Whether you're an industry watcher or a casual investor, it's been hard to ignore the coverage of up-and-coming electric vehicle (EV) manufacturer Rivian Automotive (RIVN +1.51%). From shattering initial public offering (IPO) records to fetching an over-$150 billion valuation at its peak (which is more than General Motors, Ford, or even Starbucks), Rivian embodies a spirit of optimism and imagination.
However, hope and wishful thinking don't go far in the investing world. For a growth story to truly play out, a company must demonstrate an ability to capture market share, chart a path toward profitability, and prove its mettle during tough times. Love it or hate it, Tesla (TSLA 2.75%) has these attributes in spades.
Let's see if Rivian has what it takes to become the next Tesla.
Image source: Rivian Automotive.
Tesla's recipe for success
Tesla is now a $1 trillion company and by far the most valuable automaker in the world. But just a few years ago, Tesla was struggling to achieve consistent profitability and running out of cash as it found itself in the clutches of what CEO Elon Musk once called "production hell."
Today, Tesla sports one of the highest gross profit margins in the auto industry thanks to highly profitable vehicles, vertically integrated manufacturing, and control over its distribution.
TSLA Revenue (Quarterly) data by YCharts
To sum it up, Tesla's success boils down to:
- International brand recognition that limits the need for advertising.
- Its own fast-charging network, which has more than 30,000 Superchargers and growing.
- Technologically superior vehicles at attractive price points for both the consumer and Tesla.
- Direct-to-consumer marketing that cuts out third-party franchises and boosts margins.
- Stable and growing demand that justifies Gigafactory expansion in China, Germany, and Texas.
- Undisputed leadership in the transition from the internal combustion engine to the electric motor.
- Low debt and healthy free cash flow.
Rivian's strategic approach
When looking at the ingredients of Tesla's success, it quickly becomes apparent that mimicking or even coming close to the electric car company will be a tall order. But Rivian does have a lot going for it.
For starters, it's getting a ton of brand recognition without having to spend advertising dollars. Since its IPO, Rivian's Twitter account hasn't released a single post. It's press room has been quiet. And yet, internet forums and mainstream media are spreading its story like wildfire.
In terms of manufacturing, the company's S-1 filing with the SEC states that its Normal Factory in Illinois has an annual production capacity of 150,000 units. It began production of the R1T pickup truck in September, and it plans to begin production of the R1S SUV in December. As of Sept. 30, it had 48,390 reservations for the R1T and R1S, but has since grown that number to over 55,000. It also has 100,000 orders for its RCV delivery van from Amazon -- which owns a 20% stake in Rivian.
Like Tesla, Rivian builds its battery cells in-house to control as much of its manufacturing as possible. However, the company did say that it relies on several parts and components suppliers, which is the main reason why it is behind on customer deliveries.
Rivian's manufacturing plant in Illinois. Image source: Rivian Automotive.
In terms of product differentiation, Rivian's R1T and R1S are attractively priced, starting at $70,000 or less. A fully electric, outdoorsy pickup truck and a fully electric seven-seating SUV are rare feats in the EV market. In this area, Rivian certainly has a leg up on the competition.
To meet the needs of its adventurous clientele, Rivian is building the Rivian Adventure Network to provide charging capabilities from parks to remote locations that otherwise would lack access. Like Tesla, it's bypassing the dealership network in favor of direct-to-consumer sales.
And finally, Rivian is flush with cash. Before its IPO, Rivian had $3.56 billion in cash on its balance sheet from previous funding rounds. It's now estimated the company has somewhere in the ballpark of $12 billion in cash. Even if Rivian takes years to become profitable, it should have no problem raising more cash. Unlike the days when most of Wall Street thought Tesla would fail, EV companies now have access to low interest rates and a widening pool of eager investors. As long as Rivian shows production progress and keeps it competitive edge, finding cash should be the least of its worries.
Does Rivian have what it takes?
On the surface, Tesla and Rivian are surprisingly similar. Rivian is closely following Tesla's playbook, and laying the groundwork to build the same pillars of success that Tesla currently has.
If Rivian proves its production prowess and is able to meet customer demand in 2022, then it would reach a similar milestone that propelled its peer Lucid Group (LCID +2.01%) to new heights. In many ways, it is the ability to deliver on promises that will ultimately gain investor trust and bridge the gap between newcomers and a seasoned veteran like Tesla.
Like a college prospect looking to become the next LeBron James, Rivian has what it takes to become the next Tesla. But it must first get to the NBA (deliver cars) before we seriously have that conversation.
