Rivian Q3 Preview: Impressive Delivery Numbers, Management Should Consider A Sale

Investment Thesis

Rivian's (NASDAQ:RIVN) upcoming Q3 earnings are poised to be a significant inflection point for the company, especially following the market's jittery response to its preliminary sales figures and the announcement of a substantial convertible note offering. Despite a promising start and beating delivery estimates, Rivian faces challenges typical of the EV sector, including significant cash burn, production ramp-up, and the need for continuous capital injection for innovation and expansion.

The company's robust partnership with Amazon, a critical stakeholder, adds a valuable dimension to its business model, emphasizing Rivian's potential as a strategic acquisition target. A potential sale could bolster Rivian's financial stability and operational scalability, providing an acquirer with established EV technology and an enhanced supply chain. Management should consider it.

Rivian's journey to profitability (on its own) is doable but laden with hurdles, including expected continued losses, the recent departure of Ford as an investor, and the broader complexities of the automotive industry's shift to electrification. The forthcoming detailed Q3 financials will be crucial in assessing Rivian's current health and future prospects, and management should take the opportunity to explore all options, including the exploration of a sale. While the notion is not currently supported by management commentary, the benefits of such a strategic move could be substantial, both for Rivian and a potential suitor, offering a more secure path forward in the competitive EV landscape.

Introduction

As Rivian Automotive Inc. prepares to release its Q3 earnings, the company is at an inflection point. After a preliminary quarterly sales estimate that sent the company's stock plummeting by 23%, investors are eagerly anticipating the full financial picture. The initial revenue announcement of $1.29 billion to $1.33 billion was below market projections, and the unveiling of a $1.5 billion convertible note offering sparked concerns about the company's financial health, especially during its critical production ramp-up phase. Against this backdrop, I believe Rivian management should consider strategic options, including a potential sale, to secure its position in the highly competitive electric vehicle (EV) market.

Rivian's Financial and Operational Landscape

Despite the market's reaction to its preliminary Q3 figures, Rivian's financials portray a company with significant potential. Their delivery numbers beat and management actually increased delivery estimates for the year to 52,000 from 50,000. Ending Q2 with a robust $10.2 billion in cash and credit facilities, Rivian has been channeling its resources into crucial growth initiatives, such as the development of the new Georgia plant. However, the company's substantial cash burn, which saw reserves fall to $9.1 billion in Q3, signals a need for investors and management to think about long run potential. Whether Rivian charts this path independently or considers aligning with a larger automotive entity, its financial trajectory requires careful navigation.

One of Rivian's standout strengths is its meticulously developed EV battery supply chain, positioning it as a desirable asset amidst the industry's ongoing supply chain challenges. The company's ability to navigate global supply chain disruptions more effectively than many of its peers underlines the strategic value it could offer to a potential acquirer.

Rivian and Amazon

A Strategic Alliance

The alliance between Rivian and Amazon (AMZN) is another highlight of Rivian's strategic portfolio. The partnership, which includes a commitment to deliver 100,000 electric vans by 2030, not only underscores a mutual dedication to sustainability but also enhances Rivian's attractiveness as a potential acquisition target. Amazon's 17% stake in Rivian, combined with the e-commerce giant's interest in fostering a cost-efficient, in-house delivery network using Rivian's technology, speaks volumes about the trust and potential long-term value inherent in this relationship. A high powered commercial vehicle partnership like this could be a golden ticket for anyone that’s looking to build out the fleet side of their EV business.

Why scale matters

Recently, Rivian noted in their last 10Q:

For the three and six months ended June 30, 2023, the impact of the IRA on our results of operations was not material. We will continue to evaluate the expected future impact of the IRA on our business, financial condition, and cash flows as additional regulatory guidance is issued. -RIVN Q2 2023 10Q

Rivian's customers can largely not access the lucrative IRA (Inflation Reduction Act) tax credit because most of their vehicles are above this selling price cap of $80,000. This means competitors like Tesla can sell their Cybertruck (Expected MSRP: $40,000) or Ford F150 Lightning (MSRP: ~$50,000) and qualify, eating market share.

Rivian cannot afford to cut the price more on their trucks either. They already lose money on them from a gross profit basis (10Q) meaning they will really have to scale up to get better unit discounts on materials to lower the costs on their vehicles.

Evaluating Strategic Options

The Case for a Sale

Given Rivian's current financial standing and market position, exploring a sale could be a strategic move. The automotive industry is witnessing a paradigm shift towards electrification, and traditional automakers are under immense pressure to revamp their portfolios. For these legacy players, acquiring an established EV company offers a compelling shortcut to gaining a solid foothold in this burgeoning market.

Global automakers have collectively pledged $526 billion for the transition to EVs, most of this happening by 2026. The results have been slow and Tesla is leaving many in the dust when it comes to EV production and delivery numbers. Something has to change. A legacy automaker could buy Rivian and get one of the most impressive EV startups out there on their side.

Rivian, with its advanced EV technology, established supply chain, and the prestigious Amazon fleet contract, represents a comprehensive package. A sale to a larger automaker could provide Rivian with the financial stability it needs while offering the buyer immediate entry into the competitive EV space. This synergy could be particularly appealing given the new EPA fuel guidelines, which pose a significant challenge to traditional automakers.

Recently, Ford filed a notice with the NHTSA saying new EPA emissions standards could be crushing for legacy auto. EVs are obviously exempt from this, but the legacy automakers are largely not producing at a scale yet to avoid these potential penalties. A couple legacy automakers are already paying hundreds of millions of dollars in penalties on current emission standards. Purchasing Rivian could help alleviate this.

Basically, a legacy automaker gets an EV automaker in the process of scaling and that has figured out some of the biggest early problems in scaling an EV (including the battery supply chain) and helps avoid new EPA regulations. It's in the space they want to get into and picks up a lucrative enterprise fleet contract from Amazon that could signal and help get more contracts in the industry. It certainly can help them beat Ford in the EV Truck Division (one of the current market leaders). This would actually put any firm slightly ahead (by Q3 EV sales) by simply buying Rivian. The reason EV trucks are so important is that, historically, ICE (Internal Combustion Engine) lightweight trucks have been the most profitable line of vehicles offered by legacy automakers. EV trucks have the same potential. However, the EV truck market appears saturated, with some legacy automakers pulling back scaling up production on EV trucks.

Consolidating EV sales under one legacy auto maker will allow the automaker to hit scale, lower the costs of the vehicles to qualify for the IRA $7,500 tax credit, and pick up expertise in their battery supply chain and help avoid EPA emission risks.

Valuation

As per Rivian's Q2 2023 10-Q, the company incurred a net loss of $1.2 billion in the quarter. Rivian's ability to reach profitability depends on factors like demand for EVs, consumer adoption rates, and its capability to manage costs and achieve economies of scale. Rivian acknowledged that as it continues investing for growth, including higher operating expenses and capital expenditures, it expects "to experience additional losses, which could delay our ability to achieve profitability and positive operating cash flow” (10Q). In addition, the firm plans to spend over $5 billion on the factory complex in Georgia. This will (given they have $9 billion in cash currently and burn over $1 billion a quarter) mean that they almost certainly have to tap the markets for more cash beyond their recent convertible bond sale. Their recent sale spooked investors. Their credibility might be running out.

A buyer, however, would only pay (net of cash at the end of the 3rd quarter) around an EV (Enterprise Value) of ~$13 billion (assuming a takeover price of $20/share or a ~$20 billion market cap):

The company currently has a tangible book value of $11.7 billion (2Q 10Q). This tangible book value does not include the value of the Rivian Brand (they do not list any intangible assets on their books at the end of Q2 2023). It also costs an automaker $1 billion per new vehicle to bring it to market (Rivian has 2) meaning this lineup (once EVs hit scale) could have an intangible value of $2 billion. This also does not include the intangible assets related to Rivian's supply chain they have honed since inception, and the brand value of Rivian itself.

Upcoming Q3 Earnings: A Critical Moment

As Rivian approaches its Q3 earnings release, the results will be pivotal. Reduced estimates (after the note put out by management earlier this month) are for $1.32 billion in revenue and a loss of $1.32 a share. The detailed financials, along with any forward-looking statements from the management, will provide a clearer picture of Rivian's current health and future prospects. Key factors to watch include the demand for Rivian's EVs, the adoption rate among consumers, and the company's ability to manage costs while scaling operations. We know how much cash they ended with, but the rest of the details will be key.

Risks

It's important to note that Rivian's path to profitability appears long. The recent exit of Ford as an investor, though possibly a strategic move by Ford due to its own EV initiatives, adds a layer of complexity to Rivian's financial narrative. While a pushing sale could alleviate some of Rivian's financial pressures, such strategic decisions are intricate and multifaceted, with no guarantees of this. A Rivian investment right now appears asymmetric to me, one with risks but definitely good rewards. That’s why I think they have upside potential.

Conclusion

As the EV landscape continues to evolve, Rivian stands at a crossroads. Its upcoming Q3 earnings will shed more light on its operational and financial health, potentially influencing its strategic decisions. While speculation about a possible sale is theoretical, the benefits of such a move are undeniable and management should consider. Joining forces with a larger, more financially stable automaker, could allow Rivian could secure its future in the electric vehicle market, accelerating its journey while contributing to a greener, more sustainable automotive industry.