When Rivian Automotive (RIVN -3.51%) went public in November 2021, it revealed that Amazon (AMZN -1.77%) was its largest stakeholder. That wasn't too surprising, since Amazon had previously signed an exclusive deal with the electric vehicle startup in 2019 to provide its logistics network with a fleet of 100,000 electric delivery vans (EDVs).
At the end of 2022, Amazon still owned 17% of Rivian's Class A shares. But the value of that stake shriveled as Rivian's stock price plunged more than 80% below its IPO price of $78 a share. That decline caused Amazon to post an unrealized loss of $12.7 billion on its stake in Rivian in 2022, compared to a pre-tax valuation gain of $11.8 billion in 2021.
Image source: Rivian.
As a result, Amazon posted an overall net loss of $2.7 billion in 2022, compared to a net profit of $33.4 billion in 2021. But unlike Ford Motor Company, which reduced its stake in Rivian from 11% in 2021 to just 1% at the end of 2022, Amazon insisted it would stick with the struggling EV maker.
During Amazon's latest conference call, CFO Brian Olsavsky reminded investors that its reported net losses were "not related to Amazon's ongoing operations, but rather the quarter-to-quarter fluctuations in Rivian's stock price." Nevertheless, many investors are probably still wondering if Amazon should follow Ford's lead and cut its losses.
Cracks have started to appear over the past year
In its IPO filing, Rivian asserted that it would be able to deliver 100,000 EDVs to Amazon by 2025. But last year, the companies extended that timeline to 2030. And there were other signs that their relationship could be on the rocks.
Last January, Amazon agreed to start buying Stellantis' electric Ram ProMaster as a delivery vehicle in 2023. Amazon placed a firm order for 10,000 EDVs from Rivian for 2023, but that fell short of the automaker's own expectations, prompting it to explore the possibility of revising the exclusive nature of its deal with Amazon.
Walmart has also been trying to reduce Amazon's ability to expand its fleet of EDVs. Last July, Walmart struck a deal with struggling EV maker Canoo that mirrored Amazon's partnership with Rivian, though on a smaller scale. The retail giant will buy between 4,500 and 10,000 of Canoo's electric delivery vehicles -- but that agreement came with a clause that explicitly bars it from selling any vehicles to Amazon.
Therefore, Amazon, Walmart, and other mass retailers could clash in the near future over a limited supply of EDVs. To win that battle, Amazon will need to diversify its electric van orders beyond Rivian and Stellantis, and aggressively expand its fleet.
Why did Rivian's stock crash?
It might make sense for Amazon to keep holding its stake in Rivian if it believes the stock will recover. Unfortunately, Rivian has delivered a parade of disappointments over the past year.
Last March, it halved its full-year production target for 2022 from 50,000 vehicles to 25,000 vehicles as it grappled with supply chain constraints. In the end, it only produced 24,337. It also recalled about 13,000 vehicles in October due to potential steering issues, recalled over 12,000 vehicles earlier this month due to potential airbag issues, and its own employees have filed complaints with federal regulators alleging safety violations at its manufacturing plant.
Last quarter, Rivian stopped disclosing the number of preorders it has on the books for its R1 vehicles, which is troubling because other small EV makers such as Lucid have been struggling with cancellations recently. To top it off, Rivian said it only expects to produce about 50,000 vehicles in 2023 -- well below analysts' expectations for 62,000 vehicles.
Rivian ended 2022 with $12.1 billion in cash, cash equivalents, and restricted cash on its books, but that liquidity won't last long at the rate the company is burning through it. In 2022, it posted a loss of $5.2 billion on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, and it expects to only slightly narrow that to a $4.3 billion loss in 2023.
That's why it wasn't surprising when Rivian recently raised about $1.3 billion through a new convertible notes offering. On the bright side, that offering should only boost its debt-to-equity ratio to about 0.4, so it still has room to raise more funds.
Amazon can afford to bet on Rivian's recovery
It might seem smarter for Amazon to bite the bullet and take a loss on Rivian. But with an enterprise value of $8.6 billion, Rivian only trades at 2 times this year's projected sales. By comparison, Tesla trades at nearly 6 times this year's expected sales.
Meanwhile, Amazon -- which was still sitting on $53.9 billion in cash and equivalents at the end of 2022 -- can easily afford to ride out the storm and wait for Rivian's stock to recover. The EV maker still expects to reach an annual production capacity of 600,000 vehicles in a few years, so its stock could still soar back beyond its IPO price in a new bull market. So for now, I think it makes more sense for Amazon to simply tune out the shorter-term noise and ignore its unrealized losses in Rivian.
