Deteriorating EV Incentives And Tariffs Will Crush Margins

Key Takeaways

• Shrinking policy support, cost inflation, and low demand threaten Rivian's margins, cash flow, and ability to justify ambitious expansion plans.
  
• Intensifying competition and macroeconomic headwinds further reduce pricing power, heightening the risk of ongoing losses and potential need for additional funding.
  
• Strategic cost reductions, expanded software revenue, scalable manufacturing, and strong product-market fit position Rivian for improved margins and durable growth despite policy headwinds.

Catalysts

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

• Deteriorating policy support for electric vehicles, including the loss of significant purchase incentives and elimination of key regulatory credit revenues, will directly lower Rivian's top line and make its vehicles less affordable, compressing unit sales and harming revenue growth prospects through the remainder of the decade.
  
• Increased tariffs and shifting global trade policies are set to raise costs by several thousand dollars per vehicle for Rivian in coming quarters, eroding already thin or negative gross margins and further threatening the ability to reach sustainable profitability.
  
• Supply chain disruptions and ongoing underutilization of existing production capacity continue to drive high fixed costs per vehicle and negative gross profits. Without a rapid improvement in demand or meaningful reduction in cost per unit, Rivian's net margins and free cash flow will remain deeply negative, which may require dilutive equity issuance or further debt.
  
• Intensifying cost pressures from rising material prices and the need for heavy investments in autonomy, software, and manufacturing scale will suppress Rivian's earnings and create persistent high cash burn, particularly as competition from both incumbents and aggressive newer entrants undermine pricing power.
  
• Macroeconomic risks, including elevated interest rates and tighter credit for auto loans, will limit broader consumer willingness to pay premium prices for EVs, stagnating Rivian's revenue and making the multi-billion dollar capital expenditure program for expansion appear increasingly unjustified relative to likely future demand.

Rivian Automotive Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rivian Automotive compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rivian Automotive's revenue will grow by 20.0% annually over the next 3 years.
• The bearish 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 -68.1% to the average US Auto industry of 5.4% in 3 years.
• If Rivian Automotive's profit margin were to converge on the industry average, you could expect earnings to reach $481.5 million (and earnings per share of $0.32) by about August 2028, up from $-3.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, up from -4.1x today. This future PE is greater than the current PE for the US Auto industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Rivian Automotive Future Earnings Per Share Growth

Risks

• Rivian's R2 launch is being positioned as a transformative, mass-market product with a dramatically lower cost structure-having negotiated and locked in a 50% reduction in bill of materials and conversion costs compared to R1-indicating a sustainable improvement to vehicle gross margins and a pathway to positive net margins at scale.
  
• The company's vertically integrated software stack and autonomy platform, already generating high-margin revenue through joint ventures with Volkswagen and growing revenue from proprietary over-the-air updates, service, charging, and remarketing, provide opportunities for recurring and diversified streams that can lift future earnings.
  
• Multiple sources cited strong product-market fit and robust, wide-ranging addressable market potential for R2-specifically targeting the largest-volume segments in U.S. and European markets-which could enable sustained revenue growth and sales resilience, contradicting expectations of declining demand.
  
• Rivian's growing manufacturing scale (Normal, Illinois and upcoming Georgia plants) and investments in capacity for R1, R2, and commercial vans (notably with Amazon) position it to benefit from economies of scale, lower unit fixed costs, and greater operational leverage, supporting improvements in both gross and net margin.
  
• Despite policy headwinds like the loss of some tax credits and increased tariffs, management expressed confidence in achieving positive EBITDA by 2027 through ongoing cost reductions, software and services expansion, and margin tailwinds from higher volume; this, combined with continued regulatory and consumer tailwinds for electrification, suggests long-term earnings and share price resilience.

Valuation

• The assumed bearish price target for Rivian Automotive is $7.93, which represents two standard deviations below the consensus price target of $13.96. This valuation is based on what can be assumed as the expectations of Rivian Automotive's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $7.05.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.9 billion, earnings will come to $481.5 million, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $11.79, the bearish analyst price target of $7.93 is 48.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.