Are Rivian Automotive shares cheap or expensive?

We have now listed Rivian Automotive share CFDs on ThinkMarkets. To get started trading, all you need to do is create an account and select Rivian in your ThinkTrader watchlist.

What’s best about Rivian share CFDs is that they let you take advantage of both rising and falling prices. That means with ThinkMarkets, if you think the price of Rivian Automotive is going to rise, you can go long its CFD, and if you think the price is going to fall, you can go short its CFD. Rivian Share CFDs are available on ThinkMarkets under the stock ticker RIVN.

So let’s take a closer look at Rivian Automotive and what’s behind all the hype?

Highlights

 

Started in 2012, Rivian is an American electric vehicle (EV) automaker and automotive technology company created by CEO Robert “RJ” Scaringe.  Former CEO of Amazon, Jeff Bezos, called Rivian’s founder, RJ Scaringe, “one of the greatest entrepreneurs”.

Rivian originally started life as an EV sports car manufacturer (prior to officially rebranding in 2012), but changed tack because management realised they could not add significant value to what was already on offer in that space (i.e., Tesla). Instead, they decided to focus on a glaring hole in the EV market, light trucks and sports utility vehicles (SUVs).


The Rivian R1S sports utility vehicle

Today, Rivian has two flagship consumer focussed EVs for sale, the R1T (light truck) and the R1S (SUV). It also has developed what it calls the Electric Delivery Van ("EDV"), designed and engineered by Rivian in collaboration with Amazon who has ordered an initial volume of 100,000 vehicles globally.
 

Rivian's initial public offering (IPO) consisted of 153 million shares of Class A common stock at a public offering price of $78 per share, to raise US$11.9 billion. However there are a considerable number of shares already issued in the company, held by early and cornerstone investors. Two cornerstone investors are of particular note, Amazon which owns approximately 22%, and Ford Motor Co. which owns approximately 12% of Rivian shares.


Rivian Automotive (RIVN) price chart

Rivian aims to address the large, fast-growing, and high-margin EV market. More specifically, it is targeting the niche light truck and SUVs segment which is currently significantly underserviced by existing EV manufacturers, particularly by major rival Tesla.

In addition to selling vehicles, strategy also includes value-added services such as digitally enabled financing, telematics-based insurance, proactive vehicle service (maintenance and repair), flexible membership and software services, comprehensive charging solutions, and a vehicle resale program. In addition to these services, the company will also offer consumers value adding accessories and applications aimed at improving the usage of Rivian's EVs.

In addition to consumer vehicles, also targeting commercial market via Rivian Commercial Vehicle ("RCV") platform. The first vehicle to be produced is the EDV, designed and engineered by Rivian in collaboration with Amazon who has ordered an initial volume of 100,000 vehicles globally. This is the largest order of EVs ever for any manufacturer. 

The company believes that with the cost of EV ownership no longer a significant barrier to purchase, the EV revolution has begun. They note that approximately 90 million light vehicles are sold globally each year, and a significant proportion of these will inevitably transition to EVs. Further, trucks and SUVs comprise over 70% of new vehicle sales in the United States, are the fastest growing segment, and account for most of the profits generated by incumbent automobile manufacturers. 

Globally, Rivian's total addressable market is around US$8.3 billion, with just under US$1 billion in the US. Of the US market, they believe the market for consumer EVs is approximately $650 million, and approximately $200 million for commercial EVs.
 

For the years ended December 31, 2019 and 2020, we incurred net losses of $426 million and $1.0 billion, respectively. This is because the company has invested heavily in product development, and preparations for the initial launch of their vehicles which occurred in September 2021.

A key positive of the financials for Rivian is that the company has minimal debt. Instead, it has funded the business by ways of a unsecured senior convertible promissory notes (a kind of a hybrid debt-equity instrument that starts as a loan but converts on maturity to stock at a predetermined stock price), and a number of historical preferred stock issues.

Funding is the key for Rivian as it anticipates it will spend at least $8 billion through the end of 2023 to support their commercialisation and growth objectives. The company is currently burning around US$300 million in cash per quarter, with approximately US$3.5 billion cash in the bank (proceeds of the IPO included). This gives it a growth runway of approximately 3 years.


Rivian currently has one factory in Illinois, but is planning factories within the USA

The company says that cash flows from the sales of its EVs are unlikely to cover its ongoing expenditure for the foreseeable future. As a result, the company expects to make losses for an extended period of time as it continues to invest in its growth. Given the growth runway, and expected expenditures, this implies that the company will likely have to raise capital again in the medium term.

As of September 30, 2021, the company had approximately 48,390 R1T and R1S pre-orders in the United States and Canada from customers who each paid a cancellable and fully refundable deposit of $1,000. Current production capacity at their existing plant is 150,000 vehicles p.a.

Some analysts believe the company could make revenues of between US$20 billion and US$25 billion by 2025 if it achieves its aim of 350,000 vehicles produced annually. It its margins are similar to Tesla, this could mean approximately US$1.4 billion to US$1.7 billion in net profits. Again to compare, this is roughly what Tesla currently earns in profit per quarter, and Tesla's market capitalisation us just over US$1 trillion.
 

Rivian has a limited operating history and has not generated material revenue from sales of its vehicles or other products and services to date. The company's medium term outlook depends largely on its ability to develop, manufacture, market and sell their EVs.

Initial deliveries for the R1T and R1S were and are, respectively, delayed, and the ramp up in production of these vehicles is taking longer than originally expected. This is due largely to the ongoing impacts of the COVID-19 pandemic, particularly on labour availability and supply chain disruptions.

Another key issue facing Rivian is the difficulty the company has in accurately estimating the likely demand for their vehicles, and therefore in placing long term orders with suppliers, or to negotiate scaled discounts. This means that the company is likely to face significantly higher costs than an established manufacturer like Tesla.

Also, the company is starting with just two consumer models and one commercial model. This will likely only sustain respective markets' interests for so long. Eventually they will have to upgrade or redesign existing models, and or launch new ones in other segments. In those other segments, for example passenger and sports, they are going to face significantly tougher competition from more advanced offerings by established EV and conventional vehicle manufacturers.

Rivian, by their own public admission (in their prospectus no less!) has limited experience in designing, testing, manufacturing, marketing, and selling EVs. This means that there is a significant execution risk in terms of them delivering on their short term and longer term goals. 
 

At $146.07 closing price on Wednesday, Rivian is capitalised at approximately US$124 billion. This is greater than U.S. majors Ford and General Motors, European prestige brand BMW, and well over twice the size of Japanese manufacturers Honda and Nissan. It's 90% the size of the world's largest car manufacturer by revenue, Volkswagen.

Whilst we let those comparisons settle in your mind, let us remind you that Rivian's only revenue so far is the $1,000 deposits it has taken on its presales, and has not yet delivered a single vehicle to customers. Granted it has the EDV deal with Amazon, but this is a long term supply deal with the total fleet of 100,000 vehicles to be delivered incrementally out to 2030. The key to the Rivian puzzle will be the success of its consumer offerings.


The Rivian EDV Electric Delivery Van

Rivian is often compared to Tesla, both in terms of a template for what is possible in the disruptive EV space, but also as what is possible in terms of future profitability and potential market capitalisation. We would suggest that the fact both companies produce EVs is where the comparisons should end. Tesla was producing and selling vehicles prior to its IPO, and had very little competition when it started because it was a pioneer in the space. Rivian on the other hand, is entering a highly competitive EV landscape that now consists of all of the major, established producers.

Also, Tesla has invested a great deal of effort and capital in building and streamlining its supply chains and production and distribution processes. This has been a key element in Tesla achieving the scale and profitability it has up to this point (via the cost savings that scale provides). Rivian admits it is still in the early stages of this process, and it is unclear how long it will take to achieve profitability. 

One advantage Rivian does have is it's targeting the niche of light trucks and SUVs, which is largely underserviced at the moment. However, this is unlikely to remain so for long as other manufacturers, particularly Tesla, increasingly enter this segment (Tesla is currently selling a 'soft SUV', the Model X, but has plans to release a more adventure-focussed SUV and the Cybertruck in 2023). There are also a number of European and Chinese dedicated-EV manufacturers with existing concept models and near-term production aspirations in this space.


The Rivian R1T light truck

The company admits itself that it has "limited experience, in designing, testing, manufacturing, marketing, and selling EVs". It is an unproven entity that is trading at an extremely high valuation compared to its established peers. The issue here is how well the company can capitalise on any initial success they enjoy from the R1S and R1T. Consumers are always looking for the next shiny new thing, and the next Rivian model, and the next, will be required to keep them relevant.

Given the above considerations, we consider the execution risk is extreme at the current valuation of over US$120 billion (we couldn’t think of a word more extreme than 'extreme'…perhaps 'extremely extreme!?'). Note, we define 'execution risk' as the possibility the company does not deliver on its production and sales targets, potential negative impacts from the developing competitive landscape, and favourable consumer adoption of its products.

However, on the upside, in the short term, the company's valuation likely depends more on what investors are prepared to pay for its shares rather than on its future profitability. Granted, ordinarily we would expect that these two concepts eventually merge. But in the current market environment, there are a great deal of investors who are only too keen to throw their investment dollars at companies like Rivian that are consistent with their beliefs and tastes.

In conclusion, we believe that Rivian shares at their current price are grossly overvalued. However, we note that the EV industry is growing rapidly, and many investors can see and relate to the opportunity that this presents. Perhaps 'extremely extreme' risks are less important than the 'story', and possibly also the fear of missing out on 'the next Tesla'. For this reason, we expect Rivian shares will probably remain overvalued for some time, and therefore cannot rule out further gains in the short term.

Based upon our earnings and earnings growth estimates for the company, and please note a great deal of guesswork is inevitably required on our part to form such opinions, we could entertain a valuation of as high as US$62 billion. This would be our top end based upon essentially everything going right for Rivian out to 2025. This valuation equates to a share price of approximately $76 per share.

We do acknowledge however, that the market has been prepared to pay higher multiples for technology stocks leveraged to emerging trends, particularly electric vehicles. Also, there is an increasing trend among bullish analysts to quote valuation multiples using sales rather than profits.

Certainly, if one was to take this approach, a significantly higher valuation for Rivian shares could be accommodated (assume up to double our valuation). But, we've chosen to take a more conservative approach based upon the clear and significant risks inherent in the stock. For this reason, based upon the current closing price of $146, we have no choice but to go with a Sell, High Risk rating on Rivian.