Rivian to be more profitable and competitive over the long term.”

Honestly, it feels like RIVN is just trying to reassure the market that everything’s okay and we just shouldn’t expect everything good to happen all at once. Their efforts are just “stretching out” their potential success, in my view. But let’s face it: the farther into the future we go, the more uncertainties there are. There’s a looming threat from competitors flooding the EV market, especially from China. I know the American market might not fully open its arms to the Chinese cars with their cheap production and variety of different models – that doesn’t just affect Rivian, it’s a concern for Tesla (TSLA) too. I think the politicians won’t allow it to happen. But tight now, the Chinese are ramping up their car exports to Europe (and not only there), nibbling away at the market share of American automakers. Sure, Rivian’s international sales are nearly nonexistent at the moment, but expanding globally could be a significant growth pillar in the future. So the “stretching out” is a risky move I guess as the Chinese might throw a wrench in those plans.

This is just my two cents, but Rivian’s recent financial results didn’t really impress me. Their new SUV models look intriguing, but we need to consider how costly they might be for the company. Management talks about wanting to cut costs and achieve gross profit by the year’s end, but I can’t see a solid backing for these words.

We know that Apple decided to pull the plug on its electric car development plans, and Ford scaled back its own EV ambitions. But does this signal a more favorable competitive landscape for Rivian? Or does it hint at lowering demand? Perhaps it reflects that Rivian’s business model doesn’t align with companies like Apple, known for their stringent focus on financials and gross profit margins? I’ll leave it to potential Rivian investors to ponder these questions and draw their own conclusions.

Rivian Stock’s Valuation Update

It’s interesting to observe that over the past 6 months, Rivian’s valuation has seen an uptick, as indicated by Seeking Alpha’s Valuation Grades. However, it’s worth noting that Growth grades have taken a hit, while Profitability remains stagnant at a dismal level. Following the latest quarter, we’ve witnessed several downward revisions to EPS and revenue forecasts. Consequently, Seeking Alpha’s Quant rating system also reflects a negative signal in this regard:

Let’s delve into the Valuation aspect first and foremost. What exactly has seen improvement within Seeking Alpha’s Quant rating? Taking a closer look at the comprehensive table of valuation indicators reveals that the enhancement primarily stems from multiples associated with the book value.

The thing is, Rivian’s current market cap closely aligns in absolute terms with its cash pile on the balance sheet. The company’s prolonged practice of inflating its equity capital through continuous injections of funds – each dilution is effectively hurting the existing stakeholders.

So Rivian stock can’t be called cheap solely based on price-to-book, or price-to-sales – all because these metrics can be enhanced by what the company shouldn’t do (constant dilution and selling cars below their COGS).

Concluding Thoughts

Considering that RIVN’s prospects for achieving profitability have somewhat shifted further away, to say the least, I believe the company will need to exert considerable effort to address the current situation. I hesitate to label Rivian’s stock inexpensive, as the valuation seems to rely heavily on inflated revenue (stemming from direct costs exceeding sales), or on book value multiples, buoyed by the substantial cash reserves on the company’s balance sheet resulting from ongoing capital dilution.

Despite all that, I must admit, I like the technical features of RIVN’s vehicles and their appearance – I don’t want to lie here. There might be aspects I don’t fully grasp, and it’s entirely possible that the company holds a promising future. Also, when the market capitalization closely mirrors the cash reserves on the balance sheet, it can sometimes suggest that the company is indeed undervalued. With these potential “upside risks”, I’ve chosen to reiterate my “Neutral” rating again. In my view, it’s not yet the opportune moment to invest in Rivian stock. But it’s worth watching.

Thank you for reading!