For Rivian, Challenging Roadblocks Lie Ahead

The introduction of electric vehicles in the U.S. market garnered much fanfare in recent years as trailblazer Tesla and others launched a wider selection of models at different price points. However, the adoption of electric vehicles in the U.S. is trending far lower than assumptions made in recent years, unfavorably altering the economics of EV makers.

The U.S. is now past the early adopter phase, so it’s clear that hopes for EV uptake rates similar to China or Norway have not panned out as demand growth has slowed dramatically. A path to increased EV demand would rely on an accelerating charging infrastructure build-out and further incentives that look increasingly unlikely.

Several automakers have raised warning flags, confirming the slowdown is material, including Tesla, Ford F, and General Motors GM. 

Analysts reading the tea leaves are concerned that EV maker Rivian Automotive's RIVN demand is also waning. Rivian’s path to success relies on many things going right, including gaining market share for electric trucks and SUVs in an insatiable demand environment as it ramps production. 

Getting to free cash flow positive relies on steadily improving unit sales and margins. While Rivian made progress, lowering the cost per vehicle from $300K in 2022 to $123K in 2023, the recent industry demand challenges will likely slow Rivian’s economic improvements.

Barclays downgraded RIVN last week, cutting its price target to $16 from $25, citing a host of concerns. After giving RIVN the benefit of the doubt, believing that volumes were purely a function of production, Barclays notes, “It appears that even a great product and tech is not enough to avoid the EV winter.” Margin and demand constraints will exacerbate the need for dilutive capital raises until FCF can turn positive, which may now only first come in 2028.

Deutsche Bank finds concern in Rivian’s expanded R1T and R1S configuration options to allow for the cheapest standard battery pack. They see margins at risk since this deep price cut comes with only a slight cost improvement. Management’s signal of slowing demand could have severe implications of a negative financial feedback loop: pushing out the timeline to breakeven, leading to larger cash burn, necessitating additional capital raises, and possibly leading to questions about R2’s future profitability.

Meanwhile, Adam Jonas from Morgan Stanley questions the logic of building a new $5 billion high-capacity Georgia plant in light of weakening EV demand. He notes that in 2024, Rivian expects to spend $3.9 billion in capex and R&D while only delivering 60 thousand vehicles. Jonas believes Rivian will need to raise an additional $5 billion in capital over the next two years to fund an absurd $8 billion in negative FCF.

Amazon AMZN still owns close to 17% of Rivian shares, yet their uptake of delivery vans from an initial 100K order has been short of initial expectations. While Rivian had an exclusive deal to provide Amazon with delivery vans, Rivian has pursued other commercial customer deals to fill the pipeline. A deal to supply AT&T T with vans in a pilot starting this year gives a glimmer of hope in expanding commercially beyond Amazon.

When you add up RIVN’s headwinds and the difficulties of the EV sector, the margin of error has narrowed considerably, implying a poor risk/reward for investing in the stock. 

Sure, Rivian shouldn’t be written off since it’s part of auto mega-trends for the transition to EV and software-defined vehicles. The company also has a strong balance sheet with $9 billion in cash. Still, challenging hurdles lie ahead due to significant capital needs, competitive threats, a struggle to achieve positive cash flow, and slower EV demand. 

A raft of concerns will likely dog the shares and investors should steer clear until Rivian’s path toward profitability is more tangible.

At the time of publication, Ginesin had no positions in any securities mentioned.