Don't Expect a Tesla 2.0 From Rivian Stock

Rivian has a long way to go to meet investor expectations, but replicating Tesla's upscaling tactic probably won't be the silver bullet it needs to scale.

Christopher Johnson 30 January, 2024 | 9:00AM
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Rivian UK Main

The US is famous for its love of big vehicles, but it's the pickup truck that holds a peculiar place in the hearts of millions of its citizens.  

According to data from advertising agency Hedges & Company, in 2022 and 2023, respectively, manufacturers registered a whopping 2.7 million and 2.8 million pickup trucks in the country. The Ford (F) F-Series claimed the top spot as the best-selling truck for the 48th year running.

But there's one brand attempting to dislodge Ford's dominance with a green alternative.

Founded by chief executive Robert Joseph Scaringe, Rivian (RIVN) is the electric vehicle manufacturer focused on revolutionising what Scaringe says is "the least efficient vehicle on the road". Referencing the "gorpcore" clothing brand beloved of urban millennials, he describes Rivian as the Patagonia of pick-up trucks: luxury adventure vehicle; good for the environment. This is a compelling story. But investors may not feel so confident.

Did Rivian Stock Float via a SPAC?

Rivian has struggled to meet investor expectations since its exuberant floatation on the NASDAQ in November 2021. Initially priced by the company at US$78 Rivian opened at US$129.95. But shares in the company are now priced at US$15.29. What's more, the company is yet to produce a profit.

According to data from Morningstar Pitchbook, at September 2023 the EV maker's net income margin was down by over US$4.9 million, producing a net profit margin of -148.97%.

Rivian does, however, have big institutional firepower backing it. Ben James, investment director and US equities specialist at Baillie Gifford, backs Rivian because of its long-term growth expectations."What attracts us to Rivian stock firstly is that exposure to this long-term structural change in society away from the internal combustion engine towards electrification," James says.

"The culture – that is an important thing for us in our portfolio – with RJ Scaringe you have got someone who is quite special and who has built a very strong team around him." James also believes Rivian's boss is the real deal and is on a personal mission to decarbonise mobility. He studied for a doctorate at the Massachusetts Institute of Technology, before setting Rivian up in 2009 after the global financial crisis. 

He argues Rivian is building a strong brand for itself with a Net Promoter Score (a customer experience metric) of 23 – above FedEx (FDX), but just below EV rival Tesla (TSLA).

Seth Goldstein, Morningstar equity market strategist and chair of its electric vehicle (EV) committee, meanwhile, is confident about US EV proliferation overall. "EV sales grew at roughly 50% in the US in 2023," he says.

"We think EV sales will continue to grow, driven by the $7,500 tax credit now applicable upfront and taken off the purchase price, despite fewer models qualifying," says Goldstein, "We also point to the buildout of more EV chargers as a catalyst for growth, which will reduce [the] road trip anxiety that holds some consumers back from buying EVs."

What Goldstein is less enthused by is the special purpose acquisition company, or SPAC. A real talking point in 2021, this type of investment vehicle has failed to really garner the long-term attention of retail investors, some of whom were interested in garnering exposure to EV companies via it.

In Morningstar's 2021 EV Observer report, Goldstein argued SPAC use by retail investor was too risky because of the sheer amount of time needed to benefit from profitability."Investors may not benefit from growing EV sales through a SPAC, as these firms carry company-specific risks that could ultimately outweigh their pure-play exposure to EVs," he said in June 2021. Lucky, then, that Rivian pursued a traditional (and arguably more transparent) floatation.

'I Quit Rivian Stock – Here's Why'

Risks remain. Goldstein still believes there are persistent barriers to entry deterring consumers from buying Rivian's products. "When you look at Rivian trucks they start at the high end," he says,"So, you look at the truck market and there are affordable trucks and then there are luxury trucks. Rivian is a luxury truck. So right there you have a smaller total addressable market of consumers that would be interested and able to afford Rivian."

The starting price for Rivian's flagship R1T is $73,000, which places it at a price disadvantage to more affordable brands selling at $40,000 to $50,000. He also points to the lack of charging infrastructure throughout much of the US – especially in rural areas dependent on reliable off-road vehicle or SUV use.

"Unfortunately in the US [...] chargers tend to be located on the East and West coast closer to major city locations where you might see less demand for trucks," Goldstein says.

Rivian has made obvious efforts to address this. According to Eric Clark, portfolio manager of AccuvestGlobal Advisor's Alpha Brands Core Equity fund, Rivian's new manufacturing plant in Atlanta, Georgia, will help it produce more vehicles at more attractive prices.

"When Tesla was just kind of doing nothing and then all of a sudden its profitability went sky high [that was] because they really ramped up production of the model 3 and model Y. That was where consumers really wanted to be,” Clark says.  

He believes that, if Rivian emulates the tactic it may also achieve similar levels of profitability. But he doesn't believe it enough to have stuck around, however. Clark recently sold out of the company amid the higher interest rate environment. "The problem is Rivian is doing it with a much higher cost of capital than Tesla", he says.

"Tesla had the benefit of zero interest rates, whereas Rivian is not going to have that benefit. It is going to cost a lot more to reach scale," he says, "I am not sure why people would have an appetite for a stock that, in a world where quality business metrics profitability is really where money is flowing, profitless speculative growth is not where money is going right now".

Furthermore, Clark believes much of the EV market has already been tapped into. Already suspicious of EVs, the general consumer may want to take their tentative first drive in a hybrid rather than an EV. He is therefore surprised a pure hybrid brand has not been launched to US consumers to provide them with the optionality of using both gas and electric – especially given the constraints around charging infrastructure.

'I'm Still in Rivian Stock – Here's Why'

Baillie Gifford's James is keeping the faith. He believes the stock is trading at a particularly attractive valuation and that all roads lead to momentous growth, and thus a strong return. "Americans buy pickup trucks in the hundreds of thousands – if not millions," he says, "Its next model, the R2 (expected 2026) is going after the US$50k market - the price point will be $40-65k with the base model below $50k. But even above the $50k point the market is massive. That means there is enough room in the next five years for Rivian to grow sales significantly."

James is also bullish on the company's potential to gain popularity across the US's bipartisan divide. In time, it could appeal to both coastal Democrats as well as Republicans living in rural areas more wedded to the combustion engine.

The one person who is all in, however, is Scaringe. For him, there is no reverse gear. Having spent his life's work (so far) in physically building the EV consensus, pivoting to a hybrid model would probably be a compromise too far.

For now, it looks like Rivian is staying in its lane.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Ford Motor Co11.71 USD-1.93Rating
Rivian Automotive Inc Class A10.88 USD-2.07
Tesla Inc178.01 USD-2.44Rating

About Author

Christopher Johnson  is data journalist at Morningstar.

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