Rivian: It's More Than The Mercedes Deal

Sep. 21, 2022 10:10 AM ETRivian Automotive, Inc. (RIVN)AMZN, F, F.PB, MBGAF, MBGYY16 Comments

Summary

  • Rivian stock has demonstrated resilience against the recent selloff that brought key market benchmarks back to mid-year lows due to heightened recession risks.
  • The EV maker's latest deal forged with Mercedes on jointly operating a manufacturing facility in Europe has offered some respite to the stock's steep downtrend this year.
  • But a critical catalyst to sustaining the stock's uptrend momentum in the near-term will be its ability in ramping up production volumes.
  • The following analysis will discuss progress over Rivian's critical second shift at its Normal plant, benefits of the IRA, improvements to supply chain constraints, and its latest joint partnership with Mercedes, and gauge their respective implications on the EV maker's longer-term growth and profit realization prospects.
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Ford To Sell 8 Million Shares Of Electric Vehicle Maker Rivian Stock

Justin Sullivan

Rivian stock (NASDAQ:RIVN) benefited from a steep weekly gain after announcing its partnership with Mercedes (OTCPK:MBGAF / OTCPK:MBGYY) to build a new manufacturing plant in Europe designated for the production of electric last-mile delivery vans in the region. The stock outperformed key market benchmarks in the first two weeks of September, gaining more than 25% to make up for earlier losses incurred in August after announcing second quarter earnings that included a downward adjustment to its EBITDA guidance. Although it has given up some of its gains this week due to broad-based market jitters ahead of the Fed's rate decision this week, the stock is still up close to 10% this month, with investors' sentiment still largely positive on the EV maker's near-term outlook.

Rivian's latest partnership with Mercedes is considered a step in the right direction for its Europe strategy, as it paves way for the electric vehicle start-up's impending penetration into one of the world's largest and fastest growing markets for plug-in cars. Rivian's key backer, Amazon (AMZN), which currently holds exclusive rights to the EDV delivery vans, also has a sprawling e-commerce business across Europe, underscoring the value that the latest Rivian-Mercedes partnership forged will draw.

And taking a step back to look at Rivian's overall manufacturing progress over the past 12 months, the company is making positive developments on its highly anticipated second shift that is critical to achieving its 2022 production target of 25,000 vehicles. Management's sentiment on easing supply chain constraints are also largely positive, though caution remains as the situation is still fluid with component availability still the key determinant for whether cars can roll off production lines. Meanwhile, the Inflation Reduction Act that was recently signed into law makes another tailwind for Rivian, especially given its vertically integrated business model. In addition to the $7,500 tax incentive in which Rivian consumers would be eligible for, the start-up is also well-positioned for an additional battery credit to alleviate input costs that have soared toward new records.

While Rivian's near-term outlook on production ramp-up remains uncertain given industry-wide supply chain disruptions, the company appears to be making prudent internal decision that could unlock greater upsides over the longer-term. With production ramp-up still a key focus area in the near-term, the stock will likely remain rangebound in the $30-level until there is concrete evidence that Rivian is on track towards pushing out 25,000 vehicles by the end of the year.

The Critical Second Shift

Recall in our previous analysis on the Rivian stock that the addition of a second shift will be critical to achieving its production target for the year. Having produced 4,401 vehicles in Q2 and 2,553 vehicles in Q1, Rivian is still more than 18,000 vehicles out from its goal for the year, which translates to a production run-rate requirement of about 465 vehicles per week in 2H22.

Considering an earlier disclosure that Rivian had produced approximately 1,400 vehicles in the period between April 1st and May 9th, and total Q2 output of 4,401 vehicles, productions have likely ramped up to more than 400 vehicles per week in the latter half of the quarter. This puts Rivian's current production efforts in close proximity to the ramp velocity required through 2H22 to reach 25,000 vehicles by year-end.

In the latest update regarding Rivian's addition of a second shift, the company is already in the process of adding additional workers in some parts of the production line to get the ball rolling. CFO Claire McDonough cited during a recent interview at the RBC Global Industrials Conference that "general assembly will be the last area to add a second shift", which will occur later in the current quarter. On this basis, Rivian's production run-rate will likely remain muted at the low 400-range in the third quarter, and rely on a "catch-up" in the fourth quarter when the second shift in general assembly ramps up to achieve its 25,000-vehicle target.

While the 25,000-vehicle production target for the year is not entirely out of reach for Rivian considering the positive progress it has made in recent quarters on ramping up output at its Normal facility, the timing is tight. Under the current situation where the second shift for general assembly is not expected to come online until later in the third quarter, a meaningful impact on volumes is not expected to be felt until at least later in the fourth quarter or even into early 2023. Evolving supply chain disruptions across the auto sector also adds another layer of challenge to Rivian's immediate production goals. Although management remains "confident in supply chain improvements and the ability to show progress on increasing production", any material disruptions to component availability could risk derailing Rivian's near-term production goals.

Yet, with Rivian's ability to ramp up productions being a key near-term focus for investors, realizing its 25,000-vehicle production target for the year could be a form of reassurance for the company's long-term growth and profit trajectory, and unlock fresh valuation upsides ahead. Specifically, producing 25,000 vehicles by the end of the year could reduce its current order backlog of more than 98,000 pre-orders (excluding Amazon's EDV reservations) and unlock more than $1.7 billion in recognized revenue for Rivian in 2022 based on its current average vehicle selling price ("ASP") of about $79,000 - a number that is expected to be higher on units produced and delivered later in the year as pre-price-hike orders and discontinued entry-level trims "roll off". And from a bottom-line perspective, while margins will be pressured in the near-term consistent with early-stage production ramp-up costs on the added shift, it is expected to show structural improvement once volumes start to scale up later in the year and into 2023, barring any material supply chain constraints.

Supply Chain Update

Circling back to the earlier discussion on Rivian management's optimism over supply chain improvements, overall industry sentiment on the situation remains mixed. COVID disruptions continue to be an overhang on industry-wide production levels given stringent mobility restrictions enforced in China - a key raw material import hub for the auto sector. And the added challenge of extreme weather conditions in the region during August have only exacerbated constraints across the supply chain.

Yet, Rivian's optimism is not without support. Management's positive sentiment over easing supply chain bottlenecks is corroborated by Rivian's consistent progress made on ramping up productions in recent quarters, with output growth showing robust sequential acceleration. This is a huge improvement from Rivian's early days when it repeatedly found itself as a victim of industry-wide chip supply shortages that have led to significant production delays.

While auto production volumes remain a function of supply availability across the industry, Rivian has long acknowledged the inevitable risk of key component shortages over the longer-term:

Put very simply, all the world's cell production combined represents well under 10% of what we will need in 10 years, meaning, 90% to 95% of the supply chain does not exist…Semiconductors are a small appetizer to what we are about to feel on battery cells over the next two decade.

Source: Rivian CEO RJ Scaringe, WSJ

As a result, management has continuously taken prudent measures in securing long-term supplies of key components to avoid production and delivery delays experienced during its early days. With the company now having sufficient "cell supply secured for the next couple of years", while also working to "establish relationships deeper in the value chain which could include upstream supply relationships", Rivian remains well-positioned on mitigating supply risks over its long-term production ramp-up efforts.

Benefits of the Inflation Reduction Act

As part of the Inflation Reduction Act ("IRA") in which President Biden has recently signed into law, electric pick-up trucks and SUVs assembled in the U.S. priced under $80,000 - like the R1 vehicles offered in Rivian's line-up - would be eligible for a $7,500 federal EV tax credit. The consumer subsidy is not only expected to spur momentum within the U.S. EV market, but also draw additional demand for Rivian's vehicles given the added price appeal with the exclusive tax credit:

Fewer than a dozen of the EV and plug-in hybrid models among the hundreds of vehicles on display at the industry confab Wednesday would be eligible for tax credits of as much as $7,500…To help consumers, the Biden administration published a list of 24 vehicles that it says are likely to meet the bill's requirement for "final assembly" in North America…The new legislation knocked out about 70% of the 72 models that previously qualified for tax credits…The numbers aren't likely to change quickly, given the industry's heavy reliance on Asia for batteries and raw materials, and the many other supply challenges facing manufacturers.

Source: Bloomberg

In addition to consumer incentives that would benefit demand for Rivian's vehicles, there is also the less talked about credits in which the company would qualify for given its battery pack assembly efforts in the U.S. Specifically, Rivian is set to benefit from a $10/kWh credit for its internal assembly of battery packs at its Normal facility in Illinois. And over the longer-term, given Rivian's vertically integrated business model, it could potentially qualify for an additional $35/kWh credit under the IRA should it consider internalizing the production of battery cells as well. This would accordingly yield a manufacturing tax incentive of up to $45/kWh on whole battery productions, which would substantially alleviate rising battery cost pressures and hasten the company's overall timeline to profit realization.

The Mercedes Partnership

Rivian's latest partnership forged with Mercedes on the joint construction of an EV manufacturing plant in Europe is another step in the right direction when it comes to realizing its long-term growth plans. The partnership will be a 50/50 joint venture, with the new plant to come online within "a few years". Rivian's latest partnership with Mercedes also aligns with its long-time playbook in latching onto reputable names - spanning Amazon and Ford (F) - which provides additional validation to its brand and operational viability.

The latest development has been welcomed with praise across investors, as it sent the stock on an uptrend that held-on for a week earlier this month before buckling slightly amid a violent wave of market-wide selloffs ahead of expectations for further Fed tightening to tame an inflation figure that remains stubbornly elevated. From a fundamental perspective, the joint partnership with Mercedes is, again, a step in the right direction for Rivian's Europe strategy, as it makes a "capital efficient approach" at a time where financing costs are high and investors are putting more focus on profitability. And from an operational perspective, the partnership is expected to further alleviate Rivian's exposure to longer-term supply risks mentioned in the earlier section, as it will allow the EV start-up to leverage Mercedes' expansive manufacturing expertise and network across the supply chain.

As discussed in the earlier section, the joint facility in Europe will be dedicated towards the production of Rivian's EDV vans. In addition to capital efficiencies, Rivian's joint venture with Mercedes would also unlock additional operational cost benefits when it comes to servicing Amazon's demands within the European market. Specifically, having a local production hub in Europe would reduce logistics costs and other potential tariffs when it comes to supplying Amazon with last-mile delivery vans outside of the U.S. For now, Amazon continues to have exclusive rights to Rivian's EDV vans until at least four years after initial delivery - which occurred earlier in the summer - and holds a right of first refusal to buy additional EDVs for two additional years after that. With Amazon's e-retail business across Europe still fast expanding, Rivian's local manufacturing capacity is expected to further its global market share gains over coming years.

And over longer-term, Rivian's partnership with Mercedes makes it uniquely positioned for capitalizing on favorable market tailwinds across the European EV market. While Europe is currently one of the largest and fastest-growing markets for passenger EVs behind China, the region's demand for electric commercial vehicles is also picking up speed:

Growing adoption of slew of automation technologies for supply chain has generated lucrative opportunities for service providers in the first and last mile delivery market… The first and last mile delivery market is forecast to advance at a CAGR of 6.12% from 2022 to 2031…Europe is expected to account for a key share of the global first and last mile delivery market. The growth is fueled by early uptake of advanced automation solutions in transport and logistics in various end-use industries.

Source: TMR Study

Final Thoughts

While Rivian continues to make favorable improvements across all avenues of operations that is within its control, 2H22 production levels will remain the key determinant for whether the stock can break out of the $30-range. Volume ramp-up remains a key focus area for investors as it implies positive progress at Rivian on further expanding margins towards ultimate profitability. For now, it seems the stock will remain rangebound - or potentially trend lower towards better entry opportunities in tandem with elevated market volatility ahead of tightening economic conditions - until its 25,000-vehicle production target for the year is in the bag.

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