Proverbs Chapter 29 verse 25 states, "Fear of man will prove to be a snare, but whoever trusts in the Lord is kept safe."
This is no more true today than it has always been. Although time seems to make moments seem difficult or challenging, there is nothing that has not already been faced before. I find myself relying on this verse when I consider today's climate with respect to political pressures and attacks on freedom. If I am to be bold and stand my ground, I must trust in the Lord.
For investing this is also very true. In order to be a successful investor for the long haul, one needs to stand their ground definitively. This all the while other major players attempt to control narratives, and institute their games through manipulation.
What a way to start the month of October! Rivian Automotive, Inc. (RIVN) just filed its initial S-1 statement so let's get right to it. I'm not going to spend a lot of time here talking about all the risks, issues, opportunities, etc. for Rivian. Instead I'm going to focus on Rivian's quick bits and financial model I've built, and then I'm going to give my perspective on the EV revolution and what it means for companies like Tesla, Inc. (TSLA), Lucid Group (LCID), and Rivian versus SPACs and traditional players like Ford Motor Co. (F) and General Motors (GM). If there is one thing for certain, it is that traditional automotive OEMs are not the clear future winners - the race is on!
Rivian Quick Bits
I think what is on most people's minds is how can a company like Rivian be valued pre-IPO from $70-80 billion? It's a great question and the answer is not simple. Tesla is currently valued at just below $760 billion, while Lucid is valued at $35 billion, so Rivian will likely find itself somewhere in the middle. The complexity of valuing new EV entrants like Tesla, Lucid and Rivian are twofold - 1) there is the simple fact that a company going from little to no Revenue to $50 billion over a short period of time merits a premium; 2) the robo-taxi/autonomous vehicle technology race is also another area to afford a premium.
Tesla's Model S/X and 3/Y production is nearing one million deliveries in 2021 globally. Lucid is anticipating 20,000 Lucid Airs delivered next year, and including Gravity and other models, growing to 250,000 deliveries by 2026. Rivian doesn't have public growth forecasts for the mid-term, but it does have 150,000 orders for both consumer and commercial deliveries. Looking out to 2023, and Lucid will have two makes in production, while Rivian will have two as well, one on the consumer side with multiple models, the other being commercial and also with multiple models. While I'm not here to determine a perfect valuation for Rivian, somewhere in the middle of Tesla and Lucid makes some good sense as we think about production and deliveries.
For those not aware, Rivian has one consumer make including two models, the R1T (pick-up truck) and the R1S (SUV).
Additionally, Rivian has an exclusive contract with Amazon, Inc. (AMZN) to develop Amazon's Electric Delivery Van, EDV. The EDV includes three models, the EDV 500, 700, and 900 based on payload capacity.
Combined, Rivian has a total of five models to be produced, and based on my initial read and projections, I am expecting four of them to be in production next year. This in my mind is the justification for Rivian to be trading at a premium to Lucid.
For investors, I also think it is important to understand how Rivian is viewing its Total Addressable Market, TAM and Serviceable Addressable Market, SAM. For the consumer side, the TAM and SAM are shown below. To calculate the SAM and TAM for the entire consumer opportunity, Rivian first adds the total number of vehicles sold per year multiplied by the average selling price and then includes the total number of vehicles sold multiplied by the LTR of approximately $67,900.
For the commercial side, the TAM and SAM are shown below. To calculate the SAM and TAM for the entire commercial opportunity, Rivian first adds the total number of vehicles sold per year multiplied by the average selling price, and then includes the vehicle upfit of approximately $9 billion for the SAM and $29 billion for the TAM based on total number of vehicles sold, and the total number of vehicles sold multiplied by the LTR of approximately $64,600.
It is important to recognize the SAM as the key focal point in my opinion as it reflects the most near-term opportunity notably from a competitive perspective. The other item that investors should be thinking about is Rivian's approach to what they are calling Lifetime Revenue Potential, LTR.
Rivian defines its LTR for its consumer and commercial vehicles as the Revenue that can be generated from a vehicle throughout its lifetime if the owner(s) were to use and subscribe to all the additional services and accessory products that Rivian offers. To illustrate the size of the opportunity, Rivian has represented the full LTR of each consumer and commercial vehicle below.
With production beginning this past summer, Rivian is on track to start delivering its R1Ts with the expectation for the R1Ss to begin production later this year and into 2022. The same can be said for the company's EDV model 500 and 700s. The consumer vehicle side is fairly straight forward as Rivian has just below 50,000 orders - the company is essentially looking to target specific markets and build momentum. There are of course going to be competitors, and Rivian is looking to get ahead of the competition as a new brand.
For the commercial vehicle side, the exclusive agreement with Amazon precludes Rivian from producing its EDVs for say United Parcel Service (UPS), or FedEx Corporation (FDX) until the fifth year after Amazon has initially begun receiving EDVs. Even from the four year period and through six years after first receiving deliveries, Amazon still will retain a first right of refusal for the EDVs produced by Rivian. In effect, Amazon will have a six-year period to maximize all of Rivian's EDV production.
While this is highly lucrative and valuable for Rivian to have this deal with Amazon, it does naturally push major last mile delivery competitors towards other EDV OEMs. There is also no guarantee that Amazon will meet and/or exceed the current 100,000 orders. Amazon is not wedded to Rivian on where they purchase their EDVs. Thinking big picture here, if Rivian is truly successful at maximizing this opportunity, Amazon through its Logistics segment could very much so lease vehicles beyond its e-commerce operational needs. At the same time, Amazon will likely far exceed EDVs on a comparable basis against peers like UPS and FedEx as e-commerce continues to grow, affording further upside. The deal is structured to benefit Amazon with greater flexibility, Rivian will need to execute and meet Amazon's expectations to win big from this opportunity.
Rivian Financial Model
The financial model is predicated on the initial 150,000 vehicle orders, and is broken down by the R1T and R1S and collectively the EDVs on the commercial side. I am assuming that through 2023 all 50,000 consumer vehicles will have been delivered, while it will take Rivian into 2025 for the 100,000 commercial EDVs to be delivered. The language states through 2030 for the EDVs with Amazon, but if successful, I'm assuming this ramps much quicker.
For 2022, I am assuming 50,000 total units delivered for both consumer and commercial vehicles, including 25,000 R1Ts, 15,000 R1Ss and 10,000 EDVs. By 2026 I am forecasting 415,000 total units delivered. Including LTR I'm looking for Rivian to generate $3.4 billion in Revenue in 2022 and nearly $30 billion by 2026. This forecast puts Rivian at around 66% greater units delivered than Lucid's forecast through 2026, but only around 30% greater Revenue based on Average Selling Prices, ASPs.
I expect Rivian to head towards greater than 15% Operating Cash Flow, OCF margin by 2026 as well. I do believe that Rivian should be capable of exceeding Tesla's OCF margin over time. Since the initial S-1 has yet to disclose the Shares Outstanding, as well as the anticipated Cash raise, I'm not going to get into any Stock Price, SP relationships. I will provide comments to this blog once the amended S-1 provides this information. The key is being prepared before the company goes public to have a sense of valuation so that when the SP begins trading, I will be prepared to layer in on my initiation. Another important point to mention is that as of Sept. 30th Q3 2021, Rivian did have $3.6 billion in Cash still, part of which was raised from $2.5 billion in Convertible Debt. However, this debt is expected to be converted into the Shares Outstanding, so as has been the past precedent, I do anticipate that Rivian will have minimal if any debt once public.
As 2021 marches on, it is becoming more clear as to how the competitive landscape is shaping up. From this, I think it is prudent to begin crafting the narratives that will be important to continue monitoring in finding and solidifying winners versus losers.
In my mind there are three categories to consider the EV revolution opportunities:
Vertically integrated EV leaders
Traditional automotive OEMs
De-SPACed new entrants
I'm not going to deconstruct all of these categories in this blog (I've got a new product in EV pretenders for that coming later this year), but I will at a high level provide my perspective on them.
Vertically integrated EV leaders include Tesla, Lucid and Rivian. These companies have all proven that they can get to a level of production and for Tesla's case, successfully scale much higher. I view these players as leaders all following a similar vertically integrated approach, while also leading with many respects in EV technology. There is also another key element, with the customer market of focus being north of $50,000 in ASPs, much more so for both Lucid and Rivian. I continue to believe that vertically integrated EV leaders will look to target premium markets affording higher margins, before considering more economic makes and models, if ever. As such, leading technologies for the time being, will not be equitably available to all EV consumers. The valuation among EV OEMs will differ significantly from prior traditional automotive OEMs as all competitors will not be equal. This is a core reason why I am very interested in and will end up owning all players in this category, and I am not as bullish on the next two.
Traditional automotive OEMs, notably Ford and GM in the U.S. have been pushing and marketing strongly for their EV ambitions. This has been clearly evidenced by the tens of billions in proposed capital investments by both companies over the mid-term. Regardless, there is no denying that these companies are behind on all fronts, namely technological innovation and human capital. Another very interesting factor through this is Ford's clear commitment to its truck and SUV models, while looking to eliminate economy and sedan models for EVs. GM has taken a similar approach in promoting truck models and more recently, the Hummer. I never would have imagined that Chinese EV OEMs would make any dent in the U.S., but if Ford and GM are to focus exclusively on higher margin makes and models, it will inevitably lead to China taking the lower margin EV market in the U.S., further pushing the standard of quality among lower margin vehicles apart. As one can imagine, there is much at stake, and a lot of risk for traditional automotive OEMs looking to transition to EVs. In some respects, their need to cannibalize existing models to EVs while instituting new supply chain arrangements with battery technology companies is a bigger risk than vertically integrated EV leaders focusing on one major facility and make at a time. The pace of change will be difficult for traditional automotive OEMs as they will be tested with execution on one end for a new EV technology, while still expending resources in other non-EV technology areas.
De-SPACed new entrants are the final category and the least likely to succeed in my opinion. I'm sure there may be one or two that make for a while, but long-term, I'm not so confident. While companies like Ford and GM can make EVs work over time, and afford missteps along the way, companies in this final category will be at risk of running out of capital to sustain their business operations. Lordstown Motors (RIDE) is case-in-point example. The company was on target with over 100,000 orders to begin production this year, but has gone through some serious issues with a short attack from Hindenburg, to firing its CEO and CFO, to filing its quarterly report with a going concern, to now possibly selling its manufacturing facility to Foxconn, sacrificing control of the production process. This type of unraveling of events is typical of a company headed in the wrong direction. At the same time, there are plenty other de-SPACed companies both for consumer and commercial EVs that are also going to be facing some challenges. The key challenge - capital. Many of these companies were able to raise around $500 million to $1 billion through their SPAC merger IPOs. While this is a sizeable amount of capital, for any company with ambitions to successfully develop a make and model of vehicle and sustain mid- and long-term growth, much more capital will be required. There are also differing business models, some not looking to vertically integrate production creating further risks. Back to the Lordstown example, if Foxconn indeed purchases the Ohio plant, Foxconn is also partnered with Fisker, Inc. (FSR) and there could be even more constraints on Lordstown's production because of this, let alone Foxconnn has no prior experience in massively producing consumer or commercial automobile vehicles to begin with.
Right now, it's easy for mainstream media, Wallstreet, and many pundits to place all of the negative focus on vertically integrated EV leaders. But in reality, there are equal and in many cases more risks for traditional automotive OEMs and de-SPACed new entrants. There is something to be said of companies like Tesla, Lucid and Rivian having their creative initial CEOs leading them versus companies like Ford and GM, whose innovative leaders are from generations ago. The clearest element of this is the willingness to take risk. Risk taking is business as usual for vertically integrated EV leaders, whereas traditional automotive OEMs are being forced into this type of mindset, that is not their strong-suite.
For me, I have taken my stake in where I believe the EV revolution will afford the strongest investment returns. But beyond that, I am monitoring these players amongst themselves in order to identify key elements of what will lead to winners versus losers - ability to execute and scale, financial strength as evidenced by capital structure, human capital, and technology and innovation, among others.
It is not surprising of Ford's investment with Rivian. The opportunity to gain insights as well as to raise capital that can be redeployed back into Ford's EV ambitions are two key benefits to having been an early investor. I expect Ford to sell its stake in Rivian and to use the proceeds directly. Keeping its stake would only display further weakness and validation of Rivian's market leadership.
Rivian will be added to the portfolio once it goes public. Whether this occurs on its first trading day or soon after will remain to be seen. The EV revolution has no clear winners today, but it does have leaders that are the best bet to shape the future. The competitive landscape is only going to get more interesting, and winners will be defined by execution and progress, and most importantly risk taking. With pressures mounting, only the strong will survive, and over the next five years-plus, there will be some bankruptcies along the way.