Unlike Tesla (TSLA -1.05%) which produces nearly 1 million cars a year and most importantly generates a profit, up-and-coming electric vehicle (EV) makers face an uphill battle to eventually reach profitability. One of those new companies is Rivian (RIVN -0.57%), an electric vehicle manufacturer that specializes in sport utility vehicles and trucks.
Since its November 2021 IPO, which was the largest in the U.S. in nearly a decade, Rivian has been forced to learn quickly that the electric vehicle industry is a daunting one that demands results.
The company doesn't plan on generating a profit anytime soon, but it does have one advantage other EV makers don't: a massive pile of cash. Based on its Q2 earnings report, the company is said to have roughly $14.9 billion. That is down from $17 billion in Q1 but it's still more than twice as much cash on hand than rival Lucid (LCID -0.91%).
Rivian has its sights set on the year 2025 for when they expect to generate enough income to become profitable. That's when its gigantic 2,000-acre factory north of Atlanta should open its doors. Once operational, the plant is estimated to produce another 400,000 cars per year at peak production. For a company that only plans to make around 25,000 cars this year, the idea of being able to produce 400,000 is almost unfathomable. But if estimates on the new factory's capacity are correct, then those 400,000 units could be Rivian's saving grace -- and a sign of hope for a stock that's been pummeled over the last year.
It doesn't take a mathematician to figure out that Rivian is running on borrowed time while not turning a profit. But until that day comes, Rivian will need to manage that $14.9 billion efficiently by minimizing costs while increasing production, sales, and deliveries -- a formidable challenge to say the least. Yet Rivian might be able to rise to the occasion. Q2 production, deliveries, and sales were all up this quarter. But where do the cost-cutting measures come in?
Sometimes less is more
A recent announcement suggests that management is more than aware of the situation at hand. Last week, Rivian canceled its cheaper entry-level versions of the R1T electric pickup and the R1S SUV. These two models make up what is known as the Explore package and are primarily designed to target consumers looking for more affordable electric vehicle options that don't break the bank. Now that Explore package models have been cut, customers will need at least $70,000 to buy a Rivian vehicle. https://www.thestreet.com/technology/rivian-gets-itself-in-trouble
The move is being scrutinized by critics, but it should be lauded as a decision that will ensure the company is able to accomplish its goal of becoming profitable. Rivian management stated that "it was our expectation a large number of customers would choose it" in an email sent to customers who had reservations for the Explore Package models. Turns out the more expensive Adventure package vehicles were more popular than the entry-level Explore package equivalents.
Of more importance in the email was that Rivian acknowledged that the benefit of this move will be an increase in production, something that upstart automakers struggle with. In the same announcement, the company stated that by focusing its efforts on the Adventure package, it will be able to "streamline our supply chain and ultimately deliver vehicles more quickly."
The last sentence is where most attention should fall. Many automakers have cut different models from production over the years. Remember Tesla's $35,000 Model 3 getting nixed? The move was made for a similar reason -- to get cars to drivers faster and more efficiently.
Cutting the Explore package models won't make Rivian profitable overnight. That will likely take years. But the move seems to indicate that executives realize the fledgling EV company is dealing with circumstances -- namely, supply chain issues and inflation -- that make it even more difficult to reach profitability. A change was necessary and the company took action.
When considering that Rivian was able to increase production significantly over the last quarter in association with the decision to cut the Explore models, investors should have more confidence that Rivian is on the right track. It will be a long road before profitability is potentially reached, but the company seems to be navigating its most precarious stage of growth just as it should. Investors buying at today's prices could set themselves up for great returns if Rivian is able to turn the corner toward profitability.