Rivian (NASDAQ:RIVN) stock has a very long way to go before it’s worth buying and, at this point, it might be time to get out if you’re holding this embattled EV play.
As part of the company’s annual meeting, CEO RJ Scaringe wrote a letter to shareholders. While generally positive in its tone, Scaringe emphasized that RIVN stock and the entire company won’t amount to a hill of beans if it can’t deliver “compelling gross margins.”
Further down the shareholder letter, the CEO talked about a path to positive margins. On the surface, the fact that the company has more than $17 billion in cash on the balance sheet should be perceived as a positive in the company’s development. However, Scaringe’s letter also emphasized the ramp-up of its R2 platform and 2025 launch.
If the production of the R1 vehicles doesn’t deliver substantially more than the current backlog of 90,000 orders, it’s possible that RIVN won’t have enough cash to get the R2 platform up and running. It will have to return to the markets for additional equity and debt capital.
That won’t be good for RIVN stock. For this reason, I believe Rivian will continue to be a tough hold over the next 18-24 months.
RIVN Stock and Gross Margins
In Rivian’s latest quarterly report, it had a gross loss of $502 million on $95 million in revenue. It had more than $6 in costs for every dollar in sales. That’s before accounting for its operating expenses. They were over $1 billion in the first quarter alone.
In 2022, it expects to produce 25,000 vehicles. Based on a $78,000 sticker price, that’s approximately $1.95 billion in revenue. If the gross margin is similar for the entire year, we’re talking about $12 billion in gross losses. Again, that’s before operating expenses.
Let’s assume that the ratio of sales to costs drops by half. That’s a 2022 gross loss of almost $6 billion. In 2021, it had operating expenses of $3.76 billion. Assuming they’re similar in 2022, Rivian would lose nearly $8 billion this year.
Then it’s got two more years after this one. That’s a lot of potential losses.
Hope for 2024
Analysts expect Rivian to produce 100,000 or more vehicles in 2024. Not coincidentally, that’s the same year it expects the company to generate a full-year gross profit. Looking at some of the other EV manufacturers, I’ll go with a 10% gross margin in 2024.
Based on 100,000 vehicles produced, that’s $7.8 billion in revenue and a gross profit of $780 million. Even in 2024, it should lose close to $3 billion ($3.76 billion in operating expenses less $780 million).
So, if Rivian’s 2023 loss is halfway between $8 billion and $3 billion, it will rack up $16.5 billion in losses between now and 2024. That’s virtually all of its current cash on its balance sheet.
The saving grace for Rivian could be higher EV production. If it produces 200,000 EVs in 2024, that’s $15.6 billion. Assuming its gross margin bumps up to 20% by then, it is closer to overall profitability.
The problem is that everything has to go like clockwork.
Buying Ford or Amazon Instead
If you bought Rivian at or near its 52-week low of $19.25 in mid-May, you’re probably hoping that you caught the bottom. Maybe you did.
In April, I suggested that if you wanted to buy RIVN, you ought to do so through Ford (NYSE:F). You could also buy Amazon (NASDAQ:AMZN) to ride the Rivian train. It owns even more of the EV maker than Ford at 16.6% as of April 11.
While it’s impossible to know what will happen to Rivian, it’s safe to say that it will include significant quarterly losses adding up to billions for the foreseeable future. For this reason, I don’t think owning RIVN stock will be an easy hold between now and the end of 2024.
If you’re risk-averse in any way, Ford is the smarter bet until many of Rivian’s question marks get answered. That won’t be until sometime in 2024.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.