Description

Rivian (RIVN)

Disclaimer: A short thesis report on Rivian seems almost too obvious to post. And how much value can be added on a name that hasn't produced much of anything and can't be modelled with any precision? Perhaps its in helping bring this idea top of mind and particularly the combination of extreme valuation and easy borrow. We’re living through a historic period of speculation and bubbles at least in certain parts of the market. EVs, as one of the major mega-themes of the day, are a magnet for bubbly stocks given the massive TAM and unprecedented transformation that will occur. We generally prefer writing about and investing in stocks where we can build detailed models and incorporate meaningful financial analysis along with qualitative and macro views and insights and we almost always eschew valuation shorts for all the typical reasons. 

In this case we are short Rivian because we believe even if they pull off the execution story of the century, and we are doubtful they can, we foresee many bumps in this long road between here and nirvana. With an expected delivery estimate of 1,000 cars in 2021, the company sports an almost $100B market cap, more than GM and Ford, despite the fact they will likely generate negative free cash flow for the next 5-10 years. Even Elon Musk commented on how absurd this is when he tweeted:“ Maybe they should be required to deliver at least one vehicle per billion dollars of valuation *before* the IPO?” True Amazon lost money for years on its way to dominance, however making vehicles is a capital-intensive business with incredible operational complexity. And in truth Rivian is trying to build and scale numerous complex businesses simultaneously.  

Tesla has generated an industrial miracle before our eyes over the past decade, and that is probably one of the biggest reasons why Rivian can enjoy a $100B valuation before mass producing any cars. That said, Rivian’s operational plan is even more ambitious than Tesla’s as they seek to produce three new models (Commercial,Suv, and Pick-up) simultaneously. They are later to market, seek to sell to customers without dealerships, and must execute on an almost impossible operating plan. They also are emerging as a public company at a moment where the Fed is beginning a tightening cycle, IPOs this year have floundered ( ~75% now down from their IPO price) and investors are becoming more discriminating about long lived growth stories. 

After rising 47% post IPO the company will soon be held accountable for executing their plan as they begin to mass produce and deliver vehicles. Even in an upside case they will face many operating challenges. To justify the current valuation, sell-side analysts are projecting deliveries 300% higher than IHS estimates for the next 5-7 years, and still on these uber aggressive production estimates, Rivian’s valuation seems more appropriate for a software stock. Finally, the borrow is easy and cost low. We expect an exit opportunity on this short that can generate a 30-50% return over the next 12 months.   

Thesis

Rivian Automotive represents a compelling short opportunity over the next 12-18 months as initial IPO exuberance fades and the many challenges of building a major automotive / commercial vehicle brand play out. Even Telsa, who has seemingly successfully scaled their operations to produce first rate quality vehicles, was severely challenged operationally on numerous occasions and over years. In a few instances it almost went broke. At current IHS production estimates, and applying a generous EBITDA margin forecast, the company is trading at 6.2x estimated 2027 sales and 54x EBITDA [ Note: Tesla trades at 8.5x 2025 sales]. We see both macro (hawkish fed, rate increases), and micro (numerous execution challenges) catalysts over the coming months/years to propel the stock lower, providing a compelling risk/reward even if Rivian eventually succeeds in its ambitious mission.  

Company Description (from their S-1)

We design, develop, and manufacture category-defining electric vehicles (“EVs”) and accessories. We sell them directly to customers in the consumer and commercial markets. Our vehicles are complemented by a full suite of proprietary, value-added services that address the entire vehicle lifecycle and deepen our customer relationships. Starting with a clean sheet, we built a vertically integrated ecosystem comprised of our vehicle technology platform, cloud architecture, product development and operations, products, and services. Interconnected by our data and analytics backbone, our ecosystem is designed to deliver fast- paced innovation cycles, structural cost advantages, and exceptional customer experiences, all of which combine to create a self- reinforcing growth dynamic while serving our mission to Keep The World Adventurous Forever. 

Historical Timeline 

Bull case for Rivian 

The bull case for Rivian is built upon (i) notable strategic investors (Amazon and Ford), (ii) a 100,000 EV order from Amazon for commercial vehicles, (iii) successful, upsized 11.9B IPO, (iv) focus on profitable niche (pick-ups and commercial vehicles), (v) good initial reviews of their pick-up product, and a massive TAM for EV vehicles. 

We acknowledge that the company’s premium valuation is positive in one sense, in that Rivian will need to raise substantial capital until it reaches break-even, likely not until 2025 at the earliest. Both Goldman and JP Morgan estimate a ($20B) cumulative negative free cash flow through the end of 2025, however IHS’ more conservative revenue estimates suggests break even could come a few years later (‘27-28). 

The backing of Amazon, and the 100,000 unit Amazon order is significant and probably explains, in large part, the halo effect the company has enjoyed since its IPO. We think of Amazon’s investment and the large order planting one of many seeds to ensure they have multiple options to expand their future green transportation footprint. The investment, and large order, allows Amazon to project a green image to customers and regulators and enables them to be close by in case Rivian experiences financial or operational distress. The deal is also somewhat prohibitive to Rivian in that Amazon is entitled to the initial 100,000 units by 2025, after which Amazon retains a right of first refusal on commercial vehicles for the following 2 years. This deal provides Amazon maximum optionality and likely significant negotiating leverage around price and delivery dynamics, placing Rivian in a more compromised position for the next 6 years in this segment. 

While the pick-up segment is highly profitable today, that is in part due to its fairly oligopolistic structure historically (in North America), something that would change with the entrance of Rivian. Further, we believe that the core pick-up buyer will be a slower EV adapter and that loyalty to traditional brands in this segment runs extremely high. Further, worries of charging and range anxiety will likely remain far more pronounced with Pick-ups. 

All of the above are before considering that Tesla will be rolling out the cybertruck and will remain dominant from both a cost and brand standpoint in this category. The domestic incumbents are not sleeping, they are rolling out their own versions of EV pickups including the Ford F-150 which has been the best-selling vehicle in the US for many years, and which now boasts a 200,000 until back order dwarfing the orders accumulated by Rivian.

The SUV segment is incredibly competitive and will remain so as many existing and new players intend to launch compelling EV models. Rivian’s offerings are also currently limited to the higher end of the market thereby reducing their ultimate addressable market.   

Rivian’s products appear well designed and have been well received with some awards won in 2021. That said, mass producing vehicles at high quality is difficult even for the incumbents who have decades if not almost a century of production know-how. Any major defects, or recalls, could present monumental problems for the company as it will lack dealerships and will initially have few mechanics who will know how to service their vehicles. Also, Rivian’s brand recognition is dwarfed by Telsa, not to mention GM and Ford. Tesla was in many ways a first mover EV brand, not so for Rivian. Supply chain problems facing the industry will prove more challenging to Rivian than incumbents due to their smaller production footprint. Finally, the company will need to build broad brand awareness, something that typically takes years and sizeable marketing investments.   

Product Summary

RIT: A mid-sized electric pickup with 314 mi of range (Rivian has a 400 mi range variant planned; EPA certified), 0-60 mph in approximately 3 seconds, and 800+ horsepower (per Rivian; deliveries began in September 2021). While the size of the R1T is comparable to top selling mid-sized ICE pickup trucks like the Ford Ranger and Toyota Tacoma, we believe there will also be customer overlap with full-size models like the F-150, Silverado, and Ram (all of which plan to have electric variants by mid-decade). Note that Rivian is also planning to bring a full-sized pickup to market mid-decade. (Goldman Description)

R1S A full-size electric SUV with 316 mi of range (EPA certified), 0-60 acceleration in approximately 3 seconds, and 800+ horsepower. The R1S has a common drive unit, battery, chassis, and electronic systems to the R1T.

Both the R1S and R1T are priced as premium vehicles, and we estimate that ATPs will reach >$80K in part as the company rolls out new variants. In addition, Rivian sells accessories for the R1T/S such as camp kitchens, three-person tents, and camp speakers.  The company is also in the product development phase for two mass-market priced vehicle platforms, the RT (a full-size pickup launching in 2024, per Rivian), and the R2 (a smaller SUV launching in 2025, per Rivian). (Goldman Description)

RCV An electric delivery van platform optimized for last mile use cases. The van will be fully upfit in Rivian’s factory, has three planned size variants, and has a common drive unit, battery and electronics systems to the R1 platform. The RCV has up to 150 mi of range, and we believe is best suited for routes under 100 average daily miles traveled (as real world range is typically lower for all EVs than the maximum capable range). The company has an order for 100K deliveries to Amazon by 2025 (this is non-binding). (Goldman Description)

Valuation

As shown in the comp table below, Rivian sports a high valuation relative even to a peer group with heavily inflated valuations. The comparison to Ford and GM is striking, even when considering the incumbent / disruptor dynamics at play, especially considering how focused both are on the EV opportunity and given their historical dominance in Rivian’s chosen segments. As Rivian begins operations and becomes a show me story we believe they will struggle to retain a premium valuation to their peer group.  

Vehicle Production Estimates

Sell-side estimates remain aggressive and significantly higher than IHS estimates. Tesla’s stock price tends to track delivery performance relative to estimated deliveries. The estimates below reflect high expectations embedded in Rivian’s current valuation and are unlikely to be met in our view.  

Other Risks

Rivian’s vertically integrated ecosystem (see diagram below) reflects an incredibly ambitious plan to insource many key components and systems critical to their vehicles. At scale the plan would provide significant margin potential but it elevates execution risk manifold. In essence the company is looking to build and scale multiple complex businesses and services simultaneously. The failure of even a few critical components, or services, can cause material delays to production and profitability forecasts. 

Summary

Rivian is a compelling short because it enjoys an astronomical valuation and faces significant operating challenges to achieve its objectives. The company is unlikely to generate free cash flow for 5-7 years, will likely require additional capital in 2-3 years, and faces other well-funded, more experienced competitors in its segments. Scaling an auto company to mass production is a daunting task that few have ever achieved. The company has enjoyed a halo due to its high-profile investors (including Amazon and Ford), its beautiful products, and momentum in the EV sector, however the company will become a show me story in 2022. In seeking to produce three new models simultaneously, vertically integrating its tech stack, and selling and servicing its vehicles without a dealer network, the company has taken on too much and is almost guaranteed to stumble. The combination of micro risks, combined with an unfavorable macro backdrop (fed tightening, supply chain bottlenecks, inflation) set the company up for a tough coming 12-24 months. The borrow is easy and cheap, and we expect shortfalls in production to act as a catalyst to push the stock price down to its IPO price and below.       

Catalyst

Production Shortfalls

Supply Chain Issues

Insider Selling

Quality / Recall Issues

Sales Shortfall

Larger Losses Than Forecast 

Mass Production Scaling Challenges

Growth Stock Correction 

Lose Tesla Lawsuit 

Key Personnel Turnover