The Glass is Actually Half Full

[140 degrees]

Since Rivian’s last earnings report, there has been much wailing and gnashing of teeth. Clearly the sky is falling. Or is it?

You might be surprised if I reveal that I feel more positive about Rivian’s situation than I did 6 months ago. All of this is predicated on my opinion that while the ramp up of Electric Vehicles may be slower, it will still happen. Let me explain my reasoning. Rivian's situation has changed in important ways.

1. Tesla didn’t deliver the Cybertruck that they promised. If they had introduced a $40K entry price for a 400 mile range as expected by some, Rivian would be in a world of hurt. Instead, the entry level RWD Cybertruck is $61K, to be delivered in two years, with an expected range of 250 miles. Also, Rivian’s R1T has better efficiency than Tesla’s Cybertruck. In some important ways, it is Tesla that is playing catch-up. Not what I expected.

2. The reduction in demand for EVs came at exactly the right time for Rivian. Some analysts opine that a reduction in demand is bad for all vendors, IMHO this is not true.

Rivian’s competition is stepping on the brakes. Ford announced they are cutting Lightning production from 3200/wk to 1600/wk. Ford delayed the Explorer EV launch to next year, and delayed the Bronco and Maverick EVs until the early 2030s. GM is having trouble producing Ultium batteries, they have delayed the Silverado and Sierra by a year. Stellantis is late to the market, but appears to have a strong offering.

This is important because Rivian has been negotiating with vendors for the R1 refresh and R2 introduction at the same time that many of the industry’s suppliers are having orders canceled by Rivian's competition. There is a lot of excess capacity right now. Battery prices just hit record lows. Prices are roughly 25% less than in 2019. In the conference call, it was mentioned several times that contracts were renegotiated for R1 production, using R2 volumes as leverage.

During the call, they forecast flat production while still achieving a modest net profit per vehicle. This is much better than getting to break-even by primarily increasing volume. If the volume needed for break-even is lower, the profit at full production should be higher.

If your reaction to the competition pulling back is negative, read the Innovator’s Dilemma by Clayton Christensen. Large entrenched companies have a hard time dealing with change that threatens their profitable product lines.

3. A good development team pulls risk forward when possible. By introducing the updated ECU architecture and vendor changes in this year’s R1 refresh, they are completing some of the riskier parts of the R2 development while gaining some of the cost reduction benefits. They will have two years of experience with the new distributed ECU architecture when the R2 comes to market. This could be much better than the example set by the Cybertruck, where software functions like traction control are MIA.

Normally, in a product development process, the composition of the team changes as progress is made. In a big company, these exempt employees just move to another project. I think that Rivian might not be diverse enough in terms of new project development to absorb the vendor management, component qualification, and design engineers who have finished their work. None of us like layoffs, but Rivian must run a lean company. These layoffs could actually be a sign of positive progress.

This post is already longer than I intended, so I’ll stop here. I’m interested in your reactions, both positive and negative.

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[MidnightRivian]

 

[DuoRivians]

The biggest question that Rivian needs to answer: how will they get an additional $5B in cash to make it out the other end?

Until then, even with R2 scale factored, stock investors can’t easily figure out how 1 + 1 = 2.

 

[COdogman]

You make some great points. I wouldn’t necessarily say they are in a better position than 6 months ago, but it’s also not the apocalypse many are making it out to be.

I definitely agree the delays at GM/ Ford will benefit Rivian/ Kia/ Hyundai/ Tesla. They were already behind and this only puts them further behind. They know this, which is probably why they are trying to get the US to slow down on aiding the transition.

They would benefit greatly if interest rates would go down some!

 

[evguy]

I agree with a lot of your points. Rivian is clearly hurting, but the pain will be temporary.

 

[evguy]

The biggest question that Rivian needs to answer: how will they get an additional $5B in cash to make it out the other end?

Until then, even with R2 scale factored, stock investors can’t easily figure out how 1 + 1 = 2.

They issued $3B in bonds in 2023. I suspect they'll issue more in late 2024 or 2025. Yes, it will cause some dilution and more teeth gnashing, but that too will be temporary.

 

[DuoRivians]

They issued $3B in bonds in 2023. I suspect they'll issue more in late 2024 or 2025. Yes, it will cause some dilution and more teeth gnashing, but that too will be temporary.

That’ll all need to priced in and de-risked before investors consider coming back into stock. Until then, while Rivian may be a viable company, I think $rivn will stay around $8-14.

Currently, more attractive opportunities in AI, tech, chips.

 

[evguy]

That’ll all need to priced in and de-risked before investors consider coming back into stock. Until then, while Rivian may be a viable company, I think $rivn will stay around $8-14.

Currently, more attractive opportunities in AI, tech, chips.

Yep, it's gonna be a bumpy ride. I'll scoop up some more shares when it's under $10!

 

[VSG]

I think everything the OP said was reasonable.

And I think the "analysts consensus" graph isn't worth the pixels it's printed on - those analysts are the same one who can't seem to accurately predict anything about Rivian over the past two years.

Likewise, everyone, including the OP, seems to think the whole story about Rivian is the consumer vehicles like the R1 and R2. They neglect to consider the RCV, at their peril ... it's about half the business plan and has the biggest potential for growth over the next two years.

 

[DuoRivians]

I think everything the OP said was reasonable.

And I think the "analysts consensus" graph isn't worth the pixels it's printed on - those analysts are the same one who can't seem to accurately predict anything about Rivian over the past two years.

Likewise, everyone, including the OP, seems to think the whole story about Rivian is the consumer vehicles like the R1 and R2. They neglect to consider the RCV, at their peril ... it's about half the business plan and has the biggest potential for growth over the next two years.

I was a big investor in $rivn (since mid 2022) until that last earnings call. It was a shitshow, and gave no confidence that Rivian was capable of balancing its books.

I still love the products, but you can’t deny the harsh market reaction on the stock, post earnings. It was a big step gap down, unlike previous earnings.

Markets are markets, and people are welcome to vote with their dollars and be rewarded for making the right calls.

But, as far I’m concerned, unless Rivian communicates a realistic funding plan (not just “maintain a strong balance sheet” bs), figure out how to control costs within their cash budget, and/or material jump in production with relatable sales confidence, I’m staying on the side lines.

Also, the opportunity cost of keeping money in $rivn for potentially another two years at a flat price is too great.

 

[VSG]

I still love the products, but you can’t deny the harsh market reaction on the stock, post earnings.

I try not to let the panicky reactions of the get-rich-quick speculators, short sellers, and day traders influence my judgement.

 

[DuoRivians]

I try not to let the panicky reactions of the get-rich-quick speculators, short sellers, and day traders influence my judgement.

Well, let me ask a different way, what’s your stop loss? Or will you hold the stock till $0?

 

[UnsungZero_OldTimeAdMan]

Since Rivian’s last earnings report, there has been much wailing and gnashing of teeth. Clearly the sky is falling. Or is it?

You might be surprised if I reveal that I feel more positive about Rivian’s situation than I did 6 months ago. All of this is predicated on my opinion that while the ramp up of Electric Vehicles may be slower, it will still happen. Let me explain my reasoning. Rivian's situation has changed in important ways.

1. Tesla didn’t deliver the Cybertruck that they promised. If they had introduced a $40K entry price for a 400 mile range as expected by some, Rivian would be in a world of hurt. Instead, the entry level RWD Cybertruck is $61K, to be delivered in two years, with an expected range of 250 miles. Also, Rivian’s R1T has better efficiency than Tesla’s Cybertruck. In some important ways, it is Tesla that is playing catch-up. Not what I expected.

2. The reduction in demand for EVs came at exactly the right time for Rivian. Some analysts opine that a reduction in demand is bad for all vendors, IMHO this is not true.

Rivian’s competition is stepping on the brakes. Ford announced they are cutting Lightning production from 3200/wk to 1600/wk. Ford delayed the Explorer EV launch to next year, and delayed the Bronco and Maverick EVs until the early 2030s. GM is having trouble producing Ultium batteries, they have delayed the Silverado and Sierra by a year. Stellantis is late to the market, but appears to have a strong offering.

This is important because Rivian has been negotiating with vendors for the R1 refresh and R2 introduction at the same time that many of the industry’s suppliers are having orders canceled by Rivian's competition. There is a lot of excess capacity right now. Battery prices just hit record lows. Prices are roughly 25% less than in 2019. In the conference call, it was mentioned several times that contracts were renegotiated for R1 production, using R2 volumes as leverage.

During the call, they forecast flat production while still achieving a modest net profit per vehicle. This is much better than getting to break-even by primarily increasing volume. If the volume needed for break-even is lower, the profit at full production should be higher.

If your reaction to the competition pulling back is negative, read the Innovator’s Dilemma by Clayton Christensen. Large entrenched companies have a hard time dealing with change that threatens their profitable product lines.

3. A good development team pulls risk forward when possible. By introducing the updated ECU architecture and vendor changes in this year’s R1 refresh, they are completing some of the riskier parts of the R2 development while gaining some of the cost reduction benefits. They will have two years of experience with the new distributed ECU architecture when the R2 comes to market. This could be much better than the example set by the Cybertruck, where software functions like traction control are MIA.

Normally, in a product development process, the composition of the team changes as progress is made. In a big company, these exempt employees just move to another project. I think that Rivian might not be diverse enough in terms of new project development to absorb the vendor management, component qualification, and design engineers who have finished their work. None of us like layoffs, but Rivian must run a lean company. These layoffs could actually be a sign of positive progress.

This post is already longer than I intended, so I’ll stop here. I’m interested in your reactions, both positive and negative.

I don't mind long posts like this when they are thoughtful and weighted. The thoughtless knee-jerking is tiresome and benefit no one.

 

[VSG]

Well, let me ask a different way, what’s your stop loss? Or will you hold the stock till $0?

I'm cost averaging down and trading the swing, when I feel it's *relatively* undervalued. Net gain so far - I just sold a lot at a 15% gain from last week for example. When the irrational traders have left for what they see as greener pastures, I'll switch to mostly holding and stop the active trading. We're not there yet. Right now I feel the stock price has very little correlation with the underlying value of the company, so it's not about a floor price for me, and I have no worries about it becoming worthless.

 

[foxerson]

I like the optimism expressed by @140 degrees and especially the positive spin on the reports of a slowdown in EV demand and resulting pullback by legacy auto makers. Granted, it is easier for me to be optimistic as a later investor with the benefit of a much lower average costs basis than early investors.

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