After two straight quarters of positive gross margins, Rivian Automotive (RIVN 7.80%) returned to producing negative gross margins in the second quarter. This largely appears to be due to higher material costs, as China's cutback on the export of heavy rare-earth metals in the quarter disrupted supply chains and drove up the cost of electric vehicle (EV) production.
Meanwhile, a reduction of regulatory tax credits will be a headwind going forward, as the $7,500 U.S. federal EV tax credit will expire at the end of September. As a result, Rivian lowered its expectations for 2025 regulatory credit sales from a prior outlook of $300 million down to $160 million. Tax credits are pure gross margin, so that reduction hurts. Tariffs will also be a headwind, with Rivian estimating that tariffs will cost it a couple of thousand dollars per vehicle.
The automaker said it is now looking for gross profits to be about breakeven for the full year. That is down from its prior outlook of it turning a modest gross profit in 2025. Gross margin and gross profit are key metrics for Rivian, as it must be able to make its vehicles for less than it sells them for to even think about becoming profitable and generating free cash flow down the road.
The R2 is key
Much of the company's focus is on preparing for the launch of its lower-priced R2 SUV next year, which is priced starting at around $45,000. Rivian is looking for the new SUV to have much wider appeal than its current luxury R1 SUVs, which can run over $100,000 for some configurations. The company will shut down its main manufacturing facility for three weeks in September in preparation for the launch. It expects peak deliveries to be in the third quarter of this year.
Despite the R2 coming in at a much cheaper price than the R1, it is expected to have a healthy gross margin. The smaller vehicle will have a much lower underlying cost structure due to lower materials costs and manufacturing efficiencies. Material costs will be around half those of the R1, and Rivian has contractually negotiated prices locked in with suppliers. The R2 will also benefit from higher expected volumes, as well as the shared fixed cost absorption from Rivian's facility that also manufactures the R1 and its electric delivery vans (EDVs).
With the launch of the R2 next year, the company is looking to be EBITDA breakeven in 2027 following a full year of the vehicle being in production. It also expects to benefit from increased momentum in its higher-margin software and services segment.
Turning to its Q2 results, Rivian's revenue rose by 12% to $1.3 billion despite fewer vehicle deliveries. The company produced 5,979 vehicles and delivered 10,661 in the quarter, compared to 9,612 vehicles produced and 13,790 delivered a year ago.
Automobile revenue dropped by 14% to $927 million, while software and service revenue surged from $84 million to $376 million. Management said its production volumes declined significantly due to supply chain complexities and trade policy shifts. Software revenue, meanwhile, was helped by strong contributions from its joint venture with Volkswagen.
The company was able to shrink its loss from $1.5 billion a year earlier to $1.1 billion. It also reduced its free cash outflows to $398 million from $1 billion a year ago.
Looking ahead, the EV maker maintained its deliveries forecast of between 40,000 and 46,000 units. It now expects an adjusted EBITDA loss of between $2 billion to $2.25 billion, versus earlier guidance for a loss of between $1.7 billion to $1.9 billion.
Image source: Getty Images.
Should investors buy the dip?
Rivian has been facing some headwinds with both tariffs and trade policy supply chain disruptions. The end of the EV federal tax credit this fall will only add to that.
However, the company has made great strides in improving its cost structure, and the R2 is the future of the company. If the R2 can prove a success, the company should be on its way to generating free cash flow and profits in the future. In the meantime, with $7.5 billion in cash and short-term investments, the company has plenty of liquidity to invest and grow its brands moving forward.
Rivian remains a high-risk/high-reward stock, but I think risk-tolerant investors can use the drop in price to add a small position ahead of the R2 launch next year.
