Rivian’s Valuation Is Starting To Make Sense

The EV maker’s strategic shift aims to expand market reach and improve financial stability. While the valuation improves, it’s not yet a bargain

By Bernard Zambonin

Summary

• Rivian aims to reach a wider audience with new, lower-priced models and optimize production to improve capital efficiency, potentially saving over $2 billion.
• Despite significant financial challenges and operational losses, Rivian’s valuation is becoming more aligned with market realities, although it remains higher than industry averages.
• With a reservation count of 68,000 units for the new R2 model, Rivian shows strong market interest, suggesting potential for positive growth in the coming quarters.

Over the past year, Rivian Automotive Inc. (RIVN, Financial) and many other electric vehicle makers, including Tesla
Tesla
Inc. (TSLA, Financial), have experienced a slowdown in growth as reality has set in. Consumer demand for these vehicles has not been as strong as initially anticipated, compounded by the inherent competition within the EV market.

The hype around electric vehicles has indeed waned, as evidenced by Rivian’s share price dropping nearly 90% to around $10, compared to $130 per share when it debuted as a publicly traded company three years ago.

As a result, the share prices of Rivian and dozens of other EV companies have declined as they have had to adjust their plans downward, moving closer to a more realistic market outlook.

In early May, Rivian reported its first-quarter results, updating investors on financial metrics and strategic changes aimed at making its business model more accessible to a broader audience.

Despite reporting figures below Wall Street expectations, Rivian produced 13,980 vehicles and delivered 13,580, remaining on pace for its annual target of 57,000. The company’s focus on driving continued demand, enhancing the customer experience, achieving more significant cost reductions and plant efficiencies, progressing with R2 model development and moving toward profitability were all positive steps, in my view.

The significant challenge is executing this strategy amidst an increasingly competitive landscape, with abundant supply meeting a more clearly defined customer demand.

While the company is not currently trading at a value considered a bargain, I believe Rivian is moving closer to striking a balance between a business finally heading in the right direction and with a fair market price.

Strategic shift to lower-priced models and optimized production capacity

Rivian released its first-quarter 2024 earnings results on May 7. One of the highlights was the company’s strategic shift, unveiling its new mid-sized, lower-priced platform with the R2, R3 and R3X models to reach a wider audience. Until now, the company has sold around 60,000 units annually, with its SUVs priced between $76,700 and $93,000 on average.

The company announced the R2 model will start at around $45,000, making it competitive with Tesla’s Model Y. This is excellent news for expanding its market reach. Additionally, R2 production will take place in Rivian’s current facilities, which should enhance capital efficiency. According to the company, this move is expected to save over $2 billion and enable production to start in the first half of 2026. This is another piece of great news.

However, the not-so-great news was the company plans to build a new manufacturing facility in Georgia to produce the R2 units. This raises questions among investors, considering the company’s claim it could produce the R2 in its current facilities. This decision leaves investors wondering if it is efficiently utilizing its resources, especially given its current financial situation.

Financials remain troubling, but its valuation is improving

Rivian appears to be on a promising path to lowering its conversion cost per vehicle in the second half of 2024, with management highlighting expectations to reach profitability by the fourth quarter.

In the first quarter, Rivian reported a gross profit per vehicle of $38,718, indicating it still needs to achieve a sustainable business model at the current level. The company also announced it expects significant improvements in vehicle costs. It is developing the R2 model, which should be priced much lower than the R1, potentially representing a significant step forward in cost-per-vehicle conversion.

Rivian’s latest financial results continue to be less than encouraging. The cash burn is particularly worrying. Rivian now has $5.97 billion in cash and equivalents, down from $11.78 billion in the same period last year, highlighting the financial strain from deliveries and operational losses.

Source: Rivian’s first-quarter presentation

The $1.20 billion in revenue generated in the first quarter of this year, combined with a loss from operations of $1.48 billion, is also far from appealing, considering that last year the company lost slightly less cash, $1.43 billion, in the same period. This is a warning sign as the company has been growing revenue, but has yet to improve its operating losses.

Source: Rivian’s first-quarter presentation

Although the company’s market value has depreciated by 23% over the last 12 months, the current share price still does not position it in bargain territory. Yet, it is not too bad either.

Rivian trades at a price-sales ratio of 2, which is more than double the auto industry average of 0.80 and higher than that of Chinese EV manufacturers like BYD Co. (BYDDY, Financial). However, it is about a third of the price-sales ratio at which Tesla traded in the past 12 months and about one-fifth of Lucid Group’s (LCID, Financial) multiple.

RIVN Data by GuruFocus

The bottom line

Rivian’s recent developments suggest the company is on a promising path. Management rethinking its investment plan to reduce capital expenditures should keep Rivian funded through the first half of 2026, a prudent move in an industry that is much more mature than it was three years ago.

The strategic shift to reach a wider audience with the R2 model is good news. With a competitive starting price and a reservation count of 68,000 units, strong market interest indicates the R2 could bear good fruit for the company in the coming quarters.

Despite Rivian’s financial results being pretty disappointing, with not much progress over the past year, it seems the valuation is finally getting more realistic. While it may still be imprudent to go all in on Rivian, I believe this could be a great time to start reconsidering any bearish outlook on the company’s share price.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.