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Rivian: Right Thing To Suspend Its Mercedes Partnership
Rivian Automotive, Inc. (NASDAQ:RIVN) sent shockwaves through the fledgling EV pure-play makers yesterday. It confirmed that it would not pursue its partnership with Mercedes (OTCPK:MBGAF) to produce electric vans in Europe.
As such, EV investors were likely concerned about whether EV upstarts like Rivian could be facing a significant cash crunch in their production ramp as macroeconomic conditions worsen.
The IMF highlighted in a recent update that it needs to revise its global growth outlook further. With Europe still mired in its discussion to iron out its gas price caps to curtail price spikes, there’s no clear resolution yet on the energy costs visibility in Europe.
Volkswagen (OTCPK:VWAGY) also recently emphasized that the energy crisis in Europe has curtailed Europe’s leading automaker’s ability to remain competitive against its peers. In addition, Tesla’s (TSLA) production ramp in Berlin has also faced significant challenges on top of reportedly “motivation” problems among its employees.
Hence, we believe it’s the right decision for Rivian CEO RJ Scaringe and his team to focus on its domestic ramp. CFO Claire McDonough accentuated:
The pausing of this partnership reflects our process of continually evaluating our major capital projects while taking into consideration our current and anticipated economic conditions. – Seeking Alpha
Rivian’s Cash Runway Is Tightening
The consensus estimates for Rivian’s cash flow runway suggest a challenging ramp cadence through 2026, which doesn’t augur well if it commits to the Mercedes partnership now.
Rivian reported cash and equivalents of about $13.3B as of FQ3. However, the revised estimates suggest that the company could burn through nearly $13.2B in free cash flow from FQ4’22 to FY26. Hence, we believe Rivian’s cash runway doesn’t afford the company sufficient buffer to undertake the ambitious investment with Mercedes in Europe at this point.
Furthermore, we believe Rivian has also likely assessed the unfavorable prospects of tapping additional debt/equity funding. RIVN’s stock price remains close to the lows last seen in July 2022, suggesting any further dilutive equity financing could be met with “disapproval” from existing investors.
Moreover, management accentuated in its FQ3 earnings call that it had sufficient cash to meet its production targets through 2025. Hence, we believe the decision not to pursue the partnership in light of significant macro challenges is the right one.
Rivian’s Production Ramp Challenges Not Over
Notwithstanding, it doesn’t preclude Rivian from its ability to ramp production in the current environment. With Ford (F) and General Motors (GM) ramping their capacity in their bid to assume EV leadership in the US by 2025/26, Rivian’s supply chain challenges are likely not fully resolved.
Therefore, investors need to consider whether Rivian’s production ramp challenges have been de-risked significantly, as it’s critical on its route toward profitability.
Our analysis suggests that the auto chip supply chain that has beset the automakers appears to be loosening, even though the supply/demand dynamics remain tight.
However, the supply chain could continue to face headwinds till 2024 as the auto chipmakers prepare to bring more capacity online. Therefore, it’s imperative for Rivian to demonstrate its ramp capability for the chipmakers/tier-1 suppliers to prioritize sufficient supply for Rivian to meet its production requirements.
We gleaned that Wall Street has revised Rivian’s revenue and profitability estimates markedly through FY26. As such, analysts are increasingly concerned whether Rivian’s path to profitability could be impacted if the Fed remains hawkish for longer-than-anticipated.
RIVN Buyers Need To Stanch Further Decline
Given RIVN’s weak price action since its Q3 earnings, we deduce that the market could be anticipating a soft Q4 earnings release, even as the S&P 500 (SPX) (SP500) has recovered remarkably from its October lows.
However, we assess that another speculative buying opportunity in RIVN is getting increasingly closer if buyers could return to stanch further downside as it attempts to re-test its July lows.
For now, we have yet to observe such a resolution, with the momentum clearly in favor of the bears. Hence, we urge investors to remain patient, allowing the market to demonstrate its directional bias as the Fed unveils its dot plot tomorrow (December 14), which could lead to volatility if it’s more hawkish than anticipated.
Maintain Hold for now.
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