Earlier this month, premium electric vehicle (EV) maker Rivian Automotive (RIVN 1.73%) turned in a second-quarter report that's best described as mixed.
On the positive side, its revenue of $364 million beat Wall Street's consensus estimate of $337.5 million, and it reaffirmed its 2022 production target of 25,000 vehicles. The company's revenue was primarily derived from the delivery of 4,467 vehicles during the second quarter.
On the other hand, Rivian revised downward its full-year outlook for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to negative $5.45 billion, from negative $4.75 billion. This revision was largely due to macroeconomic factors, including high inflation and increased expenses associated with the global supply chain issues.
Earnings releases tell only part of the story. Here are two key things management shared on Rivian's Q2 earnings call that investors should know.
Rivian R1T pickup truck. Image source: Rivian.
Building a business that has recurring revenue streams
From CEO RJ Scaringe's remarks:
Regarding our commercial business, in July, we hosted an event in partnership with Amazon to announce the formal rollout of EDVs [electric delivery vans] to locations across the country. ... In addition to the set of unique features of the van, we developed a comprehensive fleet management system, which we call FleetOS... [E]very vehicle delivered to Amazon comes with a FleetOS subscription, which represents a monthly recurring revenue stream for us.
Businesses that generate at least some recurring revenue tend to be attractive from an investing standpoint. So far, Rivian has developed one source of (monthly) recurring revenue: FleetOS, its digital management system for commercial fleets.
Every electric delivery van (EDV) that Rivian delivers to Amazon comes with a FleetOS subscription. Rivian hasn't disclosed how much monthly revenue each subscription generates, nor has it disclosed how many EDVs it's delivered to Amazon so far. That said, the FleetOS revenue seems like it has potential to eventually be substantial.
Amazon placed an initial order of 100,000 custom-designed EDVs with Rivian, which Rivian is in the process of fulfilling. Rivian has the potential to sell additional EDVs -- along with FleetOS subscriptions -- to Amazon. It also plans to eventually sell other vehicles produced on its Rivian commercial vehicle (RCV) platform to customers other than Amazon, which would provide it with additional opportunities to sell its FleetOS subscriptions.
Long-term financial targets
From CFO Claire McDonough's remarks:
I want to reiterate our confidence in our long-term financial targets. We see a clear path to our approximately 25% gross margin target, high-teens [percentage] EBITDA [margin] target and approximately 10% free cash flow [as a percentage of revenue] target.
I'm not certain what "long term" means to Rivian's top management, but five years out is a relatively common meaning for this term among publicly traded companies and Wall Street analysts. Rivian's meaning, however, is likely further out than five years.
That said, I'd guess the question you might have upon seeing Rivian's long-term financial targets is the same one I had: How do these stack up to Tesla's (TSLA 0.53%) current numbers?
Below is a chart that addresses this question. The numbers in this chart are based on generally accepted accounting principles (GAAP), so they're not adjusted for one-time items.
Data by YCharts.
Rivian's free cash flow (FCF) target sticks out, as turning 10% of its revenue into FCF would solidly best Tesla's 2021 metric of about 6.5%.
A stock worth watching
Rivian is worth putting on your watch list. Competition in the electric vehicle space is poised to further heat up as the large traditional automakers roll out their early EV models. That said, Rivian seems like it has a good shot at being one of what probably will only be a few pure-play EV companies that survive and thrive.
One big thing to like about Rivian is that it was the first to bring a mass-produced all-electric truck to the U.S. market. This is no small feat, as it beat the likes of Ford and Tesla. And having Amazon as both a financial backer (the e-commerce giant owns a sizable chunk of Rivian stock) and a major customer should provide Rivian with some long-term benefits, provided the partnership progresses well.
As with all newer companies in the EV space, investors should keep a close eye on Rivian's cash-burn rate.
