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Rivian Automotive Stock is One Risky EV Play

October 3. 2021. 6 mins read

Investing in what you know isn’t just about understanding the value proposition on offer. It also involves vetting business models to determine their complexity. On the lower end of the complexity spectrum would be a software-as-aservice (SaaS) business model which constitutes some software that lives in the cloud and is accessible via subscription. On the higher end would be a full-stack electric vehicle manufacturer which represents extreme levels of risk, especially when they’re being run by someone known for acting erratically.

A ten year return chart for Tesla stock
Credit: Yahoo Finance

What you see above is the ten-year stock chart for Tesla, a company that’s rewarded investors with a +15,337% return over the past decade. There are two ways to perceive this outsized return:

  • Risk-averse investor: The likelihood of Tesla succeeding was so low that investors who believed in it were highly compensated for taking all that risk.
  • Risk-hungry investor: Tesla shows us the potential of the electric vehicle investing thesis. Where can I find “the next Tesla?”

We fall in the risk-averse camp, so we wouldn’t consider touching any electric vehicle stock unless they’ve crossed what one bee school professor calls “the production hell chasm.” Lordstown Motor is a great example of why you need more than a team with a dream to become a successful automaker. If you’re thinking about investing in electric vehicle stocks, don’t even consider pulling that trigger until they’ve shown meaningful revenues. One company that hasn’t is Rivian Automotive, and now they’re planning an initial public offering (IPO) to raise up to $8 billion at a valuation of up to $80 billion.

One Stock, Two Stories

Click for company website

Founded in 2009, electric vehicle startup Rivian is based out of Detroit Michigan, the stomping grounds of Ford Motor Company which also happens to be an investor alongside names like T. Rowe Price, Fidelity, Blackrock, and Amazon. All that money is being used to bring to market the first pickup truck powered by electricity – the R1T truck. Other electric vehicles being developed by Rivian include the R1S SUV and an electric delivery van of which there are three planned models.

In perusing the recently released Rivian S-1 Filing, it’s clear that the entire company is focused on appealing to the ESG types. It’s a green technology company that’s going to help save the planet and there are two clear value propositions on offer – consumer and commercial.

Electric Adventure Vehicles

Anyone who has actually had an adventure in the outdoors will quickly realize this vehicle appeals to those who haven’t, but like to think they would. Do you really think this $67,500 base price electric pickup, or $70,000 base price SUV is ever going to see a dirt road?

The only time an R1T or R1S will ever be taken off-road - during a Rivian ad
The only time an R1T or R1S will ever be taken off-road – during a Rivian ad – Credit: Rivian

No, they’re not. These are expensive electric vehicles peddled to poseurs who like to discuss – over an overpriced craft beer – the importance of saving the planet and their passion for outdoor adventures. They’ll talk about doing both, but only take action in the most superficial manner possible. An article by CNN does a great job profiling some of the target demographic who prefer the low profile of Rivian’s CEO RJ Scaringe over “jerk CEOs” like Elon Musk. (Evaluating the executive leadership team of each company you purchase products from must be a full-time job.)

“Sometimes Musk can come across as a Bond villain or something, RJ does not give me those vibes,” said Stephen Henken of Montgomery, Alabama, who drives a Prius today and has ordered a Rivian R1S.

Mr. Henken is absolutely not taking that R1S off road, and neither is his husband.

While Rivian appears to be first to market with a production-ready electric pickup truck, competitors aren’t far behind. They’re taking in a lot more pre-orders, with the Tesla Cybertruck said to be at “well over half a million” by Elon Musk who said he stopped counting. That number could be as high as 1.25 million according to an informal tally kept by the Tesla fan club. (All of the below deposits are fully refundable, so take them with a grain of salt.)

Electric TruckDepositsDeposit AmountStarts At
Ford F150 Lightning 130,000$100 $39,974
Tesla Cybertruck600,000$100 $39,900
Rivian R1T / R1S48,390$1,000 $67,500 – $70,000

Deliveries of the R1T began in September of 2021 and deliveries of the R1S are not expected to begin until December 2021. A key metric investors should monitor is the number of orders being filled per quarter with revenues to match. If every order is filled, then that represents $3.26 billion in potential revenues. And then there’s the second part of their growth story – commercial.

Rivian and Amazon

Alongside their consumer vehicles, Rivian is also building a series of electric delivery vans (EDVs) for commercial use. The only customer buying those vans for at least the next four years is Amazon.

Three types of electric delivery vans from Rivian
Rivian’s three types of EDVs

In 2019, Rivian jumped into bed with Amazon, a company that plans to buy 100,000 electric vans for last-mile delivery purposes. Amazon invested a meaningful amount of money in Rivian, now owning more than 5% of the company. In the near-term, Rivian expects that “a significant portion” of their revenue will be from Amazon Logistics. That’s because they’re contractually obligated to only sell vans to Amazon for four years following the delivery of their first vehicle. If Amazon so much as looks at them wrong, Rivian’s shares will respond accordingly. Customer concentration risk can result in a great deal of volatility.

The latest information is that Amazon is testing eight prototype vans before Rivian plans to deliver 10,000 of them before the end of 2022. That’s another metric Rivian investors will want to watch very closely – the number of vans delivered to Amazon.

The Next Tesla

We once heard someone say that a financial advisor told them to sell shares of Tesla ten years ago because that’s where most of their wealth was tied up in. “What foolish advice that was,” they said. That’s completely wrong. It was precisely the correct advice to give. You should never throw all your eggs in one basket, and anyone advising you to do that has their best interests in mind, not yours. Another rookie mistake is thinking you’ll find the next Tesla.

Rivian wants to be like Tesla, but they barely have their first vehicles in the hands of customers. Believing that a success story like Tesla’s can be easily emulated by a company with no track record of manufacturing automobiles seems optimistic at best. (Quite a few ex-Tesla employees are working at Rivian and Tesla is now suing them for sharing trade secrets among other things.) Trying to ascribe an $80 billion valuation to a company that hasn’t even recorded any revenues yet seems excessive.

A market cap comparison of Rivian, GMC, and Ford
One of these companies is not like the others – Credit: Nanalyze

Ford and GMC brought in 2020 revenues of $127.1 billion and $120.5 billion respectively. Rivian has just started producing cars to sell. “But Tesla commanded a similar valuation before shares went to the moon,” you’ll hear them say. And there we go again with the “next Tesla” thesis.

With a 2020 burn rate of $1 billion and $3.5 billion of cash on hand, raising an additional $8 billion in their IPO should give Rivian plenty of dry powder to execute on their vision which includes much more than just being an electric vehicle maker. They’re developing the entire stack, from the vehicle operating system to the DC fast-charging stations to the service centers where customers can take their vehicles for maintenance and repairs.

A diagram showing how complex Rivian's business model is
What an extremely complex business model looks like – Credit: Rivian

And they’ll need to do that for both the consumer and commercial sides of their business, each of which has their own unique needs. While the entire global supply chain is experiencing some massive bullwhip effect, Rivian expects to launch a new vehicle – it’s first – by sourcing parts from over 300 suppliers, all while pacifying one of the largest companies in the world that has them by the balls. So many things can go wrong, yet it’s an incredibly bold vision that you can’t help rooting for. Perhaps once revenues start pouring in, we’ll take another look.

Conclusion

While Rivian should be commended for choosing a traditional IPO over the special purpose acquisition company (SPAC) route, they’re still offering investors what most SPACs offer – the promise of future growth at an exorbitant valuation. Electric vehicle stocks have a bad reputation to begin with, so prospective investors should wait until the dust settles following the IPO before considering a position. As always, we’re avoiding the company until they show traction through meaningful revenues.

Should Rivian’s IPO go through as planned, Rivian stock will trade under the ticker RIVN.

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  1. Using your metric of market cap/Revenue, this remains untouchable until they’re bringing in 2 Billion in Revenue, and if the market cap still remains at 80B, correct?

    1. This is an excellent observation. Yes, you are exactly right! It just goes to show how richly valued this company is for not having any revenues yet. Note that we annualize quarterly revenues. So, they’d need to have $500 in a single quarter for the valuation ratio to equal 40 at a market cap of $80 billion (80 / (.5*4)) = 40

  2. Analysis seems fine. Rivian is definitely risky, but might be good for a punt. Maybe cut down on the homophobia: “Mr. Henken is absolutely not taking that R1S off road, and neither is his husband.” It’s fine to think his quote is silly – we didn’t need the gay dig.

    1. Cheers for taking the time to leave a comment mate.

      It seems like you’re not a regular reader. We take the piss out of everyone around here, and the gays don’t get a free pass. 😉 The author of that piece is a little light in the loafers himself to be honest. And there’s nothing wrong with that at all.

  3. Rivian has now market cap $127B. That is crazy valuation considering they have no revenue. Revenue = 0.
    I’m glad ARK is not buying it, otherwise I would seriously start doubting ARK’s judgement.
    Since Rivian started trading on Nov 10th the price keeps climbing: from $95 to $153.

    1. Infinite simple valuation ratios are definitely not our shtick. At that market cap, the company would need to hit $793.75 million in a single quarter before we’d consider investing.