Prediction: Here’s What Rivian Stock Will Do Next

Manufacturing cars is hard, and it’s even harder if you’re starting a new vehicle brand from scratch. The huge initial investment required for production creates a barrier to entry, so very few new car brands achieve lasting success. Recent examples include adze and BYDbut there are dozens of failures for every successful car business.

Rivian Automotive (RIVN -5.23%) is trying to become the next sustainable car brand. Focusing on electric vehicles (EVs), premium vehicles and outdoor enthusiasts, the brand has found a niche and now delivers over 10,000 vehicles to customers every quarter. The stock is nearly double from April, when it hit $8 a share, but is still 90% off its initial public offering (IPO) highs.

This business is at a crossroads. After seeing its recent earnings report, here’s my prediction for what’s next for Rivian stock.

Stagnant deliveries, more profitable new models

Rivian reported its second quarter financial results to investors earlier this month. The numbers were a mixed bag. On the one hand, shipments of its original products remain strong, at 13,800 for the quarter and 56,900 over the past 12 months. This is a significant increase from just 20,000 deliveries at the end of 2022.

On the other hand, deliveries have stagnated for several quarters and production is declining. Production was just 9,600 in the second quarter, down from a high of 17,500 at the end of 2023. Management says this production slowdown is due to the company repurposing factories for new models. However, if you look at the quarters leading up to this change, it’s clear that production has outstripped customer deliveries, indicating a quarterly cap in demand for these top-of-the-line models.

The updated EV models are vital to Rivian, not only to boost deliveries, but also because they are supposed to have better unit economy than the original products. Shockingly, Rivian has negative gross margins — significantly negative, in fact. Last quarter, gross margin was negative 39%, leading to an operating loss of $1.375 billion on revenue of $1.158 billion. Not great. This needs to be addressed in the coming quarters and years.

Volkswagen joint venture

With thin profit margins, Rivian is currently burning through a lot of cash. Over the past 12 months, the company has burned through $5 billion in cash flow. With less than $10 billion in cash on the balance sheet, this cash burn will lead to a liquidity crunch within two years at the current level of burn.

To extend its burn-in period before it (hopefully) reaches scale, Rivian has just announced a partnership with Volkswagen. The partnership involves a joint venture and a planned total investment in Rivian of $5 billion by Volkswagen. As part of the partnership, Rivian will license the software and electronic systems for Volkswagen’s new EV models. Although this is many years in the future, this could lead to high margin revenue for Rivian and prove its technological capabilities.

However, the most important thing is the cash infusion on the balance sheet.

RIVN Revenue (TTM) data by YCharts

Profitability is what matters (in the end)

Rivian management talks a lot about the future: future products, future software offerings, and future unit economics. However, the company continues to report poor profit numbers today. Gross margins are well into the negative and operating margins are over negative 100%.

The stock may have rallied in recent months, but what ultimately matters above all else is profits. If Rivian can grow production to hundreds of thousands of vehicles per year and tens of billions in revenue (it generated $5 billion in the last 12 months), the company can achieve positive profit margins and generate several billion in earnings each year . This should also lead to positive free cash flow. At a market cap of just $15 billion today, the stock is likely higher in a few years in this scenario.

However, I do not think this scenario is likely. Rivian talks profitability – it just never shows it. Given concerns about oversupply in the EV sector and track record, Rivian won’t be turning a profit anytime soon. Because of this, I think the stock will decline and is one that investors should avoid for the time being.