A few weeks ago I wrote a article explaining why my position on Rivian (NASDAQ:SHORE) was an expectation. Anyway, I thought the rise of Rivian was too slow, and I was worried about their competition, especially the Tesla (TSLA) Cyber truck. In the recent earnings report, one of my worries came true as they provided disappointing delivery updates. However, Tesla Investor Day has passed and I now have a better view of Rivian and its competitors. Whereas I was previously against the bullish consensus, I am now against the general bearish consensus on Rivian’s 2023 outlook. I think the market overreacted to their delivery updates and Rivian will provide good news over the next few quarters.
In my article, I stated that I believe Rivian “will meet revenue expectations and exceed earnings by approximately 7%”, when in reality, Rivian missed revenue expectations by 9% and exceeded earnings by 11.4%. In the fourth quarter, Rivian produced 10,020 vehicles and delivered 8,054, the chain of supply being the main limiting factor. 50,000 vehicles produced the outlook for 2023 sent RIVN stock falling as it was well below Wall Street estimates of 62.2K. I was certainly disappointed, as I estimated only 40-50K R1Ts would be produced for 2023.
That said, I expect Rivian to easily exceed its production target of 50,000 and instead choose a very conservative target due to lower your production target several times and still did not reach it last year. Before explaining the reasons for my positive production outlook, I will first address their competition.
About the competition
One of my concerns was competition from Rivian. The electric truck market is still relatively new, so I felt the need to know what Tesla offers in order to better understand the competition. Tesla’s Investor Day unfolded covering their “masterplan 3”, with few of the quantitative qualities sought by investors. There hasn’t been much of an update to the Cybertruck other than reaffirming that production begins this summer. They briefly mentioned that the truck is comparable to the competition, which tells me what I need – that Tesla probably won’t meet the specs it set in 2019.
Keep in mind the featured model had an MSRP of $69,900 in 2019. In comparison, the R1T has a starting price of $73,000 for a dual motor with an estimated range of 260 miles. Indeed, Tesla will not meet its 2019 estimates and would have to raise prices or lower specs or a combination of the two for models to be “competitive”.
I expect the Rivian to continue to be one of the best electric trucks on the market and I am no longer worried about their competitive landscape.
Regarding the production
Another criticism I had was that Rivian was ramping up productions too slowly. For reference, the Ford Lightning is expected to produce 150,000 units this fiscal year. Compare that to estimates of around 40,000 for the R1T. The supply chain remains Rivian’s main problem. However, my optimism for their production comes from 2 sources: the rumors and the letter to shareholders.
The rumor comes from a recent article by Bloomberg, where “Rivian tells staff that electric vehicle production could be 24% higher than forecast.” Keep in mind that the “forecast” listed was 50,000, translating to 62,000 units, which is within the range of Wallstreet’s original estimates. The sources of this information have been kept anonymous for leaking information about the private meetings.
Personally, I think the figures disclosed are quite plausible. This matches what Wall Street and I had in mind. Considering the 10,020 vehicles that were produced in Q4 and considering their QoQ production increase, 50,000 for the year seems too low.
Now, why would Rivian set such a low bar for itself? They might hold back from “beating expectations”, it’s one of the oldest tricks in the book. However, it doesn’t really beat expectations if the actual numbers roughly match Wall Street estimates. And it’s not worth letting their market capitalization plummet for such pleasure. What I think is more likely is that Rivian is playing it conservative because their delivery updates have so far been disappointing. Last year, they missed their production target due to various issues, and the stock fell 71% over the same period. It is very possible that Rivian provides the “worst case scenario” so as not to disappoint investors in case the same disaster occurs. It may be wiser in their minds to under-promise and over-deliver.
However, I think there are several reasons why this worst-case scenario wouldn’t happen. Chief Financial Officer Claire McDonough said in the management commentary that Rivian today has “65,000 units of R1 capacity in the Normal plant”. He then said that Rivian believes supply constraints will ease in the second half.
One interesting thing I’ve noticed is that Rivian has been very vocal about their high expectations for 2024. They plan to “reassess” their facility, going so far as to close their factory for a few weeks in the middle of the year ( 2024) to reach their desired capacity of 85,000. This demonstrates confidence in solving their silicon supply chain problem, and Rivian vaguely stated that they are confident in solving it. They expect to see positive gross profit by the end of 2024, which means no more LCNRV inventory fees and losses on firm purchase commitments.
Thus, it is possible that Rivian recently figured out the supply chain issues earlier than expected, so they may now exceed expectations.
In less than three weeks, two of my biggest concerns – competition and production – were resolved. If Rivian officially updates its production outlook, it makes sense that the stock will return to its pre-earnings report level. Equity shouldn’t be too much of a concern in the near term as it has an asset to liability ratio of 4.4 and it has Amazon (AMZN) supporting them. There are certain topics, such as R2 models, that I did not want to discuss due to their uncertainty. In my previous article, I went deeper into Rivian’s business model as a whole.
With that in mind, the rumor behind the improved production outlook seems legit as several people “familiar with the matter” have confirmed it. If all goes well, Rivian is a company set up to succeed not just in the short term, but for years to come. I think the hold is over and I would feel comfortable investing as Rivian trades at all-time lows.