Making automobiles is difficult and expensive. If you look up a list of defunct automakers throughout history, there are nearly 100 automakers starting with the letter "A" that have closed their doors for good.
The task of making automobiles is even more daunting for those focused on electric vehicles (EVs), as the only automaker doing it profitably right now is Tesla (TSLA +3.29%).
But Rivian Automotive (RIVN +0.60%) has a chance to thrive similar to its predecessor, and it checks off a number of boxes necessary to make a great long-term investment. In fact, after Rivian's first quarter, Bank of America analyst John Murphy rated Rivian a buy and slapped a $40 per share price target on the automaker. Here are a few reasons Murphy might be right on the money.
Buying time
One major box for new EV makers to check is financial flexibility. A young company like Rivian needs time to accelerate production, build scale, and slowly creep toward profitability.
At the end of the first quarter of 2023, Rivian had roughly $12 billion in cash and cash equivalents. That $12 billion excludes the capacity to pull capital from its asset-based revolving credit facility. While Rivian is still burning through cash rapidly -- it had negative free cash flow of $1.8 billion in the first quarter of 2023 alone and burned through $6.4 billion in 2022 -- it should have plenty of financial flexibility in the coming years.
Beyond its cash pile, management has also strengthened its balance sheet in other ways. In mid-April, Rivian announced changes to its credit facility that doubled available commitments, extended the maturity to 2028, and essentially secured that the company would be able to launch its R2 vehicles before its debt matures.
If consumer demand for Rivian's SUV and truck remain strong in the coming years, the automaker has bought itself enough time to accelerate production, deliveries, and profitability.
Consumer bloodline
If you look at successful automakers, you'll notice that they all have brand power. That brand power makes the traditional auto industry fiercely competitive as companies fight to gain loyal customers. Winning new consumers from other brands is difficult and expensive in the traditional automotive industry.
Because of that, it's often difficult for start-up automakers to gain traction. The good news for start-up EV makers such as Rivian is that so far that isn't the case in the EV market. In fact, Edmunds.com conducted a survey that revealed 85% of EV car shoppers are open to buying an EV from an automaker they have never previously owned.
While that survey metric is likely to slowly creep toward the historical loyalty seen in the traditional auto industry, it offers young EV makers an opportunity to win consumers early in the EV race.
"EVs are throwing a monkey wrench into the loyalty patterns that automakers have grown accustomed to, and it will be fascinating to watch if the growing number of EV models from mainstream brands will shift consumers back fully toward their loyalty tendencies or if brand allegiances are a thing of the past," said Jessica Caldwell, Edmunds' executive director of insights, in a press release.
NASDAQ: RIVN
Key Data Points
Quality product
Ultimately, it might not matter much if Rivian buys itself time to accelerate production, build scale, and bring new consumers to its brand, if the vehicles aren't up to expectations. The good news is that Rivian's R1T and R1S have been well received in terms of consumer satisfaction, quality, and safety.
Take J.D. Power's U.S. Electric Vehicle Experience Ownership Study as an example. Tesla owned the survey as recently as 2022 when its Model 3, Model Y, and Model S took all three top spots in the rankings. However, in 2023, it was Rivian's R1T taking the study's top spot.
Rivian's vehicles also received a major nod from the Insurance Institute for Highway Safety (IIHS). Rivian received the highest safety rating (Top Safety Pick+) for both the R1T and R1S, passing the tougher testing across all categories -- the R1S was the only large SUV, and the R1T the only electric truck to achieve these ratings in 2023.
Rivian has come a long way
Ultimately, while many new automakers struggle and eventually close their doors before achieving greatness, Rivian has checked off a number of critical boxes to give itself a chance to reward long-term investors.
Rivian has a strong balance sheet, a pile of cash, and debt that matures after the launch of its R2 vehicles. The EV maker also has a unique opportunity to win consumers while they remain open-minded regarding EV brands, before securing them long-term as they become more loyal as seen with the traditional auto industry. If Rivian vehicles, through design, safety, and consumer satisfaction, can keep demand strong, the automaker has a real chance to thrive in the coming years as EV sales accelerate.
Rivian currently trades at roughly $26 per share, but Murphy might be right on the money and $40 doesn't seem so far-fetched.
