Rivian Is Determined To Deliver, Come Hell Or High Water (NASDAQ:RIVN)

Rivian’s (NASDAQ:RIVN) reiterated full-year production guidance earlier this week has indeed salvaged some of investors’ lost confidence. The stock has lost about 80% of its value since Rivian’s high-flying IPO just a little under a year ago after investors’ sentiment soured on its rocky start of productions that barely made it out the door amid repeated delays, which were later compounded by pains of the 2022 bear market run.

However, it remains a concern that close to half of Rivian’s targeted production volume of 25,000 vehicles for the year is still in the form of raw materials or work in progress that needs to be converted into completed units within the next three months. Yet, Rivian’s reaffirmed guidance implies it is determined to get there – from adding a second shift to terminating productions on the lower-trim models, the company is fixed to squeeze out every bit of efficiency it can get in order to reach the finish line as intended. But there remains one key barrier beyond its control – ongoing supply chain constraints that have upended the broader auto industry this year.

While Rivian’s sequential production growth implies improving weekly production run-rates and easing impacts from protracted supply chain bottlenecks, whether these developments are sufficient to bridge the gap between ~14,300 vehicles produced YTD and 25,000 vehicles needed within the next three months remains a huge overhang on the stock’s near-term performance. Paired with continued market volatility in response to the ever-evolving nature of macro factors such as inflation prints, recession risks, and Fed hawkishness, we still think Rivian remains exposed to significant risks of a further downtrend that make any buy decisions worth the wait to year-end when its final full-year production count is in.

Understanding Rivian’s 3Q22 Production And Delivery Numbers

Rivian produced 7,363 vehicles (+67% q/q) in the third quarter and delivered 6,584 vehicles (+47% q/q) over the same period. This implies an average weekly production run-rate of about 560 vehicles (includes consideration of weekends and holidays for prior period comparison purposes). This compares to about 404 vehicles produced per week on average between May 9^th and June 30^th, or a production ramp-up improvement of almost 40%, a slight deceleration from the 61% improvement observed between 1,400 vehicles produced in the April 1^st to May 9^th period and 3,001 vehicles produced in the May 10^th to June 30^th period. And on the delivery front, Rivian’s 3Q22 figure is also slightly shy of consensus estimates of 7,000 vehicles, which could be due to similar issues expressed by Tesla (TSLA) earlier this week over difficulties in “securing vehicle transportation capacity during peak times”.

On a YTD basis, Rivian has produced 14,317 vehicles and delivered 12,278 vehicles in the nine months through September 30^th. This means the company is still 10,683 vehicles out from its full-year production target, which implies an average weekly production run-rate of 814 vehicles over the coming three months. This is a wide margin from Rivian’s average weekly production run-rate observed during the three months through September, though it is likely the “exit rate” was higher as ramp-up efforts pertaining to the newly added second shift during late stages of 3Q22 as discussed in our previous coverage had improved over time. However, considering the slight deceleration observed in the rate of production ramp improvement over the past two quarters, Rivian’s output likely remains a function of supply availability rather than labour capacity on the floor – a “gating factor” that is well beyond Rivian’s control.

With only three months left to the end of the year and close to 50% of its annual production target unrealized, execution risks have only increased at Rivian. Under a market climate where investors are allocating a stronger preference for profitable growth, Rivian’s fixed focus on achieving its production target set earlier in the year leaves it with little room for error. If Rivian disappoints at year-end, which there is a reasonable chance of given ongoing supply chain uncertainties and an added shift that is still in early stages of ramp-up, management’s recent decision to reaffirm guidance only risks leaving its shares to a steep tumble again.

But Rivian’s improvements are worth applauding. Recall that it is ramping up three models with different trims at the same time, which is not an easy feat for any automaker, let alone a vertically integrated start-up within a still-nascent industry. While the company’s fixation on reaching its production target of 25,000 vehicles by the end of the year is well received by investors for now, we view that Rivian’s reiterated guidance only subjects its shares to higher risks of another steep selloff.

Looking Further Ahead

While investors are primarily focused on Rivian’s near-term production ramp-up to 25,000 vehicles by year-end, there are also concerns over its 2023 production outlook that has gone largely unremarked. Recall that earlier in the year when markets were primarily focused on Rivian’s pricing mistake, the EV maker had actually also announced two updates:

1. Dual-motor option for the R1 platform vehicles – The in-house developed “Enduro” dual-motor powertrain will mark Rivian’s diversification away from Bosch, its electric motor supplier for the quad-motor R1T/R1S models. The Enduro dual-motors will first be incorporated into the EDVs beginning 2023, then become available for the R1T/R1S models in 2024, which is consistent with the estimated delivery wait time displayed on its reservation site.
2. Standard battery pack option with 260-mile range – The newly introduced standard battery pack option will incorporate lithium iron phosphate (“LFP”) cells instead of the current lithium-ion battery cells. LFP cells, which are safer due to its lower energy density, are currently cheaper to make but offer a lower range per charge. These cells will be used in Rivian’s new standard battery pack, which will offer an estimated range of about 260 miles on a single charge for its R1T/R1S models. This compares to Rivian’s previous entry option, which offers 320 miles on a single charge.

While both updates are meant to improve Rivian’s cost profile over the longer-term and potentially quicken its timeline to profits and positive operating cash flows, they are bound to stall ongoing production ramp-up efforts next year. The integration of the Enduro motors begin for the EDVs starting later this year or in early 2023, which implies potential disruptions to production ramp-up during the “switch-over” from externally sourced components. In addition, early-stage in-house production of the Enduro motors are expected to result in a transitory adverse impact on margins due to added ramp-up costs. The same idea goes for the introduction of the new trims fitted with standard battery packs, given the accommodative adjustments required to be made on the production line.

In addition to temporary impacts to production volumes and elevated costs stemming from the two major vehicle configuration updates, Rivian is also looking to shift “75% of the 150,000 [vehicle] production capacity to the R1 which will result in a multi-week stoppage while it re-rates the [production] lines” in mid-2023. This means production volumes will again be stalled, risking muted improvements to ramp-up efforts next year, and pushing out the timeline for more evident improvements out to 2024.

With an increasingly hawkish Fed fixed on taming inflation – even at the cost of growth – the probability of a recession in the near-term is now as high as 98%. And the anticipated hiccup in Rivian’s production ramp-up efforts next year, though they will yield sustained longer-term benefits thereafter, risks boding unfavourably with the shaky macro backdrop. This could potentially weigh on the stock further over coming months before any anticipated upsides buoyed by Rivian’s longer-term growth narrative can re-emerge.

Final Thoughts

We remain hold-rated at a price target of $39 for the Rivian stock given its 3Q22 production and delivery numbers. While a positive improvement, we view Rivian’s 3Q22 production volumes as mediocre and insufficient to assuage investors’ concerns that it remains a victim of ongoing supply chain constraints. Rivian’s reiterated guidance, in our opinion, have only added to its already-elevated execution risks. While some may view it as a confidence booster given the favourable response observed on Rivian’s share price performance following the reaffirmed full year production guidance, it has instead pushed some closer to the edge of their seats, hiking up skepticism on whether it would make it and which direction the stock will be headed.

And looking further ahead, Rivian is expected to face some growth and margin pressures in 2023, which together with the anticipated continuation of macro weakness introduces risks of a further weigh-down on the stock’s near-term performance. But considering the vehicle configuration upgrades next year will lead to improved cost efficiencies over the longer-term, with increasing industry tailwinds spanning benefits from the Inflation Reduction Act and an inflection point in global EV adoption to support sustained growth, Rivian’s long-term valuation prospects remain favourable, making its shares’ anticipated near-term declines a potential entry opportunity.