This may be an unpopular opinion at the moment, but I think Rivian Automotive (RIVN 1.85%) could be an attractive buy-and-hold stock for the long term. The company has been absolutely crushed on the market, down 76% from its all-time high set just a few months ago, but there are some positives for Rivian's business.
Despite production challenges, Rivian does expect to ramp up to 25,000 vehicles produced in 2022. It also recently pushed through a big price increase. Finally, it will be a leader in electric trucks, SUVs, and commercial vehicles for at least a few years. And I think the market has underestimated this EV stock's disruptive nature, which could make it a great stock long term.
Image source: Rivian.
Rivian's pricing and production
During its fourth-quarter earnings report, Rivian said that it will only make 25,000 vehicles in 2022, despite having the capacity to make 50,000 vehicles. Shortages of parts like semiconductors are to blame, according to management, but capacity should be built so there's progress on the production front.
The current Normal, Illinois, plant could produce 200,000 vehicles in the future, and if a planned Georgia plant is built, Rivian's capacity could be 600,000 vehicles in a few years. But management has said it hopes to make 1 million vehicles per year by 2030, putting a number on the potential upside for Rivian's production.
On the pricing side, Rivian recently pushed through price increases that were up to $20,000 per vehicle on new orders (vehicles already ordered by customers but not yet delivered will keep their agreed-upon pricing). Base prices are still $67,500 for the R1T truck and $72,500 for the R1S SUV, but the base model has a shorter range and dual motors instead of the quad motor design.
I think we'll see sale prices drift significantly higher as a result of the price changes. These price increases are key to Rivian maintaining gross margin goals of 25% and free cash flow margin of 10%, which management projects.
99 problems but cash ain't one
As disappointing as Rivian's production plans might be, the company still has years of runway before having too many problems. It had $18.4 billion in cash at the end of 2021 and spent $4.4 billion in cash last year, primarily building its manufacturing plant. Spending will continue with a $5 billion plant planned for Georgia, but there's still a lot of cushion to get operations up and running.
If -- and it's a big IF -- Rivian can ramp up production and meet financial targets, this could be a stock with massive upside.
The upside for Rivian
Here are some revenue, gross margin, and free cash flow scenarios based on management's current projections. If we assume that the average price of a vehicle is $90,000 and there are scenarios for low, medium, and high production rates by 2030, the company could be generating a lot of cash.
| Item | Low | Medium | High |
|---|---|---|---|
| Production per year | 200,000 | 600,000 | 1 million |
| Price per vehicle | $90,000 | $90,000 | $90,000 |
| Revenue | $18 billion | $54 billion | $90 billion |
| Gross profit (25%) | $4.5 billion | $13.5 billion | $22.5 billion |
| Free cash flow (10%) | $1.8 billion | $5.4 billion | $9 billion |
Data source: Author's calculations.
Rivian currently has a $38 billion market cap, so if it can reach 1 million units of production and generate 10% cash flow, it seems like it would be a great value stock today. The medium production scenario seems more likely to me, but even then it could be a great stock.
Rivian is playing a different game
A lot has to happen before Rivian becomes a cash flow machine, but the unique business model the company has gives it a potential leg up. The company isn't selling through dealers, which will likely help margins and brand continuity, as it has for Tesla. Its commercial van business also leverages technology that's used for trucks as well and comes with a 100,000-unit order from Amazon.
The service and software model could also be a differentiator. Rivian plans to service vehicles with a mobile fleet of workers, giving it financial and operational flexibility. And its software will be key to running commercial delivery fleets and could also add features for truck and SUV owners as well.
This is a ground-up electric vehicle company that isn't bound by the rules engrained in the auto industry over the last 100 years. I think that's a big competitive advantage, and if management can execute and demand keeps rolling in, this could be a market-beating stock long term.
