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Elevator Pitch
I rate Rivian Automotive, Inc.’s (NASDAQ:RIVN) stock as a Hold. I discussed RIVN’s “growing preorders” and its “greater focus on cash management” in my earlier update for the stock published on May 31, 2022.
This latest article shines the spotlight on the partnership between Rivian Automotive and Mercedes-Benz Group AG (OTCPK:MBGAF) (OTCPK:MBGYY) that was recently announced. I am positive on the recent partnership as a driver of RIVN’s growth plans in Europe and the company’s financial outlook (i.e. lower costs associated with European expansion) for the long run.
On the flip side, I am concerned about wider losses and greater cash burn for Rivian in the short term, and the need for capital raising in the medium term. In conclusion, I still think that a Hold rating for Rivian is appropriate given the balanced risk-reward profile of the stock.
Why Did Rivian And Mercedes-Benz Partner?
Rivian revealed on September 8, 2022 during lunch time that it entered into a partnership with Mercedes-Benz, and the company also commented on this recent disclosure at the Goldman Sachs (GS) Communacopia + Technology Conference held on September 14, 2022.
In its press release dated September 8, 2022, both Rivian and Mercedes-Benz have plans to “establish a new joint venture manufacturing company” to “build an all-new electric-only production facility leveraging an existing Mercedes-Benz site in Central/Eastern Europe.” The goal of the joint venture is to make “bespoke large electric vans” in “a few years’ time” as indicated in the media release.
RIVN’s management comments at the recent mid-September GS investor conference make it even clearer why both companies are partnering with each other. At the GS conference, Rivian pointed out that the partnership with Mercedes-Benz allows both companies to “leverage joint investments into production capacity and rapidly reach scale from an economies of scale point of view.” At the same time, RIVN stressed at the recent investor conference that “the products (for Rivian and Mercedes-Benz) will be separate.”
In a nutshell, the investment required to produce electric vans is substantial, and the timing of breakeven or payback is highly dependent on operating leverage (i.e. growing production volume on a fixed cost base). As such, it makes a lot of sense for Mercedes-Benz and Rivian to work together on creating a production joint venture.
Is The Rivian and Mercedes-Benz Partnership Good For Investors?
The Rivian and Mercedes-Benz partnership is good for RIVN’s investors. RIVN always had the ambition to expand in Europe, and the recently announced partnership represents a key milestone in Rivian’s plans to penetrate the European market, particularly the commercial van segment.
In its listing prospectus, RIVN mentioned that “our launch is focused on the U.S. and Canadian markets”, but it stressed that “we intend to enter Western European markets in the near-term, followed by entry into major Asian-Pacific markets.” Rivian estimated that its commercial serviceable addressable market (or SAM) for the Western Europe market is $62 billion in the company’s prospectus, and this is 226% larger than the $19 billion commercial SAM for the US and Canada market.
Rivian also emphasized at the September 14, 2022 GS conference that “localized production is critical” to “enhance the economics of launching into” the electric van segment in Europe, which the company referred to as “an incredibly important market.” If RIVN had not ventured into this partnership with Mercedes-Benz, the time line for Rivian’s path to long-term profitability might be pushed back further assuming that the company needed to build a manufacturing plant and scale up on its own in Europe.
The share price performance of Rivian following its Mercedes-Benz partnership announcement is the best indication of how investors view this move by RIVN. Notably, Rivian’s stock price surged by +11% from $33.25 as of September 7, 2022 to $36.88 as of September 8, 2022 after RIVN issued the media release disclosing the partnership. RIVN’s shares last closed at $39.26 as of September 16, implying that its stock price has gone up by 18% on a cumulative basis since the announcement of the partnership.
What Is Rivian’s Business Outlook Now?
Even though I have a positive view of Rivian’s partnership with Mercedes-Benz as discussed, I need to emphasize that this shouldn’t change RIVN’s business outlook in the near term.
In the preceding section, I noted that production for the joint venture between Mercedes-Benz and Rivian will only commence in “a few years’ time” as disclosed by RIVN.
A September 12, 2022 Seeking Alpha News article cited a Wedbush Securities sell-side research report which highlighted that the partnership between the two companies is “a smart strategic move” for RIVN “to meet its long-term growth and profitability targets.” The keyword here to pay attention to is “long-term”, which supports my view that Rivian’s short-term or even intermediate-term financial outlook won’t change with the recent Mercedes-Benz announcement.
I touch on Rivian’s near-term or medium-term prospects in the next section.
RIVN Stock Key Metrics
Rivian’s Q2 2022 financial results released on August 11, 2022 offer an indication of the key metrics that investors need to focus on if they want to evaluate the company’s business outlook in the short term.
According to the company’s second-quarter investor letter, RIVN’s net loss widened from -$580 million in the second quarter of fiscal 2021 to -$1,712 million in the most recent quarter, and this was worse than the sell-side’s consensus loss forecast of -$1.6 billion as per S&P Capital IQ. Also, Rivian burned more cash in the recent quarter, as its negative free cash flow went from -$920 million in Q2 2021 to -$1,563 million for Q2 2022. Looking ahead, RIVN revised its full-year FY 2022 non-GAAP adjusted EBITDA guidance from -$4.75 billion previously to -$5.45 billion now, implying expectations of wider operating losses.
This suggests that it is unavoidable that Rivian will eventually need to raise more cash to support its growth plans for the intermediate term. It is tough to predict the state of capital market conditions in 2023 and beyond, and there are challenges (inability to secure financing) and risks (financing secured at a huge cost in an unfavorable market environment) associated with RIVN’s future fund raising.
Is RIVN Stock A Buy, Sell, or Hold?
RIVN remains as a Hold-rated stock for me. I like Rivian’s improved outlook (lower production costs needed to exploit this larger addressable market) in Europe for the long run considering the recent partnership with Mercedes-Benz. On the flip side, RIVN’s continued losses and cash burn indicate that fund raising in the medium term is inevitable.
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