One of the many bullish sentiments for Rivian (RIVN 6.10%) investors over the past year has been that the company is aiming to be gross-profit positive this year -- almost certainly toward the end of 2024. Why is that a big deal, and what does it really mean for Rivian investors hoping to see a surging stock price?
Pens and paper out! We're cracking open the quarterly earnings report, the 10-Q, and going back to school to show what positive gross profit means, doesn't mean, and why it matters.
Gross profit 101
Under the consolidated statements of operations, you'll see that gross profit is incredibly simple. It's simply what's left after you take the cost of revenues (also known as cost of goods sold) from revenues. From year to year, you'll see the cost of revenues remains more stagnant as fixed costs remain, while revenues will soar once production accelerates.
Image source: Rivian SEC filings.
Right now, as you can see in the table, the fixed costs are resulting in cost of revenues exceeding revenues, meaning each vehicle rolling off Rivian's line is negative gross profit. That shouldn't surprise anyone as just about all EVs being produced are losing money. Rivian has made substantial progress when you consider in the third quarter of 2022 it was losing roughly $139,000 per vehicle; as of the third quarter 2023, it trimmed that to a loss of about $30,500 per vehicle.
Once Rivian is able to accelerate production and deliveries high enough to exceed the cost of revenues, the company will become gross-profit positive, which management hopes will happen in 2024. But what does that mean exactly?
It doesn't mean the company will be profitable, so let's clear that out of the way. After gross profit, you then have to add in operating expenses such as research and development, as well as selling, general, and administrative (SG&A) expenses. Combining those expenses with gross profit will give you your total profit or loss from operations. Operational results is the bulk of the figure that will determine earnings, or loss, per share that Wall Street loves to forecast and analyze quarterly.
Image source: Rivian SEC filings.
What it means for investors?
So if turning gross profit positive in 2024 doesn't make the company profitable, and it's not what Wall Street follows, what's the big deal?
The big deal is simply that Rivian's operations have matured enough to prove to investors it can produce a vehicle at scale. It's far beyond a proof of concept, and it's a major step in becoming a profitable company.
Becoming gross-profit positive toward the end of this year will be huge in convincing investors to jump on board and that the company will be able to fund its own operations sooner rather than later. It would also take place at a point in time when investors can look toward the horizon and see Rivian's second factory taking shape, which will produce R2 vehicles in 2026.
The R2 platform is expected to churn out vehicles that will cost consumers between $40,000 to $50,000, much lower than the R1 vehicles' starting price of roughly $78,000.
Make no mistake, becoming gross-profit positive might be one of the simplest things to gauge on a 10-Q, but it will be a huge deal for the company and for its potential investors. Rivian is emerging to become one of the more intriguing investments in the young electric vehicle industry.
