As more electric vehicles hit the road, industry heavyweights like Tesla are slashing prices to boost volumes and take market share. Tesla's price cuts have already shown up in the company's profit margins, which steeply declined in first-quarter earnings.
Tesla's latest moves could hurt emerging electric vehicle maker Rivian Automotive (RIVN 2.84%), which is still getting off the mat, seeking to grow its production volume. Rivian might not be equipped for a race to the bottom in an already ruthlessly competitive industry.
Here are some key issues facing Rivian that investors should know about before buying shares.
Rivian is swimming against the current
Tesla benefited from ramping up its production volumes when there was far less competition than today. Unfortunately, Rivian is stuck between a rock and a hard place. It must dramatically increase its factory output to become profitable, as factories are expensive and require lots of volume to offset the costs of keeping the lights on and machines running.
The company has already tried over the past year to pad its margins. First, it implemented price increases, which it had to partially walk back for existing orders after a fierce backlash from customers. Then, it faced allegations that it had prioritized orders placed after a price increase, pushing back prior, less profitable orders.
Read between the lines, and Rivian seems like a company worried about its cash burn. It reported Q1 2023 production of 9,395 vehicles, a drop in the bucket to Tesla's 440,808. Rivian is guiding for 50,000 vehicles in 2023, but it remains to be seen if it'll hit that mark after cutting its delivery forecast in 2022. In other words, Tesla's massive size and head start in volume give it leverage to squeeze profit margins for smaller competitors like Rivian.
The financials paint a clearer picture
Rivian's need to increase production shows up clearly in its financials. You can see that just $1.6 billion in revenue generated $5 billion in operating losses. Its negative operating margin is shrinking as revenue grows, illustrating the operating leverage of spreading those factory costs across more units, but the problem for Rivian is the road ahead.
RIVN Revenue (TTM) data by YCharts
Rivian produced 24,337 vehicles in 2022 and anticipates double that in 2023. That should put revenue somewhere in the range of $3.2 billion, which is not nearly enough to offset heavy losses. Additionally, Rivian is expecting $2 billion in capital expenditures this year as it invests in growth, up from $1.3 billion in 2022.
This might not be a short-term issue; Rivian has $11.5 billion in cash on hand, a benefit of going public at a very lofty valuation. However, the financials don't paint a confident picture that Rivian will be able to turn a profit before needing additional cash down the road. It's already doubled an existing credit agreement, allowing the company to borrow $1.5 billion if needed. If losses continue growing as volume increases in 2023, its cash could quickly dwindle.
Where do investors go from here?
Investors shouldn't hold it against Rivian -- automotive manufacturing is a heavy lift that almost bankrupted Tesla when it scaled Model 3 production years ago. However, just because a business succeeds doesn't mean the stock will deliver good investment returns.
If you value the company by sales, Rivian trades at the same price-to-sales ratio as Tesla. But one could argue that Tesla's robust balance sheet, ongoing growth, and future opportunities warrant a premium to Rivian's potential growth once you add in Rivian's financial risks.
RIVN PS Ratio data by YCharts
Given the threat of potential recession and competitor price cuts to demand, Rivian carries a lot of risk for a business that could be several years away from approaching profitability. Assuming Rivian survives over the long term, it doesn't guarantee the stock is a good investment.
Automotive is a challenging industry with steep competition and capital requirements. Rivian remains an underdog and should be approached by investors as such until the financials point in the right direction.
