Rivian Is On A Slippery Highway (NASDAQ:RIVN)

Intro & Thesis

Let me say it instantly – I’m not an knowledgeable on the automotive business and have by no means lined this sector professionally within the fairness analysis crew of analysts at any funding financial institution. I slightly take a generalist strategy and attempt to present essentially the most cheap “generalist view” and talk about it with those that are out of contact with actuality and blindly consider what they wish to consider.

When Rivian Automotive, Inc. (NASDAQ:RIVN) simply went public at an $80 billion valuation – and didn’t but have a automobile on the street – I instantly went towards the bullish calls. After finding out the historic experiences of earlier friends, it was clear to me by mid-November 2021 that the bubble wouldn’t proceed to rise. And so it occurred – earlier than the enchanting deflation, I attempted 2 extra occasions to warn buyers of the approaching collapse:

I’m not making an attempt to boast about myself. I simply wish to instantly defend my name from the assaults of those that wish to accuse me of generalism – though I’m not an knowledgeable on this business, my strategy is predicated on widespread sense and helps keep away from deep portfolio drawdowns by not entering into shares like RIVN at their peak.

RIVN grew to become one of many worst performers in its business in FY2022 – the identical continued in FY2023:

As you possibly can see within the chart above, utilizing Financial institution of America for example, RIVN’s horrible efficiency doesn’t deter analysts, who provide the inventory as a purchase and see an upside potential of 216.7% primarily based on numerous valuation multiples:

Effectively, 0.5x EV/gross sales and 3x EV/EBITDA seems very conservative. Nevertheless, I have to once more disagree with the bulls’ opinion and go away my Promote score unchanged – I’ve a number of causes for this resolution.

Rankings, scores, scores…

Corporations that may obtain such an enormous valuation for mainly the thought of launching a large-scale manufacturing all the time entice the eye of the group. Rivian attracted a lot consideration from the very starting that its preliminary valuation of $80 billion rapidly grew to become $100 billion, then $140 billion, and eventually crossed $150 billion in a matter of days:

And that was though its objective was to make use of the proceeds from the IPO to create a serious automotive firm, which, though targeted on electrical automobiles, is a very capital-intensive and cumbersome enterprise, identical to conventional automakers.

From the initiation of protection, numerous banks issued extraordinarily optimistic outlooks – virtually till the tip of the first half of 2022 – solely the worth targets modified:

Most main banks – from Morgan Stanley to Mizuho – have merely modified their worth targets in order that the implied upside potential nonetheless seems spectacular, however not outrageous. You recognize – the previous worth targets within the $150-160 per share vary look too off towards as we speak’s $18 per share worth.

In truth, from what I see, the Avenue’s positivism has not gone away:

This Wall Avenue positivism remains to be having an influence on the broad mass of retail buyers – after a 72% decline (1 12 months) and solely a modest restoration for the reason that starting of 2023 (+4.04%), about 58% and 69%, respectively, of these surveyed on earningswhisper.com consider that RIVN inventory will develop within the foreseeable future and beat consensus figures at its subsequent earnings report. This market sentiment appears fairly optimistic to me.

Disinflation is a product of the approaching recession

Along with Tesla’s (TSLA) massive wave of worth cuts for the reason that finish of 2022, there was information on Monday that Ford (F) additionally intends to chop costs for its electrical Mustang Mach-E – disinflationary processes, because it abruptly turned out, don’t happen on their very own, however as a rule – towards the backdrop of a decline in demand and financial exercise. Apparently, promoting vehicles has change into tougher as banks’ necessities have change into more durable – lending charges proceed to rise, and in response to The Kobeissi Letter of January 22, the typical automobile cost has reached a report $800/month. On the identical time, delinquent auto loans are up 27% this 12 months and bank card debt is up 15% in 2022 [biggest jump since 2008] – credit score financing will doubtless stay costly till the Fed cuts charges.

Now the market expects the speed cuts to start out in November 2023 and proceed all through 2024, and the Fed Funds fee to fall again beneath 3%:

Why would the Fed wish to decrease rates of interest? Inflation goes to go down, certain factor. How is that going to be completed? For my part, by a decline in demand.

That is why we see a drop in producer costs throughout the board – not simply within the automotive business:

Traditionally, the present setup has solely led to a recession – a comfortable touchdown was solely potential towards the backdrop of already subdued inflation, which we have now not but skilled:

Due to this fact, something that has a protracted period and doesn’t generate FCF – for instance, RIVN – is more likely to be suppressed as soon as the Fed begins to decrease the rate of interest. Mainly, the financial easing that everybody is ready for signifies the actual fact of the start of a recession. That is how I see the present macroeconomic setting – chances are you’ll disagree with me [welcome to the comment section below]. Rivian, even because it depends on its large backlog, will proceed to burn money, and the thesis of those that look solely on the measurement of the money cushion on the corporate’s steadiness sheet turns into irrelevant.

Rivian’s Cons beat Execs

So far as I can see, banks and retail bulls have roughly the identical arguments for getting RIVN inventory at present ranges – I’ve summarized the important thing factors for you:

1. The corporate operates in a really engaging sub-segment (SUVs, pickups, and supply vans) and will keep away from capital dilution till 2024 due to the liquidity already amassed;
2. Revamped strategic partnership with Amazon (AMZN);
3. Per-unit prices fall beneath the promoting worth;
4. Rising shopper curiosity in EVs and the federal government stimulus [Inflation Reduction Act];
5. The corporate’s technique in software program and companies will doubtless result in higher monetization prospects.

This all sounds good, however as you’ll have observed, it speaks of a slightly distant future or the existence of a capital cushion, which appears imaginary to me.

As I wrote above, the automotive business may be very capital-intensive. Increasing manufacturing requires large investments or CAPEX and working bills (OPEX), so producers make a reasonably low-profit margin whereas scaling up.

RIVN’s complete historical past is constructed on scaling – the corporate wanted to make use of the proceeds from its IPO to construct vegetation and start producing automobiles shortly thereafter. On the finish of 2021, RIVN had simply over $18 billion in money and ST investments, in response to In search of Alpha. For simply 3 quarters of FY2022 (9 months), the corporate burned by 26.8% of that cushion – with this burn fee, the corporate reached $1.049 billion in TTM revenues. Now that even veterans of the auto business like Ford are being compelled to chop costs – which is unhealthy for RIVN anyway, each from a aggressive standpoint and as an oblique indication of the state of demand – the corporate is more likely to deplete its money a lot sooner than the Avenue expects. What’s going to comply with this? Most definitely – a capital dilution.

Within the 9 months of 2022, RIVN spent $1.075 billion on CAPEX and $2.938 billion on OPEX – the previous down 19.66% y/y, whereas the latter up 74.5% y/y. I anticipate as we speak’s $14.41 per share to drop considerably in a short time if spending retains developing – RIVN will then in a short time unwind considered one of its bullish arguments, specifically the margin of security.

To be aggressive, the corporate must decrease the worth – “per-unit prices fall beneath the promoting worth” seems like a fairy story to me proper now, particularly given how sticky the labor/manufacturing prices are (disinflation will come from slowing housing slightly than reducing enter prices for labor and R&D).

Authorities assist as a catalyst for development appears too imprecise – and most significantly – it applies to the business as an entire, not particularly to Rivian. The corporate is a small area of interest participant with a market capitalization bigger than Nissan Motor Co., Ltd. (OTCPK:NSANY), which generates 63 occasions extra income (TTM).

In keeping with Financial institution of America, RIVN is not going to even be worthwhile in FY2025 – the In search of Alpha consensus doesn’t speak about breakeven till FY2027. The implied price-to-earnings (P/E) by FY2030 stands at ~4x. In the event you suppose that is low-cost, suppose once more, as a result of for half that a number of you should purchase shares of Porsche Automobil Holding SE (OTCPK:POAHY) as we speak, which has a ahead EBIT development of ~24%.

That’s, Rivian is price 2 occasions greater than Porsche if it had been already worthwhile, which is not going to be the case in a number of years.

The Backside Line

I titled my article “slippery street” – precisely the type of floor beneath Rivian’s wheels that I see towards the backdrop of all that’s presently taking place within the capital markets.

​EPS and income projections promise the super alternative for the corporate in 6-7 years – as you possibly can think about, that is too far sooner or later to pay twice the marketplace for this distant objective [Porsche was a clear example].

On the identical time, it is very important perceive that RIVN is unlikely to interrupt even on EBITDA by FY2025, as BofA’s predictive multiples inform us:

Primarily based on the foregoing, I might not simply concentrate on the price-to-sales ratio or EV-to-sales ratio when analyzing RIVN. For me, the inventory shouldn’t be well worth the dangers and needs to be averted on the present worth ranges.

Thanks for studying!