Rivian Automotive (RIVN +0.28%) is facing a slowing economy, rising interest rates, and parts shortages as it tries to ramp up production. But the electric vehicle (EV) company had the good fortune of going public at the peak of the market, giving it a solid balance sheet with about $14 billion in cash to improve operations and expand production.
In five years, the company will need to prove that it can operate profitably, leveraging its differentiation in the market. Here's what to expect.
A Rivian pickup truck. Image source: Rivian.
Becoming a world-class manufacturer
Rivian is a $26 billion company, but it hasn't really proved anything yet. Management has said it will produce about 25,000 vehicles this year, making it a fraction of the size of larger manufacturers like Tesla (TSLA +3.93%) and General Motors (GM +0.50%). But it can grow quickly over the next five years with a 150,000-vehicle factory in operation and plans to expand to about 600,000 in annual capacity over the next five years.
To live up to expectations, Rivian will have to prove it can make money selling vehicles, and the framework is there. You can see below that Tesla has a whopping 25.1% gross margin right now and GM has a 14% gross margin. Rivian has a long way to go to be a leading manufacturer like these two companies, but it can rethink manufacturing, dealerships, and service the way Tesla did to generate better margins than legacy automakers.
RIVN gross profit margin (quarterly); data by YCharts.
If Rivian can generate margins that compare to Tesla's, it'll live up to its high valuation. But to do that it'll need to leverage its business model.
Leaning into differentiation
The biggest advantage EV start-ups have over legacy automakers is their differentiated business model. Two of the biggest advantages are not having a dealer network that lives between the manufacturer and the customer and the ability to rethink the service business.
One of the biggest reasons Tesla has higher margins than competitors is that it can control its dealerships' pricing, inventory, and costs. Rivian is copying a lot of what Tesla has done, which could give it an operational leg up on legacy automakers.
NASDAQ: RIVN
Key Data Points
Rivian has leaned into service differentiation as well. The company has small service centers but intends to do a lot of work in driveways and parking lots across the country.
It helps that it's making trucks and SUVs that are normally higher cost than cars. That gives more latitude in pricing, which could help margins as well.
If Rivian can lean into its differentiation to make a better user experience and better margins, this could be an unstoppable automaker.
Rivian may have (accidentally) timed the market perfectly
The timing of the company's initial public offering (IPO) and expansion can't be overlooked. If the U.S. or global economy goes into a recession in 2023, it'll likely mean less demand for vehicles, particularly the expensive EVs made by Tesla and Rivian. But Rivian has 114,000 pre-orders and will only make 25,000 vehicles this year, so it will likely sell anything it can make in 2023 and into 2024, insulating the company from a recession.
Surviving recessions is tough enough in the auto industry, and Rivian may come out of a 2023 recession with more capacity and improved operations, while competitors will need to manage capacity and inventory more tightly. Rivian could have (accidentally) timed the market perfectly, raising IPO funds near the peak of the market and having more demand than it can supply in a recession. If that's the case and the company can execute on building out manufacturing capacity, distribution, and service centers, this could be a great stock to own in the long term.
