R2 Program's Cost Advantages And Volkswagen Partnership Will Drive Future Success

Key Takeaways

• The R1 and R2 platforms' significant cost reductions are poised to boost future profit margins and profitability as production increases.
  
• Strategic partnerships and technology adoption are expected to drive substantial revenue growth and market share expansion.
  
• Rivian faces supply chain issues, cost management struggles, and operational inefficiencies, impacting profitability amid intensifying EV competition and reliance on regulatory credit sales.

Catalysts

Designs, develops, manufactures, and sells electric vehicles and accessories.

• The introduction of Rivian’s second-generation R1 platform is expected to enable a 20% reduction in material costs, which will positively impact future profit margins and earnings.
  
• The R2 program, with 85% of its bill of materials already sourced within aggressive cost targets, is anticipated to have a 45% lower cost relative to R1. This could lead to higher net margins and profitability as production ramps up.
  
• Rivian's partnership with Volkswagen and the structural cost advantages of their technology platform are expected to drive significant revenue and profitability growth by accelerating the adoption and deployment of their advanced technology across numerous vehicle brands.
  
• Progress on Rivian's R2 program, including the development of new suppliers and a planned objective to sell at an approximately $45,000 starting price, is targeted to capture a strong market share and drive top-line growth.
  
• The positive gross profit goal set for the fourth quarter of 2024 and beyond is supported by a focus on the sale of regulatory credits, cost reduction initiatives, and an enhanced sales mix, which are anticipated to raise revenue per unit and improve overall earnings.

Rivian Automotive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Rivian Automotive's revenue will grow by 38.0% annually over the next 3 years.
• Analysts are not forecasting that Rivian Automotive will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Rivian Automotive's profit margin will increase from -121.4% to the average US Auto industry of 5.9% in 3 years.
• If Rivian Automotive's profit margin were to converge on the industry average, you could expect earnings to reach $711.2 million (and earnings per share of $0.61) by about February 2028, up from $-5.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.0x on those 2028 earnings, up from -2.3x today. This future PE is greater than the current PE for the US Auto industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 4.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Rivian Automotive Future Earnings Per Share Growth

Risks

• Rivian faces supply chain challenges with new suppliers and supply ramp issues, impacting production and potentially future revenue and profitability.
  
• The company reported a significant gross loss per vehicle, indicating ongoing struggles with cost management that could affect net margins.
  
• The financial guidance for 2024 includes a major adjusted EBITDA loss, suggesting ongoing operational inefficiencies and potential challenges in achieving profitability.
  
• Increased regulatory credit sales are pivotal to improving gross profit, raising concerns about the sustainability of revenues without them.
  
• The competitive landscape for EVs is intensifying, and high product prices could limit market share growth and future revenue compared to competitors offering lower-priced alternatives.

Valuation

• The analysts have a consensus price target of $14.821 for Rivian Automotive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $6.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.0 billion, earnings will come to $711.2 million, and it would be trading on a PE ratio of 33.0x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $12.48, the analyst price target of $14.82 is 15.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.