Investors often overlook the automotive industry due to its capital-intensive business, but discarding the entire industry will throw away some fantastic long-term opportunities. For example, Ferrari has qualities unlike any other automaker, Tesla is the only automaker profitably making electric vehicles (EVs), and General Motors might end up with the industry leading robotaxi service thanks to its Cruise company.
All that said, if I could buy one auto stock it would be Rivian Automotive (RIVN 6.10%). Here's why.
Be greedy
In wise words from famous investor Warren Buffett, savvy investors are often greedy when others are fearful, and one glance at Rivian's stock performance since its initial public offering (IPO) might tell you it's time to be greedy.
While Rivian is trading roughly 77% lower since its IPO, its prospects have arguably never been better. Let's take a look at some of its recent performance metrics and what investors have to look forward to from here.
What have you done lately?
One issue that sent Rivian's stock lower earlier in 2023 was its production rate. There was a bottleneck in the production line that management has since worked through by introducing its in-house Enduro motor, and that adjustment delivered a spike in production and deliveries.
Data source: Rivian production. Chart by author.
Not only did Rivian deliver a roughly 50% increase in production versus the first quarter of 2023, and a 60% increase in deliveries, but the accelerated production and reduction in material costs boosted its gross profit per vehicle by nearly $35,000.
Further, after delivering a strong second quarter, management improved its guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA); bumped its production forecast by 2,000 units to 52,000 (which might prove conservative if its production keeps accelerating); and reduced its capital expenditure guidance.
Because Rivian is still in the very early innings of its story, just as important as what the company has done for investors lately is what it plans to do going forward.
What's next?
When considering EV stocks, there are two critical factors: getting to profitability and having the financial flexibility to survive early losses.
To the first point, with improving gross profit per vehicle, accelerating production, and cost improvements, Rivian's management anticipates becoming gross-profit-positive in 2024 -- one step closer to turning a profit. Its R1S (SUV) outpaced the R1T (truck) for the first time since the start of production. That's more important than many realize as the R1S not only has a sticker price roughly $5,000 higher than the R1T, but it's also more profitable for Rivian.
To the second point, Rivian ended the latest quarter with cash and cash equivalents of $10.2 billion, and total liquidity of $11.3 billion. It's true that Rivian is also burning through cash rapidly, and posted a negative free cash flow of $1.6 billion during the second quarter. Despite the cash burn, Rivian still has plenty of cash to fund operations while it improves production and profitability, and likely wouldn't have much of a problem raising more capital if and when needed.
Better yet, Rivian's management believes its next vehicle platform, the R2, will be similar to Tesla's "Model 3 moment" when the latter was able to significantly boost production at a lower price point to expand its addressable market. Currently, the R2 vehicles are slated to hit the market by 2026. They will also have batteries manufactured domestically, which should enable the vehicles to meet the Inflation Reduction Act (IRA) federal EV tax credit criteria -- the current Rivian vehicles aren't eligible for the full credit.
Why Rivian?
There are a number of solid investments in the automotive industry, but Rivian has an intriguing mix of being sold off compared to its IPO price, increasing production and deliveries, a focus on larger and more profitable vehicles, cash to survive early losses, and a new platform arriving in the near term to boost its addressable market and gross profit per vehicle.
Of course, investing in a company this early in its story comes with risk -- but there's a lot to like about Rivian. And for all the reasons above, it's why Rivian is the one auto stock I would buy.
