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Rivian - It's Time to Initiate

Ephesians Chapter 2 verses 8-9 state, "For it is by grace you have been saved, through faith - and this is not from yourselves, it is the gift of God - not by works, so that no one can boast."


Being a Christian can be confusing to some, especially in today's performance-based society. I'll be candid here, I struggle myself on setting expectations and attempting to gauge success based on achievement all the time. But I also continually remind myself of the above verse, God's greatest gift of salvation is something that I cannot earn. This is both literal and helpful in that it is humbling.


For investing, especially in the case of Rivian, it is equally important to be humble and set realistic expectations as best as possible. Financial modeling is an exercise and process that changes frequently based on assumptions. While I know that my financial models will never be perfect, I can use them effectively to help mitigate risks and be prepared through management strategies to efficiently make and execute solid decisions.


I've been writing on Rivian Automotive, Inc. (RIVN) for a bit now. I contend that Tesla, Inc. (TSLA), Lucid Group (LCID) and Rivian are going to continue to lead the EV revolution as they are ahead of the competition on many fronts, and have an entirely different approach when it comes to capitalizing their businesses. I have categorized them as vertically integrated EV leaders. There's also a lot of risk that is not being factored in for traditional automotive OEMs as the focus is on the scale that they have built over time, and not the transitional challenges.


Today, Rivian filed its amended S-1 which details out three important items - the company's number of Shares Outstanding, the IPO SP, and the anticipated amount of Cash to be raised through the IPO, transferring to the Balance Sheet. With these key items in mind, I have updated my financial model as provided.

I am assuming that Rivian will be a highly subscribed IPO. That being said, I'm including the assumption that the underwriters will exercise their option to purchase additional shares of Class A common stock in full. This equates to Shares Outstanding at over 882 million, as well as Cash net proceeds at around $9.1 billion. That's right, $9 billion in Cash added to the Balance Sheet. I've already added this to the Cash line item above, but it should be noted that Rivian did disclose that as of Q3 2021, they estimate having just over $5.1 billion in Cash, versus the Q2 2021 $3.6 billion. The $93 SP assumes the high-end price disclosed at $62 with a 50% first-day trading premium.


While it will be important for Rivian to have capital to grow its business, this is a massive Cash raise that will essentially see the company at $12-14 billion in Net Cash with no debt. Lucid generated around $4.5 billion through its SPAC IPO merger as a comparison.

Rivian's current financials are predominantly associated with Cash Burn today as the company isn't generating Revenue. However, as of Q3 2021, the company did produce 12 vehicles and deliver 11 of them. The Cash Burn amount will be exceeding $3 billion for sure in 2021 when accounting for operations and Capex. So the question is, when can we expect Rivian to generate positive OCF.

I'm projecting Rivian's financial performance to begin generating positive OCF by 2024. Looking at cumulative negative OCF amounts and considering further Capex needs, and it is possible that if Rivian is able to execute prudently, the company could be positioned to utilize its Cash raised from this IPO to sustain its operations through the mid-term.


The 2022 numbers reflect an estimated 45,000 vehicle units delivered between R1T/R1S and EDVs. Unlike Lucid, Rivian will have a shot at producing three different models in 2022. Amazon's recently disclosed 20% stake in Rivian is reassuring on the commercial vehicle side, despite the current exclusivity on Rivian's side placing Rivian in the more risky position of the deal.


When it comes to valuation, Rivian's upper SP per the amended S-1 stands at $62. With no assumed premium, this places an EV at around $42 billion. As mentioned, my SP amount in the first table above includes an assumed 50% premium on the first trading day equating to $93 or so, bringing the EV to nearly $70 billion. Based on my valuation of Rivian over time (assuming they scale accordingly), and Rivian may still offer a highly compelling opportunity even at $100 per share. On an annualized basis, if Rivian tracks towards $18 billion in Revenue by the mid-point, it could equate to a return of 25%. Even if we assume a much more conservative $12 billion Revenue amount, this still could lead to an annualized 15% return with a first-day trading price at $100.


The Bottom Line


Investing Rivian, like Tesla and Lucid is predicated on the core assumption that traditional automotive OEMs will not transition as smoothly as some expect over the mid-term, and will be at risk long-term for automotive dominance. If anything, it is a play on the automotive industry becoming much more fragmented. This makes a lot of sense as many traditional automotive OEMs will be pressured to reduce the number of makes and models they produce as they transition to an EV-based world. Many de-SPACed players will struggle to execute and compete as well.


I am highly bullish on vertically integrated EV leaders like Tesla, Lucid and Rivian. I could be wrong of course over time, but I will be prepared to mitigate/manage the portfolio as I will continue to diligently track progress on the EV revolution through vehicle unit sales and corresponding financial performance. All holdings within the portfolio are monitored quarterly and assessed based upon the competitive landscape, peer valuation, financial models, etc., to gauge the investment thesis.


Paywall


A product available for paying subscribers is the EV Pretender List. There are three categories to consider for investors with respect to the EV revolution - vertically integrated EV leaders, traditional automotive OEMs, and de-SPACed peers.

Many of these companies are expected to go bankrupt over the mid- and long-term. All annualized performance below 10% is severely discounted as the business thesis is highly questionable. As more red flags prop up, PTs and annualized performance will be reduced further.


All companies have fully detailed financial models that are updated quarterly. Additionally, traditional automotive OEM financial models are being developed with Ford Motor Company (F) and General Motors Co. (GM) already built. Others including Manga International (MGA) as well as foreign OEMs are being constructed.


Each week I will highlight one of these companies specifically focusing on key red flags and concerns with respect to mid- and long-term sustainability.







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