R2 Shutdown And Tri-Motor Rollouts Will Define Auto Future

Key Takeaways

• Planned facility shutdowns for R2 integration and external component dependencies could restrict production, affecting deliveries and annual earnings.
  
• Capital expenditures and regulatory shifts could strain cash flow and net margins, delaying the path to profitability and affecting EBITDA.
  
• Strategic expansions and partnerships, alongside investments in new technologies, are set to enhance revenue growth, boost margins, and improve overall operating efficiency.

Catalysts

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

• Rivian's production expectations for 2025 may face challenges due to a planned shutdown for integrating the R2 line into shared facilities, which could adversely affect automotive revenue and lead to lower deliveries, impacting annual earnings.
  
• Regulatory and policy shifts, including potential changes to incentives and tariffs, are expected to create uncertainty and could negatively impact Rivian's EBITDA by hundreds of millions of dollars, hampering net margins.
  
• Despite significant investments in self-driving features, the competitive landscape and pricing pressures for these features could limit potential revenue from Rivian's autonomy platform and affect profit margins.
  
• The emphasis on rapid expansion and significant capital expenditures for facilities in Normal and Georgia could constrain free cash flow, delaying the path to profitability and impacting earnings.
  
• Dependency on external factors such as component shortages and a challenging demand environment, particularly illustrated by lower expected deliveries in Q1 2025, might suppress revenue growth and inflate COGS, impacting both net margins and overall financial performance.

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 16.6% 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 -95.5% to the average US Auto industry of 5.6% in 3 years.
• If Rivian Automotive's profit margin were to converge on the industry average, you could expect earnings to reach $438.9 million (and earnings per share of $0.32) by about April 2028, up from $-4.7 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 47.9x on those 2028 earnings, up from -2.8x today. This future PE is greater than the current PE for the US Auto industry at 18.2x.
• 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 11.41%, as per the Simply Wall St company report.

Rivian Automotive Future Earnings Per Share Growth

Risks

• Rivian's efforts to reduce costs, such as the $31,000 reduction in cost of goods sold per vehicle, coupled with increased average selling prices and rising regulatory credit revenue, are enhancing gross margins and could positively impact net earnings.
  
• The introduction of the Tri-Motor Dune Edition and its unexpected higher take rate could strengthen revenue streams as it appeals to more consumers, further improving margins.
  
• The strategic expansion of production capacity, including the Georgia facility and Normal plant expansion, along with expected production of R2 and R3 product lines, is poised to drive revenue growth and enhance operating efficiency.
  
• Rivian's joint venture with Volkswagen and robust software and services segment, including $2 billion from Volkswagen over four years, may significantly boost revenue and profit margins.
  
• Rivian's heavy investment in the Rivian Autonomy Platform, with advancements in AI and self-driving capabilities, could lead to premium offerings and high-margin revenue streams from software and services.

Valuation

• The assumed bearish price target for Rivian Automotive is $10.97, which represents one standard deviation below the consensus price target of $14.3. 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 $23.0, and the most bearish reporting a price target of just $6.1.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.9 billion, earnings will come to $438.9 million, and it would be trading on a PE ratio of 47.9x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $11.6, the bearish analyst price target of $10.97 is 5.7% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.