Potential Threat to Rivian's Primary Driver?
Electric vehicle manufacturer Rivian (RIVN at 5.90%) is an attractive investment proposition for several reasons, mainly due to its early stage in a lengthy game, where every advancement significantly impacts the company. Investors and potential investors are interested in discovering Rivian's next move to assess its potential as a risky bet.
The major development that investors may not witness until the first half of 2026 is the introduction of Rivian's subsequent vehicle model. That's quite some time away. On the brighter side, investors can look forward to Rivian posting positive gross profits in the fourth quarter. However, this growth driver could be jeopardized by a production challenge in the third quarter.
Rivian encounters a hiccup
Rivian encountered a production interruption in the third quarter due to a component shortage shared between its R1 and RCV platforms. This led to decreased deliveries (as shown below).
The production hiccup had a ripple effect on the financials as well, with Rivian's adjusted EBITDA loss standing at approximately $760 million, significantly higher than the $650 million predicted by expert analysts. Moreover, Rivian's gross margin came in at a negative 45%, significantly more severe than the negative 22% expected by analysts.
Despite the third-quarter setback, management maintained its projections of producing and delivering between 47,000 and 49,000 units, with deliveries anticipated to range between 50,500 and 52,000. However, management also revised its 2024 EBITDA loss estimate to a range of $2.825 billion to $2.875 billion, an upward revision from the previous predicted loss of $2.7 billion.
Reasons to stay hopeful
There are two compelling reasons that suggest Rivian can still record positive gross profits in the fourth quarter, a move expected to significantly impact the stock in the near term. First, the improvements in variable costs will play a crucial role. By redesigning hundreds of hardware and software enhancements in the R1 vehicles with the introduction of the second generation, numerous cost savings were implemented, contributing positively during the fourth quarter.
Second, Rivian's results will receive a boost from approximately $300 million in regulatory credits for the entire year, with approximately $275 million anticipated in Q4.
What this means
The main takeaway for investors is to adjust their expectations. While Rivian's fourth-quarter positive gross profits will be a significant milestone, it's not as straightforward as it appears, due to regulatory credits. In fact, investors might anticipate a blend of quarterly gross profits and losses throughout 2025, culminating in a positive annual position. As shown in this chart, progress isn't always linear, especially for the electric vehicle industry, which experiences occasional roadblocks while delivering successive quarters of gross profit improvement.
In summary, 2025 is expected to be a year dedicated to process improvements and cost reductions for Rivian investors. The fourth quarter will serve as our first glimpse into management's execution capabilities, and if it manages to generate a positive gross profit, it will set the stage for a promising 2025.**
Following the production challenge in the third quarter, Rivian is looking to invest its resources to mitigate the impact and ensure a smoother operation in the future. This could potentially lead to improved financials and better profit margins in the coming quarters.
In light of the regulatory credits and cost savings from the redesign of the R1 vehicles, Rivian has a strong opportunity to reinvest the earned money into its operations, further enhancing its financial position and potentially leading to positive gross profits in the fourth quarter.
