Rivian's (RIVN 2.84%) trucks are starting to appear in the wild, giving investors hope this company will be one of the few electric vehicle (EV) manufacturers that can survive in an ultra-competitive environment.
As an investment, there are multiple factors to consider. However, I think there is one positive and one negative that investors must be aware of before taking a position in Rivian's stock.
The green flag: Rivian reaffirms production numbers
It takes a while for production to reach its full capacity for something as complicated as an EV. Upstarts like Tesla and stalwarts like Ford have experienced difficulties, so investors shouldn't expect perfection from Rivian immediately.
However, the company believes it can produce 25,000 vehicles during 2022. It didn't make much of a dent in this goal during the first quarter, as it produced a mere 2,553 vehicles. However, in Q2, Rivian nearly doubled this figure with 4,401 vehicles.
Image source: Rivian.
That leaves about 18,000 vehicles for the second half of the year, but management believes it's on track to achieve this. While investors won't get a clearer picture of Rivian's finances until Aug. 11 (when it reports Q2 results), management's comments about the supply chain and production ramp-up will be vital in assessing the stock's prospects.
Production and cash burn are probably the two most important figures for Rivian, but has Rivian burned too much cash?
The red flag: Layoffs are in progress
Layoffs typically indicate a struggling company. However, Rivian is doing this as a proactive step, believing it grew too quickly in some areas. With the company planning to lay off about 5% of its non-production employees, these steps should streamline the company's primary efforts (like developing a new R2 platform and launching its electric delivery van) while tabling some other ideas.
This is debatably a red flag. If Rivian was succeeding and growing without any challenges, it wouldn't need to lay off some of its employees. Instead, these employees would be free to develop new technologies that aren't management's top priority.
Still, this is likely a wise step by management and gives Rivian the best chance to succeed in the EV market by prioritizing what management believes are its best ideas.
Is the stock a buy?
Despite excellent production progress and proactive steps in controlling expenses, Rivian remains a difficult company to analyze. In Q1, Rivian only had $95 million in revenue, and the cost of that revenue totaled $597 million, leading to a negative gross margin. While its revenue will significantly increase quarter over quarter, its input costs will likely remain similar. Even if management can hit its production goals in the following quarters, this negative gross margin will likely persist.
This loss will lead to a significant cash burn, although Rivian still has nearly $17 billion in cash and equivalents as of March 31. During Q1, it burned about $1.5 billion, giving Rivian enough resources to survive for just under three years at its current burn rate. However, its cash burn should decline as factories ramp up production and expensive manufacturing equipment purchases drop once the $5 billion Georgia plant is complete. Still, Rivian will be cutting it close in terms of cash flow versus cash burn.
Image source: Rivian.
At that time, it will likely come down to consumer appetite for an expensive, adventure-based product line. With more than 90,000 preorders for its R1T truck and R1S SUV and 100,000 electric delivery vans ordered by Amazon, Rivian should have plenty of orders to keep it busy for a while. But the market for vehicles with a starting price of $67,500 isn't nearly as broad as the market legacy automakers are targeting.
The Ford Lightning starts at under $40,000, and Tesla's Cybertruck is projected to begin around the same range. Rivian may be able to secure its adventure market niche, but without a cheaper offering, it may fail to capture a larger audience.
With these concerns, I think there are better EV stocks to purchase than Rivian. However, I'm still rooting for the company to succeed, as its product brings innovation to a truck industry long dominated by only a handful of companies.
