Rivian: No Pain, No Gain

Rivian: No Pain, No Gain

Justin Sullivan

$Rivian Automotive, Inc.(RIVN)$ (NASDAQ:RIVN) stock was mauled by the bears sensing blood after the RJ Scaringe-led company posted aproduction outlookthat was much weaker than expected.

Accordingly, Rivian's 50K production outlook for 2023 came below Wall Street'sestimates of 62.2K. As such, the 10% post-market decline implies Rivian could face more headwinds in 2023.

However, a closer inspection ofmanagement's commentaryandshareholder lettersuggests that the pessimism may have been overplayed.

Rivian is scheduling downtime in 2023 to retool its production lines for technological improvement and "re-rate" for higher volume growth. The company has also planned to focus more of its production capacity on the "consumer business," with pre-order visibility through 2024.

As such, the company took great pains to explain the need for these changes, which is part of its roadmap in reducing its cost ofgoods sold or COGS per vehicle over time.

Therefore, even though it will impact its near-term production cadence, it should significantly benefit the company's production ramp toward its Normal facility annualized capacity of 150K units.

Moreover, the company remains on track for the subsequent introduction of its lower-cost R2 line, which is expected to benefit from the $7.5K consumer credits embedded in the Inflation Reduction Act or IRA.

Notably, Rivian highlighted plans to capitalize on lithium iron phosphate or LFP batteries in its line-up. Although it did not name its battery partner, investors must know that China dominates the LFP battery supply chain, "[supplying] 99% of LFP batteriesfor global energy storage and EV applications."

As such, auto OEM leader Ford (F) has planned to construct a$3.5B LFP battery facilitywith the world's leading battery maker, China-basedContemporary Amperex Technology Limited, or CATL, in Michigan. It's planned to help Ford access the IRA credits by ensuring its production and supplies are 100% IRA-compliant.

However, with Rivian focusing on ramping production to improve its fixed costs leverage, we don't think the company has sufficient liquidity to mount such a significant endeavor.

Moreover, the company was non-committal when asked by an analyst on the call regarding its vertical integration ambitions in lithium mining and supply. Keen investors should be aware that Tesla (TSLA) and General Motors (GM) have flexed their muscles,integrating the battery supply chainfurther to improve their access to critical resources for battery manufacturing.

Hence, given their scale advantages, these EV and OEM leaders will likely be able to introduce further efficiencies in their value chain and drive down costs further.

Despite that, Rivian believes that its "clean-sheet approach" should provide it with the advantages of scaling its EV platform without the legacy challenges that could hamper the auto OEMs.

Ford investors have witnessed first-hand how that industrial transformation was easier said than done, as CEO Jim Farley highlighted significantoperational challengesimpacting its EV transition.

Without these "legacy issues," could Rivian live up to its commitment to driving production ramp through 2026?

Management highlighted that it's confident the "continued ramp of the R1 and EDV in Normal can arrive at the target vehicle margins by 2025." Accordingly, management articulated a long-term vehicle gross margin of 20%, with added-on software and connectivity services potentially lifting it to 25%.

However, the consensus estimates suggest that analysts are lukewarm to the company's projections, as they penciled in gross margin estimates of 16% in FY25.

Hence, we believe the expectations of Rivian making it past FY24 is relatively low, as the company updated it has about $12B of cash and equivalent remaining. However, it is likely sufficient to last Rivian only through FY24, suggesting a capital raise could be required, further diluting investors in the process.

As Rivian trades at less than 1.5x NTM Revenue (based on February 28's close), it likely has much lesser flexibility to raise equity financing without significant dilution. Hence, we believe the company needs to rely on debt financing, which could impact its profitability ramp if the Fed remains hawkish.

Hence, Rivian still faces significant challenges across production, financing, sales, and battery supply chain, making holding RIVN as a core holding highly speculative.

Despite that, we explained in ourprevious articlethat RIVN looks well-battered, with its January lows likely the worst of its selloff.

If RIVN could survive the post-earnings pullback with short-sellers losing conviction from reloading to break below January lows, capitalizing on the pullback for another speculative ride back up looks enticing.

Source: Seeking Alpha