Electric vehicle (EV) automotive technology startup Rivian (RIVN) briefly fell below its IPO price of $78 last Thursday, but quickly bounced back. The company’s brief submersion beneath its IPO price follows a broader trend in which half of 2021’s IPOs, such as Bumble and Robinhood, ended the year below their offering price.
Although Rivian’s stock price was only briefly below its offering price, there is reason to believe that the company’s fundamentals will ultimately drive its price back down below the offering price for good. The market valued a company that is closer to a hope than an actively producing EV maker, at $52 billion, in what is one of the most absurd IPOs of all time. The EV competitive landscape suggests that Rivian will never be able to live up to the market’s expectations.
The company’s S-1 filing showed a company that has no revenues, is burning through cash, and has no competitive advantages in a market that has established, well-resourced incumbents who are much further along in the production cycle.
Financial Results
Rivian will declare its first revenues this quarter. The company disclosed that it had preorders for 48,390 units of its R1T pickup trucks and R1S SUVs in North America. Pre-orders are not sales, and can be made with a refundable $1,000 deposit. However, if we assume a 100% conversion rate, we can estimate base sales of $3.4 million for 2022, based on an average sales price of $70,000, although some of those orders will be met in Q4 2021. That number tells you just how far Rivian are to being profitable and how much cash burn we should expect given the numbers below.
Rivian burned through $2.482 billion in free cash flow (FCF) in 2020, as it designed, developed, produced and prepared to sell its EVs. With an enterprise value of -$81.665 billion, we can estimate an FCF yield of -3%. The obvious implication is that the company’s FCF is not generating enough FCF to support the business. In addition, the market has overvalued its FCF.
Understandably, the company’s Core Earnings were -$398 million in 2019 and -$982 million in 2020, per New Constructs. Meanwhile, it generated a net loss of -$426 million in 2019, and over a billion dollars in 2020. The EV maker’s net operating profit after-tax (NOPAT) was -$399.22 million in 2019, widening to -$982.65 in 2020.
NOPAT margin is truly abysmal, at -39,922.5% in 2019 and -98,265.3% in 2020. It’s easy to predict at this point that the company’s return on invested capital (ROIC) is poor. It is. Rivian’s ROIC fell from -15.6% in 2019 to -29.7% in 2020. Not only is shareholder value being destroyed, it’s being destroyed at greater levels.
Widening losses and cash burn can be attributed to the firm’s investment in a factory in Normal, Illinois, and preparations to begin production of the R1T pickup truck and R1S SUV, as well as an expansion of the workforce. Research & development costs have more than doubled, from $301 million to $766 million. Rivian’s prospectus shows a workforce of 6,274, but when the company spoke to TechCrunch, that had expanded to 8,000.
Rivian expects to jack these costs up even more. It anticipates costs of around $8 billion by the end of 2023, due to the obvious fact that it has to essentially build the productive capacity and distribution systems that incumbents already have.
In a sense, we can dismiss all this with the obvious: Rivian is a startup, of course its financials will look terrible. In the absence of anything that tells us much about its vehicle’s product-market fit, the best place to analyse the company is in terms of its competitive landscape, and that suggests that Rivian’s economics may always look terrible.
Rivian Is Too Late to the Party
The asset growth effect tells us that low asset growth stocks outperform high asset growth stocks, unless that stock has sustainable competitive advantages.
The capital cycle can be broadly explained thus: high returns and the potential for massive profits attract capital, creating excess supply, until the market collapses, driving returns down until capital exits sufficiently for profitability to return.
The EV market is typical of an industry whose growth potential is massive and where capital expenditure is soaring. According to MarketsandMarkets, the global EV market is expected to have grown to 4.1 million units in 2021 and to grow at a compound annual growth rate (CAGR) of 26.8% by 2030, reaching 34.8 million units. The International Energy Agency (IEA) is even more optimistic about EV’s prospects: forecasting global EV stock to reach 145 million units by 2030, accounting for 7% of the global vehicle fleet by that time. In addition, various governments, such as China, France, India and Japan, have backed an EV@30 campaign to get EVs to 30% share of sales by 2030. Even with a global supply chain crisis that has affected semiconductors, labour and shipping, among other things, sales have remained robust.
In terms of addressable market, Rivian’s expectations show the scale of the market opportunity. The company estimates a global consumer total addressable market (TAM) of $8.3 trillion and a serviceable addressable market SAM) which covers the United States, Canada and Western Europe, of $945 billion, with both markets served by the R1 platform, additional vehicle platforms and associated lifetime revenue. It also estimates a commercial TAM of $649 billion and a commercial SAM of $209 billion, with both markets served by an RCV platform, additional vehicle platforms and associated lifetime revenue.
Rivian is an example of the attractions of this market opportunity and the subsequent effects: increased competition. Yet Rivian is a late comer in an industry with established incumbents such as General Motors (GM), BMW (OTCPK:BMWYY), Tesla (TSLA), Ford (F), Honda (HMC), Nissan (OTCPK:NSANY) and others.
Unlike industry incumbents, Rivian has no real operational history. Indeed, it only began deliveries of its R1T pickup truck in September 2021. It will face the same operational teething problems that plagued Tesla, and will not have the advantage that Tesla had in being ahead, or seen to be ahead of many traditional incumbents. The company has already delayed deliveries, echoing Tesla’s struggles.
It is important to keep in mind that Rivian is a startup whose first two deliveries were in December 2021. In fact, when you look at the company’s income statement, it doesn’t have a line for revenue.
Bloomberg reports that Rivian plans to deliver just 300,000 vehicles per year, from a starting position of over 40,000 vehicles. These are fairly modest sums and do not explain how a company which is not themselves even talking about delivering on the scale of GM or Tesla, is valued above firms that can actually deliver those numbers. Firms for whom those numbers are not hypothetical.
Remember, nobody knows what Rivian’s product-market fit is. Nobody. Rivian’s lofty valuation, in the absence of any evidence of product-market fit, is purely speculative. Rivian presents investors with a problem that venture capitalists typically face but which is not normal in public markets: valuing a startup with no revenues. This is why it makes more sense to ask ourselves what the price implies and if that makes sense. Rivian’s price implies that Rivian can grow revenues to $113 billion by 2030 (or 6% of the forecasted EV sales), even though the company itself has no plans to produce the volume of EVs necessary to earn that price. As we said above, Rivian’s ambitions are to produce 300,000 EVs. If it were to achieve that by 2030, that would earn the company $21 billion per year at the ASP implied in the company’s registration form. That suggests that the company is extremely overvalued.
Rivian trades at the same price as General Motors, even though General Motors, as well as Ford, Volkswagen (OTCPK:VWAGY) and even Tesla have already achieved the productive scale necessary to meet market demand. All of them have the capital to invest in this attractive and growing market. Investors in Rivian have to reckon with the fact that while it is just scratching the potential of the market and building the infrastructure to deliver at scale, established incumbents are delivering at scale and winning market share, and all of this while remaining profitable, something which Rivian cannot do. By 2025, Ford, Volkswagen and General Motors alone will have spent $243 billion and by 2030, they will have produced roughly 9 million EVs.
Conclusion
Peter Druker once said that the purpose of a business is to create and keep a customer. At this point, Rivian is only just emerging as a business. There are few Rivian EVs out there. What Rivian has is an idea. We know absolutely nothing about the product-market fit. It could be that Rivian produces the best EVs ever made, it could be that they produce the worst. What we do know is that the company exists in a very attractive market, and that this market has already drawn heavily resourced incumbents who are further along the production cycle than Rivian.
Where Rivian has still to learn how to produce and deliver at scale, or even what kind of product will sell, its rivals already have proven products and established, highly functioning systems. Tesla’s struggles with deliveries show how hard it is to create an automaker from the ground up. The company itself has very modest plans for vehicle production. The market has priced Rivian to be far larger than the company itself says it will be. The company that aims to produce 300,000 EVs is being priced at the level of companies that aim to produce millions. There is no sense in that logic, unless we assume very fat margins, an assumption that at this point has no justification.
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