Is Rivian Stock A Good Long-Term Investment? Consider Demand And Supply
- RIVN's share price has been weak since it disclosed that its 2021 full-year production will fall short of earlier guidance.
- Demand for Rivian's vehicles has been good as evidenced by its R1T and R1S preorders which increased from 48,390 as of end-September to 71,000 as of mid-December.
- But RIVN stays as a Sell, as I am not confident in its ability to ramp up future production to have sufficient supply to meet strong buyer demand.
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I continue to assign a Sell rating to Rivian Automotive, Inc. (NASDAQ:RIVN). I published my initiation article for RIVN in the middle of last month prior to the release of the company's Q3 2021 results, and its shares have since declined by -30.3%. In this article, I assess if Rivian Automotive's recent third-quarter results offer any indication of the company's future prospects and its attractiveness as a long-term investment candidate.
Rivian Automotive's Share Price Performance As Compared To The S&P 500 Following My Prior Article
Source: Initiation Article For RIVN Dated December 14, 2021
I am positive on the strong demand for Rivian Automotive's vehicles as indicated by its strong preorders. But a significant proportion of the company's preorders might be cancelled in the future and not translate into actual revenue, if RIVN is not able to scale up its production going forward which I view as a genuine possibility. Rivian Automotive is not a good long-term investment candidate, as there is significant uncertainty over its ability to increase its production rate in the next few years and having sufficient cash flow to finance this expansion. My Sell rating for Rivian Automotive remains unchanged.
Rivian Post-IPO Plans
In a nutshell, RIVN's post-IPO plans are really about creating demand (preorders) for its EVs (Electric Vehicles), and ensuring that it has sufficient future supply (production) to satisfy its customers.
Rivian Automotive's most recent Q3 2021 financial results and business updates have helped me to evaluate how well the company has been able to execute on its post-IPO plans. I will discuss demand in this section, and focus on supply in the next section.
In my previous December 14, 2021 article for Rivian Automotive, I noted that "RIVN's expected revenue for 2022 seems to be adequately covered by preorders", highlighting the company's "48,390 R1T (pickups) and R1S (sports utility vehicles) preorders" as of September 30, 2021. It is encouraging that RIVN's preorders have increased by +47% to 71,000 as of December 15, 2021 as indicated in the company's Q3 2021 Shareholder Letter.
More significantly, RIVN appears to be penetrating new customer segments. At the company's Q3 2021 results briefing, Rivian Automotive highlighted that "close to 90% of customers (for R1T) that have never owned a truck", and it emphasized that "a vast majority of our customers" never ever bought an EV in the past.
In a sense, RIVN's post-IPO preorders and demand outlook have been boosted by increased visibility brought about by its public listing on November 10, 2021. Rivian Automotive noted at its most recent quarterly earnings call that the "response to the vehicle has been outstanding" and there is also "heightened awareness of the company" in recent months, and acknowledged that "the IPO contributed to that."
But the market's response to Rivian Automotive's third-quarter results release has been negative, and this is very likely linked to investors' disappointment and concerns over "the supply side (production)" of the company's post-IPO plans.
What Is Rivian's Expected Production?
Rivian Automotive guided in the company's Q3 2021 Shareholder Letter that it could be "a few hundred vehicles short of our 2021 production target of 1,200." This largely explains why RIVN's stock price decreased by -10.3% from $108.87 as of December 16, 2021 to $97.70 as of December 17, 2021, after the company reported its Q3 2021 results.
The outlook for Rivian's future production in 2022 and beyond is mixed.
On the negative side of things, it appears that there is a real risk that RIVN might have insufficient supply to meet demand, going by management's comments at the recent Q3 2021 investor call. When asked by an analyst at the third-quarter earnings briefing whether Rivian Automotive can meet the "delivery target (for R1T and R1S) by end of 2023", RIVN admitted that "the rate at which preorders are coming in exceeds the current rate of production", and noted that "we are working as hard as we can to ramp" up production.
On the positive side of things, Rivian Automotive is increasing its future production capacity. RIVN announced in the middle of last month that it "will expand its manufacturing operations, locating its second U.S. plant in the state of Georgia." As per the company's Q3 2021 Shareholder Letter, RIVN revealed that production at the new Georgia facility should commence in 2024, with a targeted production volume of approximately 400,000 units on a yearly basis.
More importantly, RIVN's future production might also be inferior to that of its peers, which I highlight in the next section.
Rivian Vs. Tesla And Other Competitors
According to EV delivery forecasts cited by Loup Ventures in a January 1, 2022 Seeking Alpha news article, RIVN might not meet market expectations in terms of deliveries this year.
Loup Ventures expects that Rivian Automotive and Lucid Group (NASDAQ:LCID) will be "challenged to meet consensus delivery expectations given they are ramping production into a tight labor and component market." Specifically, Loup Ventures sees RIVN delivering less than 42,000 units in 2022, which is what the market consensus expects from the company. In contrast, Loup Ventures is much more bullish on Tesla (NASDAQ:TSLA), which it expects to "beat consensus vehicle deliveries expectations for 2022."
It is worthy to compare Rivian Automotive against its other peers and competitors to see if the difference in 2022 delivery expectations for the various EV companies has been priced into their respective valuations.
Peer Valuation Comparison For RIVN
|Stock||Consensus Forward 2022 Revenue Growth||Consensus Forward 2023 Revenue Growth||Consensus Forward 2024 Revenue Growth||Consensus Forward 2025 Revenue Growth||Consensus Forward 2022 Price-to-Sales Multiple||Consensus Forward 2023 Price-to-Sales Multiple||Consensus Forward 2024 Price-to-Sales Multiple||Consensus Forward 2025 Price-to-Sales Multiple|
|Lucid Group, Inc.||+2,482%||+119%||+127%||+39%||29.3||13.4||5.9||4.3|
|Fisker Inc. (FSR)||+472,496%||+791%||+134%||+73%||20.4||2.3||1.0||0.6|
Source: S&P Capital IQ
Both Rivian Automotive and Lucid Group are trading at higher consensus forward 2022 Enterprise Value-to-Revenue multiples as compared to Tesla. This is despite the fact that RIVN and LCID are at a higher risk of missing this year's consensus delivery expectations as highlighted above.
In other words, the market is pricing in lofty expectations with regards to production ramp-up and revenue growth for Rivian Automotive in the next couple of years. Further disappointments in terms of production and deliveries on an absolute basis and as compared to peers could possibly lead to a further valuation derating for RIVN's shares.
Rivian Stock Forecast
In the prior section, I have already outlined Rivian Automotive's market consensus revenue growth forecasts for the next few years up to 2025. Note that if RIVN's future production and supply fall short of market expectations, a substantial proportion of the preorders might also be cancelled.
Future revenue growth for Rivian Automotive also needs to be supported by significant cash burn and capital investments. This is why another key component of RIVN's financial forecasts is the company's forecasted cash flow. According to S&P Capital IQ data, Wall Street analysts expect Rivian Automotive to only turn operating cash flow positive and free cash flow positive in 2024 and 2025, respectively.
I warned in my prior December 14, 2021 update on the company that "it is possible that RIVN underestimates the amount of cash it needs to execute on its production and sales plans" with its vertical integration strategy. I also added that RIVN "could find it tough to raise capital", assuming that "capital market conditions become unfavorable."
Apart from a slower-than-expected production ramp-up, an unexpected cash call in a challenging market environment will be another key risk factor for RIVN.
Is RIVN Stock A Good Long-Term Investment?
I don't think that RIVN stock is a good long-term investment, which explains why I have decided to keep my Sell rating for the company's shares.
RIVN's updated 2021 production target (which fell short of its earlier guidance) and Loup Ventures' 2022 delivery forecasts for the company don't give me the confidence that RIVN can ramp up future production at a sufficiently fast pace in the next few years. Furthermore, Rivian Automotive is expected to continue burning cash in the next few years, and it is unlikely to be free cash flow positive before 2025. As such, I still view Rivian Automotive as a Sell.
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