Rivian: Should You Purchase, Sell, or Maintain Your Stake?
One of the more turbulent stocks of 2024 has been Rivian Automotive (RIVN 5.90%). This electric vehicle (EV) manufacturer has experienced a rollercoaster ride this year, with the stock performing well the last couple of months, yet still down around 35% since the beginning of the year, as of the present moment.
The question now is whether the stock is a buy, sell, or hold going into 2025. Let's take a look at the arguments to help decide.
The sell argument
The case against Rivian largely hinges upon two main issues: a sluggish EV sales market and its poor gross margin.
Sales in the EV industry are still growing in North America, but growth has slowed down. Meanwhile, sales of hybrids (HEVs) continue to outpace the growth of pure battery electric (BEV) vehicles. In November, U.S. HEV sales surged 41% year over year, while BEV sales only increased 15.2%. By comparison, total EV sales (including HEVs, BEVs, and plug-in hybrids) grew by 52% in the U.S. in 2023.
The surge in sales in November could be linked to President-elect Donald Trump's plans to remove federal EV tax incentives. This could lead to a surge in BEV sales as potential buyers make purchases before the incentives disappear. However, this would mean a pull-forward in demand, which could negatively impact 2025 sales. Additionally, the removal of the $7,500 federal tax credit for EVs could also affect future sales.
Consumers, it seems, are currently more drawn to hybrids due to their increased versatility. Issues such as expensive battery longevity, resale values, charging times, insufficient charging infrastructure, and driving ranges are among the reasons that some drivers are hesitant to switch to BEVs. Both Toyota and Honda are currently focusing more on hybrids than BEVs.
The other bear case against Rivian is its negative gross margin. This means the company is selling its vehicles for less than the cost to produce them, not taking into account marketing and corporate expenses. This is not a viable long-term business model. Rivian is working to improve its gross margin, but it will not only have to find a way to achieve a positive gross margin, but also eventually positive free cash flow and profitability.
The buy argument
Despite burning through cash as it aims to improve its gross margin and expand its business, Rivian has been able to form key partnerships. One such partnership is with Amazon, for whom it manufactures EV delivery vans. Amazon is one of the company's largest shareholders.
Recently, Rivian entered into a joint venture with Volkswagen, which will invest up to $5.8 billion in the company. Volkswagen is primarily interested in gaining access to Rivian's new zonal architecture, which is expected to lower the costs of manufacturing its vehicles by reducing the number of electronic control units (ECUs) and wiring in its vehicles. Rivian has also lowered other material costs for vehicles and improved the manufacturing facility's line rates. It expects these changes to help achieve a modest positive gross margin in Q4.
The investment from Volkswagen, some of which will be paid out later upon meeting certain milestones, will help Rivian ramp up production of its lower-cost R2 model, which it plans to introduce in 2026. Rivian has been successful in selling its luxury SUVs, but it hopes the more affordable R2 will appeal to a broader audience due to its expected starting price of $45,000. Selling more cars will lead to greater scale, which will eventually lead to profitability.
Rivian is a young company with a significant opportunity ahead in becoming a profitable EV manufacturer in the future. Although this will not be an easy task, the backing of Amazon and Volkswagen should provide it with a long-term runway and a good chance to succeed.
The hold argument
As a young company with a negative gross margin and a high burn rate, Rivian is a speculative investment. However, the backing of Amazon and Volkswagen, as well as its zonal architecture, give it a decent chance to succeed. Holding a small position in Rivian's stock could be a solid option.
The conclusion
For risk-tolerant investors who are comfortable with a lot of volatility, Rivian's stock may be an option to consider for the next few years, with the hope of seeing its story unfold. Its technology has drawn in a substantial investment from Volkswagen, while its potential with Amazon could be significant in the years to come. However, the stock is not for the faint of heart.
In the realm of financial investments, some analysts argue against purchasing Rivian Automotive stock due to the sluggish EV market and the company's negative gross margin. The EV sales growth in North America has slowed down, with hybrids outperforming pure battery electric vehicles. Additionally, Rivian's current business model of selling vehicles at a loss is unsustainable in the long term.
On the other hand, proponents of Rivian see potential in its partnerships and future plans. For instance, the company's partnership with Amazon and its recent joint venture with Volkswagen can provide Rivian with a long-term runway and a chance to improve its profits. The introduction of its lower-cost R2 model in 2026, with a starting price of $45,000, could also attract a larger customer base and contribute to profitability.
