After its stock collapsed 38% in a single week to an all-time low, investors are rightly concerned about the future prospects of pure-play electric vehicle (EV) maker Rivian Automotive (RIVN +1.69%). The stock is now down 57% year to date. And yet, Rivian is still a large company, with a market cap of $9.4 billion.
The company's profitability is the most significant catalyst for Rivian rebounding or falling further. Rivian continues to spend billions of dollars annually, rapidly shrinking its cash position.
However, Rivian had a silver lining in its fourth-quarter 2023 shareholder letter -- it expects to reach a modest gross profit in Q4 2024.
Here's a look at Rivian's profitability and whether or not this potential "modest gross profit" will be enough to turn the electric car company around.
Image source: Getty Images.
Piling up the losses
EV investors are no strangers to cash burn in the hopes a company will eventually reach positive free cash flow (FCF). Tesla (TSLA +1.26%) was unprofitable for years. It took the widespread adoption of the Model 3 for Tesla to reach consistent profitability. After that, Tesla could fund manufacturing expansions, Model Y production, and other projects from its operations instead of depleting its balance sheet of cash or turning to the capital markets for dry powder.
Rivian is hoping to do the same thing. But its roll-out has proven costly, albeit successful. The Rivian R1T was the top-selling electric truck over $70,000 in the United States in 2023 -- a niche award, but an excellent achievement, nonetheless.
The issue isn't what Rivian has accomplished, but what it plans to do in 2024.
Normally, it's a bad idea to focus too much on a single year, let alone a single quarter. But with Rivian, every quarter matters. Specifically, it matters how much money Rivian loses each quarter.
RIVN Cash and Equivalents (Quarterly) data by YCharts
At its peak after its initial public offering, Rivian had over $18 billion in cash. It now has under $8 billion in cash. Yes, Rivian's cash position is nearly as high as its entire market cap, normally making the stock a clear value play. But Rivian plans to burn its cash in the hopes of reaching profitability.
NASDAQ: RIVN
Key Data Points
Meaningful cost reduction
Rivian's Q4 2023 shareholder letter and earnings call were chock-full of promises of improved cost efficiencies. As bad as Rivian's cash burn has been, it is reducing costs.
Rivian improved its gross profit per vehicle delivered by $81,000 in Q4 2023 compared to Q4 2022 due to the benefits of scaling production, lower material costs, technological improvements (like better battery packs), and higher revenue per unit.
Between Q4 2023 and Q4 2024, Rivian expects to reduce variable cost per unit by an additional 50%, reduce fixed and semi-fixed costs by 35%, and improve non-vehicle revenue by 15% through services, accessories, insurance, and software-enabled services. These cost reductions are needed for Rivian to reach gross profitability by the end of the year.
An uphill climb toward profitability
Gross profit is a step in the right direction. But much more is needed to get to positive earnings per share.
Gross profit accounts for the cost of goods sold -- a major expense for automakers. However, operating profit takes it further by factoring in operating expenses (like sales, general, and administrative costs), depreciation, and amortization. To get to actual net income, everything from one-off asset purchases and sales to taxes needs to be accounted for.
Needless to say, reaching positive gross profit alone will not be enough to turn Rivian stock around.
The clock keeps ticking
The biggest issue with Rivian is that the company is acting like it has a lot of slack to work with, when in reality, investors' patience is being tested, and the company is stressing its balance sheet.
Rivian's manufacturing capacity exceeds its production needs. The introduction of its next-generation R2 platform on March 7 is exciting and should bring a powerful yet lower-priced model into the fold, but Rivian has been pouring money into developing this platform. It will have to shut down its consumer and commercial production lines during the second quarter to "introduce new cost-saving in-vehicle technologies to the R1 platform."
Rivian reminds me of Tesla pre-Model 3. The company had so many big ideas that it seemed distracted from what matters most, which is scaling production of a popular vehicle and then using that cash to fund future growth. If Rivian had an extra $10 billion or so on the balance sheet, all of these long-term moves would make more sense. But it doesn't have that kind of wiggle room.
It can't simply crank out production at a blistering rate and hope the vehicles sell. Rivian's passenger vehicles sell at a premium price, whereas the Tesla Model 3 had plenty of pre-orders and reached a wider swath of buyers.
Rivian does have a highly successful electric delivery van, its biggest customer being Amazon. But it's unclear whether Rivian could reach positive FCF solely by selling electric delivery vans.
Rivian remains in "prove it" mode. There's no real rush to swoop in and buy the stock until the company fundamentally improves its profitability metrics.
