Excitement around electric vehicles (EVs) has waned, at least in the United States. Tesla has lost its growth profile and is struggling to ship more units to customers. Chinese brands are taking increasing share in markets outside the United States. One EV upstart stuck in the mud is Rivian Automotive (RIVN -1.64%). The maker of high-end trucks and SUVs is experiencing falling deliveries to customers and is struggling to generate positive cash flow.
The stock has fallen back below $15 as I write this, and is well off all-time highs from near its initial public offering. Does this make the stock a good buy-the-dip candidate today?
Exciting story; limited growth
The narrative around Rivian Automotive is sound. It is building premium EVs in America, tackling the high-end truck and SUV market, which has strong profit characteristics. It's got new factories under construction and more affordable vehicles coming down the line. And don't forget its EV delivery van product, which has a huge contract from Amazon -- an investor in the company -- as well as other buyers.
These tailwinds are not showing up in the numbers today. Rivian expects to deliver 40,000 to 46,000 vehicles this year, compared to 51,579 in 2024. Demand seems to be waning for Rivian vehicles as it serves the high end of the EV space in the United States, which is quite niche.
This is a problem that also happened to Tesla before it introduced its more affordable vehicles. Rivian hopes the same can occur with its upcoming R2 product, with plans for a starting price of $45,000.
Encouragingly, Rivian has increased its profitability, bringing gross profit to a positive figure in the last two quarters. However, free cash flow is still deeply negative at a $1.86 billion burn over the last 12 months. The company needs more scale and better efficiency in order to build a sustainable business. It has made some progress in this regard, but still has a long slog ahead.
Image source: Getty Images.
The math to profitability
Rivian's cash burn is ugly, but it has a lot of funding sources to help it keep building its production capacity over the next few years. There is still $7.2 billion in cash on the balance sheet, along with funding commitments from Volkswagen as part of a joint venture and a proposed $6.6 billion loan from the U.S. government. Volkswagen is a development and software partner for Rivian and plans to invest billions into the stock if Rivian can hit operational and gross profit milestones.
Last quarter, Rivian saw a huge increase in its software and services revenue to $318 million compared to $88 million a year prior. A lot of this came from $167 million in revenue from the Volkswagen joint venture, which should help the company get closer to profitability. The segment had positive gross profit of $114 million last quarter.
Overall, Rivian will need to get increased scale in its automotive business in order to generate positive free cash flow and become sustainable. It generated a slight gross profit for the automotive segment of $92 million last quarter, which is great progress compared to the ugly figures in years prior. Automotive gross margin was 10% last quarter. This figure will need to grow in the coming years to keep the company improving.
RIVN Free Cash Flow data by YCharts
Is Rivian Automotive stock a buy now?
If Rivian can return to growing deliveries with its upcoming cheaper models, there is a path to solid profit generation. Rivian generated $5 billion in revenue in 2024 even though its total deliveries were only around 50,000. If total deliveries can grow to 250,000 -- Tesla is close to 2 million, for reference -- I think $20 billion in revenue is possible. A 10% bottom-line net income margin that could occur once gross margin gets higher than today would equate to $2 billion in annual earnings. Given that, a current market cap of $16.6 billion looks mighty cheap.
But how likely is the company to return to growth? I am not sure investors should be confident in this occurring. Competition is fierce in the EV space. You have Tesla, legacy competitors, Chinese players selling outside the United States, and other upstart EV brands trying to win customer loyalty. Rivian has a good product, but that does not necessarily mean it can compete and win in this market at scale, which it needs to do in order to succeed.
It looks to me like Rivian's product demand is much lower than initially thought, which should keep investors away from the stock. If the company cannot scale customer demand, it will likely never generate a profit, making this a risky stock to buy today.
