Rivian Automotive (RIVN 6.10%) crashed to a new all-time intraday low on Thursday after the electric pickup truck, SUV, and delivery van maker reported a wider-than-expected quarterly loss and missed its 2022 production estimate.
Even after rebounding by 7.6% on Friday, Rivian stock is down 90% from its all-time high and is burning through cash at a breakneck pace. Let's determine if it's time to throw in the towel on Rivian or if the stock is worth buying now.
Image source: Rivian Automotive.
Rivian's issues in a nutshell
Rivian was a poster child of the 2021 initial public offering (IPO) boom. Its valuation peaked in November 2021 at a market cap of over $150 billion. To its credit, Rivian went public at the perfect time, as it raised a boatload of cash and fetched a premium valuation. Since then, the IPO and venture capital markets have dried up as equity valuations have compressed and rising interest rates have contributed to higher capital costs.
With a cash stockpile on the balance sheet, Rivian entered 2022 promising production of 50,000 vehicles. But supply chain challenges, a difficult macroeconomic environment, and poor cost management caused Rivian to quickly cut its forecast in half to just 25,000 units. Even after that significant cut, Rivian missed its 2022 production goal -- though only by 3% as Rivian produced 24,337 vehicles last year. More concerning, however, is the company's cash burn.
Rivian finished 2022 with $12 billion in cash, cash equivalents, and restricted cash on its balance sheet, plus its $750 million asset-based revolving credit facility. But it started the year with over $18 billion in cash and equivalents.
The good news is that Rivian is reducing costs and cutting capital expenditures. It even expects to achieve positive gross margins in 2024. Despite these efforts, the company believes its cash reserves will only be able to fund the unprofitable business through 2025. However, management reiterated its long-term targets of 25% gross margins, 10% free-cash-flow (FCF) yield, and a high-teens earnings before interest, taxes, depreciation, and amortization (EBITDA) margin target. And Rivian said it can access the capital markets if it needs more cash.
Rivian can turn the corner
Investors want to see Rivian reach a point of profitability and positive FCF so that it can sustain organic growth without depending on outside capital. The good news is that Rivian has laid the groundwork for improved efficiency, which should help its cost structure improve.
The company's plant in Normal, Illinois has a capacity of 150,000 units and plans to grow to 200,000 units. Rivian is also working on a Georgia plant that can produce 400,000 units.
Rivian's manufacturing capacity is simply too large relative to its production -- which makes fixed costs and overhead weigh on its margins. To illustrate how big of a problem this is, consider that Rivian posted an adjusted EBITDA loss of $5.217 billion in 2022. Based on 2022 production of 24,337 vehicles, Rivian lost a staggering $214,365 in adjusted EBITDA per vehicle.
With so many costs already accounted for, management believes that the variable costs of each additional vehicle produced will help reduce losses. In fact, Rivian is already adding another shift at its Normal plant to grow production. Rivian also said that the supply chain challenges should be far less severe in 2023 than in 2022. Rivian CEO Robert Scaringe said the following on the company's Q4 2022 earnings call:
As we look at 2022, there's a lot of challenges just with some of the surprises and the things that we didn't expect in terms of supply interruptions and component availability. Now as we look at 2023, we have much better visibility and a much clearer picture of access to supply and where there are going to be challenges or constraints. And very different than where we were last year. That visibility allows us to focus on exactly what will go wrong or what will be a gap.
In sum, it's time for Rivian to show investors that it can produce at least 50,000 units in a calendar year, lower costs, and chart a path toward profitability -- while also booking more reservations and proving that there's strong demand for its product even in a difficult environment. The company has run out of excuses. 2023 is teed up to be a prove-it year for Rivian.
Rivian stock may be a buy for some investors
Given all of the unknowns, some investors may choose to take a wait-and-see approach to Rivian before hitting the buy button. And while there's a lot not to like about Rivian, the company has ripped off the proverbial bandage, so to speak, by guiding for a modest production target, a target that management said it could hit even when accounting for a challenging macroeconomic environment.
That backdrop, paired with the company's cash position, sets the stage for upside potential for Rivian. Rivian has its risks. But now seems like a good time to buy Rivian stock instead of giving up on it.
