Rivian (RIVN 4.92%) is one of the most talked about EV start-ups to hit the market in the past decade, but it hasn't done a lot to add value for investors. Shares have fallen 86% from their all-time high and the company is burning cash. The company is still a start-up and has a lot to prove building trucks, SUVs, and delivery vehicles that are only now starting to show up on streets in large numbers. 

But in five years, this could be one of the more profitable companies in the auto industry. Here's a look at what to expect and the metrics to watch for at Rivian. 

Making money is hard in the auto industry

The hard truth is that it may be a while before Rivian is a profitable company. Rivian is in the investment phase of its lifecycle, and it may stay there for a while. In the third quarter of 2022, the company reported revenue of $536.0 million, only a year after delivering its first vehicle, which is impressive. However, Rivian has been spending a lot of capital to expand production, and negative free cash flow was $1.67 billion in the quarter. 

Using Tesla (TSLA 3.17%) as a proxy you can see below that Tesla wasn't generating positive free cash flow until 2019, nine years after it went public. 

TSLA Free Cash Flow Chart

TSLA Free Cash Flow data by YCharts

The investments in design and capex are necessary to support the company's growth and position it for long-term success. Still, they have also strained Rivian's short-term financial performance. The electric vehicle market is also facing some headwinds, including a slowing global economy, rising interest rates, and improved competition from established automakers. These factors could make it more difficult for Rivian to generate Tesla-like gross margins of over 25%, which the market seems to be expecting given the company's current level of cash burn and $22 billion market cap. 

In five years, Rivian needs to get its current Normal, Illinois facility up to max production of at least 150,000 vehicles per year (with the potential to expand to 200,000 per year) and execute on growth plans in the U.S. and potentially abroad.

Plans for growth

Rivian's growth plans are ambitious but won't be easy to achieve. It is continuing construction on a $5 billion plant in Georgia, which is intended to be the company's largest production facility. Unfortuantely, that's come into question over the last few months.

The state of Georgia and local governments planned to provide Rivian with $1.5 billion in subsidies, which has been met with a legal challenge that has halted the subsidy. Despite this legal battle, Rivian is moving forward with construction on the plant and is expected to begin production as early as 2024. It's a risky bet, but going back to the drawing board now could put the company years behind plan.

Rivian also canceled its plans to partner with Mercedes Benz to produce electric vans in Europe. This decision was reportedly made to focus on the development and production of Rivian's own vehicles, including the R1T pickup truck and the R1S SUV. But this is another growth opportunity that doesn't seem to be materializing. 

The cancellation of the partnership with Mercedes Benz may be disappointing for some, but it allows Rivian to focus on its own vehicles and continue building out its production capabilities in the U.S. Similarly, the legal challenge to the Georgia plant subsidies may be a hurdle, but it has not stopped the company from moving forward with the plant. 

The high bar for Rivian to clear

In five years, Rivian has to be a very different company than it is today. It should have the capacity to build around 600,000 vehicles per year, and if all goes well it could be generating Tesla-like gross margins of around 25%. If we assume an average sale price of $80,000, that would be potential for $48 billion in sales and $12 billion in gross profit, or only $8 billion less than the gross profit Tesla generates today. 

TSLA Gross Profit (TTM) Chart

TSLA Gross Profit (TTM) data by YCharts

Rivian has the potential to be one of the most profitable automakers in the world if it can expand capacity and generate the margins investors hope it can. But that's a tough hill to climb, and investors will want to ensure it's making progress along the way. For now, it's OK to watch from the sidelines and make Rivian "prove it", which is exactly what I'm doing before buying the stock.