Scaling-up Production, Securing Major Contracts
Rivian is initially focusing on the production of larger vehicles, including pick-up trucks, SUVs, and commercial vans. Its R1T premium pick-up has gained popularity among affluent customers in the United States, and the R1S SUV is scheduled for delivery within the next few quarters. Within less than two years, Rivian has rapidly increased its quarterly vehicle production from 1,000 to 16,300, and it plans to produce 54,000 EVs in 2023. These figures position Rivian as one of the largest EV manufacturers in the US, although it still trails behind Tesla, which produces over 1 million EVs annually. Furthermore, Rivian recently struck a deal with AT&T, indicating growing interest from other companies. Considering these developments, Rivian appears to have a promising future in the EV industry.
Financial Considerations and Long-Term Viability
Establishing an automotive manufacturing business demands substantial capital investment and extensive scalability to achieve favorable unit economics. Rivian is currently experiencing negative gross margins, although recent quarters have shown promising progress in this regard. Over the past year, Rivian’s free cash flow has been negative, amounting to $6.2 billion. As of the end of the third quarter, the company possesses approximately $9 billion in cash and equivalents. However, it is crucial to note that during the process of scaling up car manufacturing, negative cash flow is expected until operational efficiencies kick in. Tesla faced a similar situation before transitioning to positive cash generation within a short span of time. Rivian’s survival through this challenging period largely depends on its ability to continue expanding its operations and meeting the demand for vehicles from individual and commercial customers.
The Broader EV Market and Investment Strategies
While Rivian may exhibit potential, the EV sector as a whole may not be an attractive investment opportunity. The industry is capital-intensive and highly competitive, often following the capital cycle theory, which has been extensively explored in literature. The theory emphasizes that when excessive competition and investment flood into a sector before matching customer demand, profits and investor returns tend to decline. Despite the hype surrounding the electrification of the automotive sector, it has historically delivered poor investment performance. As a result, investors may be better off avoiding the EV sector and instead consider investing in blue-chip stocks with high returns on invested capital. By evaluating the market conditions and considering alternative investment options, investors can make informed decisions and navigate the dynamic world of EV stocks.