Thesis
Rivian Automotive, Inc. $Rivian Automotive, Inc.(RIVN)$ is facing the same problem encountered by other EV start-ups, difficulty in scaling production because of supply shortages. And while the company may not be responsible for the problem, it continues adding production capacity while barely utilizing half of its already existing manufacturing facility. This is resulting in spiraling operating expenses at a time when Ford $Ford(F)$ is entering the EV truck and SUV space in full force. Rivian’s inability to ramp production will continue to hurt stock price performance.
Slow Ramp and Growing Overhead
Rivian is an EV maker that specializes in electric pick-up trucks and SUVs. The company currently has one operational factory located in Illinois and is planning a second in Georgia; the anticipated total production capacity of both is 600,000 vehicles per year. There were about 83k pre-orders for the company’s R1T truck and R1S SUV as of March 8 and that number continues to grow. In addition to that, the company also has an order from Amazon.com, Inc. for 100k electric delivery vans. Its vehicles have won many accolades and the R1T was even selected by MotorTrend as their 2022 Truck of the Year.
Rivian is proving to be very similar to Lucid Group, Inc. $Lucid Group Inc(LCID)$ , another EV start-up that I recently wrote about, which also built an award-winning prototype that is generating a lot of buzz and pre-orders. However, both of these companies seem to have hit the same wall when it came time to ramp up production; the mass-manufacture of their vehicles in a timely and cost-efficient manner is proving to be much more challenging than either company initially anticipated.
During all of last year, Rivian produced just over a thousand vehicles and during its Q4 earnings call management said they expect this year’s production to be about 25k vehicles, well short of their 50k capacity. Management attributed their inability to fully ramp up production to supply chain challenges faced by their suppliers and also mentioned that they anticipate those challenges to persist throughout 2022.
But even this 25k target seems rather ambitious given that the company had only produced 1,410 vehicles as of March 8, averaging roughly 700 units a month so far this year. The poor rate of capacity utilization isn’t slowing down the firm’s growth plans though as it plans to spend $2.6 billion on capacity expansion in 2022; to both continue expanding the Illinois operation with a goal of reaching a 200k unit/year total capacity and begin work on a factory in Georgia.
Rivian has plenty of cash to do this, as it ended the year with $18.1 billion of cash on its balance sheet. But in addition to its capex, operating expenses are also beginning to mount. In the fourth quarter of last year the company’s operating expenses were slightly over $1 billion and net cash used in operating activities in 2021 was $2.6 billion. For this year, management is guiding to a $4.75 billion operating loss. The problem with unused capacity is it can be a cash drain; Rivian’s headcount is now over 11,500 employees and that number is set to grow as the company continues to add capacity. If supply chain challenges drag into next year and continue to constrict production, the company could face even higher operating losses.
Ford
Rivian got a major boost in 2019 when it teamed up with Ford Motor Company to jointly develop a vehicle which saw Ford even agree to take a $500 million stake in the company. Ford still holds that investment which gives it an 11.4% ownership stake in Rivian and is worth just about $4.8 billion based on the March 22nd closing price of $46.93/share.
However, what was initially a positive development for Rivian has since turned into a potential problem. In November of last year, Ford announced that it had cancelled plans to work with it as it began to ramp up its own EV production. And although Ford was able to cancel its cooperation agreement with Rivian it couldn’t sell its stock in the company. That’s because it had to wait until the end of a lockup period that prevents it from selling any shares for a 180-day period after the Nov. 9 IPO date. But that lockup period ends on May 9 of this year.
There’s been a lot of speculation as to whether or not Ford will sell its shares and Jim Farley, Ford’s CEO, hasn’t ruled it out. But when one looks at the recent announcements coming out of Ford it’s obvious that it can make good use of that money. Ford plans to spend $5 billion on EVs this year which could almost be completely covered through the sale of its Rivian stock. And if it does decide to sell, that could push down the share price for months given the size of the stake and the time it will take to sell it all.
The counterpoint to this is to say that an investor shouldn’t be focused on the short-term but should rather look at the long-term. That’s fair enough, but one has to remember that Ford isn’t going to sell its shares in order to reinvest the proceeds in some unrelated industry. Ford would sell its stake in order to use those funds to directly compete with Rivian. And if Ford fully allocates that $4.8 billion to capex this year, it would be an amount that was almost double the $2.6 billion that Rivian plans to spend on capital expenditures in 2022. Ford is quickly becoming a major competitive threat for the company as the F-150 Lightning recently beat Rivian’s R1T in terms of range. And a ramp up in EV capex spending could further tip the EV truck balance in Ford’s favor.
Conclusion
The EV industry is no longer in its initial phase, as more and more legacy automakers enter the market new EV producers will have to focus on getting product out the door. An inability to do so is costing them their first mover advantage and will drag down their stock prices over the long-term. Rivian has fallen into this trap and its inability to fully utilize existing capacity will weigh the stock price for the foreseeable future.
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