Rivian Appears Equipped to Overcomeits Major Obstacle. Is the Shares Worth Investing in?
Since going public in 2021, Rivian Automotive (RIVN 5.86%) has done well in selling its electric vehicle (EV) SUVs. However, it's struggled to sell them for more than it costs to produce. This is reflected in the company's negative gross margin.
Despite some recent challenges with component shortages affecting deliveries, Rivian claimed it would manage to achieve a modest positive gross margin in the following quarter, following improvements in vehicle design and manufacturing facilities.
The stock has had a turbulent year, with a drop of over 55% as of the time of writing, in 2024.
Let's inspect the company's recent quarterly results to determine if now is a suitable time to invest.
Decreased production, but future gross margin's significance
Due to supply constraints and factory retooling, Rivian's third-quarter revenue decreased by 35% year on year to $874 million, as it delivered 10,018 vehicles, a 36% decrease from the 15,564 it delivered the previous year. It produced 13,157 vehicles in the quarter. In October, it revised its annual production forecast down from 57,000 vehicles to a range of 47,000 to 49,000 vehicles. As a result of these production issues, the company lowered its full-year EBITDA loss prediction to between $2.825 billion and $2.875 billion.
As mentioned earlier, Rivian's major issue has been its negative gross margin, which continued in the quarter. It reported a gross loss of $392 million, equating to a loss of over $39,000 per vehicle delivered before any selling costs or corporate or research and development expenses.
However, the company insisted it would be gross-margin-positive in the next quarter due to increased revenue per vehicle, reduced variable material costs, and significantly decreased fixed costs linked to earlier vehicle redesigns and recent factory retooling. It forecasts a 20% reduction in material costs compared to the first quarter of the year, along with lower production hours per unit. For the next year, it expects its new quad motor offering to raise average selling prices (ASPs).
Overall, Rivian recorded an operating loss of $1.17 billion in the quarter, while generating negative adjusted EBITDA of $1 billion.
The company continues to consume cash, with operating cash outflows of $876 million and free cash flow of negative $1.15 billion due to $277 million in capital expenditures. It concluded the quarter with $9.4 billion in cash and short-term investments, against $4.4 billion in debt.
Should we buy Rivian now?
Achieving a positive gross margin is merely the first step for Rivian in establishing itself as a financially stable company in the long term. The fact that the component shortage will not affect the timing of its gross margin positivity is a significant advantage for the company. Any delays in production could have easily derailed this.
With its recent multi-year agreement with Volkswagen, the company received up to $5 billion in funding, and it now anticipates the joint venture with Volkswagen to be finalized by the end of the year. Additional funds from Volkswagen are expected shortly, enabling the company to launch its cheaper R2 model, which should expand its customer base with the vehicle's projected $45,000 starting price.
From there, the company will need to generate revenue and work towards profitability. This is a long journey ahead, yet it has strong partnerships with companies like Volkswagen and Amazon, its largest shareholder, for whom it makes EV delivery vans. Amazon, meanwhile, is looking to increase its van delivery orders, while Rivian expects additional commercial van deals in the coming year.
Rivian remains an early-stage company with significant cash burn, but it seems to be making progress in addressing its main issue (negative gross margin), while also forging strong partnerships. Its investment and partnership with Volkswagen, meanwhile, underscore Rivian's advanced EV technology, particularly its new zonal hardware design.
In conclusion, I view Rivian as a speculative investment opportunity, especially for risk-tolerant investors pursuing a small position based on its strengths.
In light of Rivian's strategic partnership with Volkswagen, which provides up to $5 billion in funding and anticipates the finalization of their joint venture by year-end, there's potential for the company to launch its more affordable R2 model, thus expanding its customer base. (investment, finance, money)
To become financially stable in the long term, Rivian needs to not only achieve a positive gross margin, as seen in their upcoming forecasts, but also generate revenue and work towards profitability. (investing, finance, money)
