Is the Rivian Investment Thesis Officially Broken?

Rivian Automotive (RIVN 6.10%) has more of its vehicles on the road than ever before. If you live in one of the cities where Rivian's electric delivery vans are operating, the company looks like it's thriving. But Rivian is yet another example of why a company's perceived popularity and its stock price are different.

Rivian has lost half of its value so far in 2024. Last week was particularly brutal, as Rivian's fourth-quarter and full-year 2023 earnings release unleashed a rampage of selling, with the stock falling over 36% in the three-day period between Feb. 21 and Feb. 23.

Let's determine if the electric car company's investment thesis is officially broken or if the Rivian sell-off has gone too far.

Image source: Getty Images.

The momentum is gone

Rivian just lost the one tailwind it couldn't afford to lose -- production growth. Production is now expected to be flat year over year, which is terrible news for Rivian because its manufacturing expansion now looks excessive and unwarranted.

Here's a look at what Rivian has produced and delivered since going public.

Data source: Rivian.

Its run-rate production as of Q4 2023 was 70,164 vehicles per year. However, its 2024 production guidance calls for just 57,000 vehicles, which is an average of 14,250 per quarter.

Part of the reason for the slowdown is that Rivian is shutting down its passenger vehicle and commercial vehicle production lines during the second quarter to improve plant efficiency and boost production rates by 30%. But even if you assume Rivian produced no vehicles for an entire quarter, 57,000 units over three quarters is still just 19,000 units per quarter -- which isn't exactly the increase investors were looking for relative to Rivian's record Q4 2023 production.

An added problem

Rivian's muted production forecast isn't solely due to production changes, it is also due to demand challenges. To quote the shareholder letter:

For 2024, we expect our total deliveries to be derived from our existing order bank as well as new orders generated during the year. Our full year targets rely on an improvement in order rate driven by our planned go-to-market strategies. The conversion of our existing order bank to sales can be impacted by several factors including delivery timing, location of order, monthly payments, and customer readiness. Our order bank has notably reduced over time as deliveries more than doubled in 2023 versus 2022, and we have incurred cancellations due to macro and customer factors.

Rivian talked at length about customer demand during its earnings call. Rivian is addressing demand challenges with a focus on its brand, including opening more showrooms and offering test drives. That sounds like high sales, general, and administrative expenses to me.

Rivian is guiding for an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $2.7 billion for 2024 and capital expenditures of $1.75 billion compared to an adjusted EBITDA loss of $3.98 billion and capital expenditures of $1.02 billion in 2023. 2022 capital expenditures were $1.4 billion.

Rivian is guiding for its highest capital expenditures in three years during a time when it is pledging cost cuts and operational improvements. The investment may pay off, but now seems to be a time when Rivian needs to be more careful with its spending.

It's also worth mentioning that Rivian's gross margin was negative 46% in Q4 2023 compared to negative 36% in Q3 and negative 37% in Q2 2023. So Rivian has a lot of work to do to reverse the downward trend and get its margins profitable by the end of the year.

Rivian isn't giving investors what they want

The main issue with Rivian is a lack of meaningful cost-cutting and too much focus on the long-term story. Normally, an investment thesis focuses on multiyear, sometimes multidecade concepts. That certainly applies to Rivian, electric passenger vehicles, and electric commercial vehicles. But Rivian isn't profitable, and it isn't expected to be profitable in the near term.

It has made sizable long-term manufacturing investments by assuming exponential growth in demand. As Rivian said during the Q4 earnings call, it is transitioning from a business that was merely fulfilling a multiyear order backlog to having to go out and get new demand for its vehicles. That transition doesn't seem to be going poorly per se, but it is coming at the added cost of marketing expenses.

Investors who hoped 2024 would be a year of major cost reductions, margin improvement, and sustained growth have been disappointed. 2024 adjusted operating expenses are expected to be approximately flat compared to 2023 while capital expenditures are expected to be over 50% higher than last year. There is 0% forecast production growth. And it looks like the company will simply deplete its cash reserves even further with too little to show for it.

A single quarter may not matter as much for a proven company with a track record spanning several decades, but it does for Rivian. Many investors are running for the exits, and it's easy to see why.

The Rivian investment thesis isn't entirely broken, but it has become more speculative than in the past. Rivian has always been a high risk/high potential reward company. But at least it had production growth and the prospect of near-term cost-cutting to back it up. Neither of those factors are there now to support the investment thesis. Rivian is promising production growth and significantly lower costs in 2025, but it isn't providing investors any reason to give it the benefit of the doubt.

Investors who have been waiting to buy Rivian and believe in the long-term growth story are getting their best chance yet. Expect it to be a very bumpy ride for Rivian until it gives investors something to cheer about. For most investors, it is probably best to wait to buy Rivian until it shows clear signs of a turnaround.