Investing in the electric vehicle (EV) industry is risky as it means exposure to unproven businesses in a nascent industry. Valuations based on promise and potential add to the uncertainty for investors' returns. But the basics of supply and demand remain the foundation for investment.
Rivian Automotive (RIVN 6.10%) reported its third-quarter update Wednesday after the market closed, and it seems both supply and demand remain on a positive track. The stock has dropped nearly 20% over the last two weeks, so it's worth digging in to see if the report supports it being a good time to buy that dip.
Standing out among peers
It was a good time for Rivian to share that demand for its R1 platform trucks in the form of preorders increased by more than 16% from the end of June to Nov. 7, 2022. The figure is net of deliveries and cancellations for its electric vehicles geared toward U.S. and Canadian consumers. That stands in contrast to the 8% sequential drop in reservations announced by fellow EV start-up Lucid Group yesterday.
Combined with the 100,000 unit order from Amazon for Rivian's commercial electric delivery vans (EDVs), which are not included in the preorder data, that's good news for potential investors. Amazon said this week that it expects to have 1,000 of Rivian's EDVs making deliveries in more than 100 U.S. cities this holiday season.
The supply side is not as decisively positive, but it is going in the right direction. Rivian lowered 2022 production guidance earlier this year due to supply chain challenges. But it has reaffirmed its plans to produce 25,000 total vehicles this year. The more than 7,300 electric vehicles produced in the third quarter represented a sequential jump of 67% from the prior quarter.
Image source: Rivian Automotive.
Financing concerns
Auto manufacturing is a capital-intensive business, so investors need to know how a young company will finance its growth and development. That's especially important since raw material costs have risen. Rivian generated $536 million in revenue in the third quarter, but it used $1.4 billion in net cash for operations in the period. That was twice as much as the prior-year period, but that is understandable as needs have shifted from capital expenditures more toward operating activities.
Rivian ended the quarterly period with $13.8 billion in cash, cash equivalents, and restricted cash. Management believes that is enough to fund operations and the next tranche of capital expenditures through 2025. That will include beginning construction on a second manufacturing plant to be located in Georgia, where it plans to launch its next-generation R2 platform in 2026.
Keep an eye out
Investors should be aware, however, that Rivian has also announced plans for a joint venture with the Mercedes-Benz Group van division in Europe. The company may need to raise capital or borrow from its revolving-credit facility for that venture, depending on future timing.
Additionally, supply chain headwinds haven't completely receded. Those constraints are what forced Rivian's vehicle production target for this year to be lowered to the current 25,000 unit level. But the company seems to be managing that as well as rising cost challenges. It has lowered its capital spending guidance for this year to focus on increasing production and pushing back some spending into 2023. That resulted in moving the anticipated launch of its R2 platform back one year to 2026.
That seems to be prudent of management in the current economic environment, however. But these are things investors must continue to monitor. Also of concern is that while its progress seems positive, and the stock has dropped 20% recently, Rivian's valuation is still high. Investors expect great things from this company. Its market cap remains about $25 billion. If one projects the third-quarter sales out for a full year, Rivian's price-to-sales (P/S) ratio remains high at about 12. But the company should continue to ramp production volumes up, so that will drop. Investors still should have a very long-term outlook to expect a solid return from Rivian shares, but this quarterly report looks to have made it a more promising buy at recent levels.
