By now, Rivian (RIVN -2.21%) investors understand the bargain they're making by betting on the upstart EV company.
Few companies have been as hyped and well-capitalized before even making a product. Rivian has gone as deep into the red in an attempt to build out a viable business, and the automaker's promise to stand out from the pack with category-defining EVs looks increasingly challenging in a crowded industry where it's already lost more than $14 billion over its history.
In its first-quarter earnings report out Tuesday night, the company had enough good news to push the stock up after hours, gaining 6% as of 5:15 p.m. ET.
Rivian maintained its full-year guidance, calling for the production of 50,000 vehicles in 2023, doubling from 2022, and it continued to forecast adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $4.3 billion for the year and capital expenditures of $2 billion. The chart below shows the company's performance in the first quarter.
Image source: The Motley Fool.
Rivian's $661 million in revenue topped estimates at $652 million, and its adjusted loss per share of $1.43 was better than the consensus at $1.59, but the chart shows how distant profitability is.
The company also shared some accolades, noting that its R1S SUV and R1T pickup truck were the only vehicles in their class to receive the highest safety rating from IIHS. It's also continuing to innovate, introducing a new in-house motor line called Enduro, which can go 0-60 mph in as little as 3.5 seconds. Additionally, it made its LFP battery packs available for commercial vehicles, which offer better durability cycles, providing cost savings for both Rivian and its customers.
Zigging while others zag
While Rivian's first quarter was mostly as expected, and the company had already reported production and deliveries, one phrase stuck out from the shareholder letter that should give investors pause.
Rivian is still wildly unprofitable as it just posted a gross profit loss of $535 million, or a gross margin of -81%, but the company is targeting positive gross profit in 2024. One of the factors it's counting on to get there is an increase in average selling prices.
There are a number of reasons the company expects higher ASPs, including earlier price hikes and increased sales of max battery packs that offer a higher range, but the plan to squeeze more cash out of its customers comes at a time when most of its peers are lowering prices on electric cars, signaling a new more competitive phase in the EV industry, focused on margin compression and market share gains rather than profit maximization.
Tesla (TSLA 12.06%) has already announced multiple price cuts in recent months, and CEO Elon Musk surprised investors when he talked up a car-selling model focused on market share gains to then build out valuable profit streams post-sale in areas like autonomy, squeezing out competitors by beating them on price.
Ford (F 0.08%) similarly lowered prices on some of its EVs, including the Mustang Mach-E, and GM, Nissan, and Hyundai have all cut prices on some of their EV models over the past year as well.
Can Rivian compete?
Rivian vehicles get rave reviews, and the company may be able to get away with charging customers higher prices because, at its current production level, it's essentially a boutique carmaker. The 50,000 annual vehicles it's targeting this year is a drop in the bucket next to Tesla, Ford, and the other majors that produce millions of vehicles per year.
Over the long term, Rivian aims to build at least 1 million vehicles, and as it scales, price competition is going to become more important.
Gross profit may be in reach by next year, but as the numbers above show, even if the company doubled its revenue and held cost of goods sold flat, which is virtually impossible, it would only have a slim gross profit. Accounting for all of its operating expenses, revenue would have to triple for it to break even without any additional costs right now.
The company expects a significant ramp in production capacity in 2024 and 2025, which should help it get to gross profitability, but counting on higher prices seems like a questionable strategy given the current market environment.
Rivian isn't the massively overvalued IPO stock it once was, so the downside risk to the stock isn't as great right now, but given the increasing competition in the EV industry, the odds still seem to be against it. Almost everything needs to go right for the company to be successful and for the stock to be a long-term winner.
