Rivian Automotive's IPO

Published: 2021-10-22

Introduction

Rivian Automotive a newcomer to the automotive industry has made quite the splash over the past couple of years. In November 2018 at the LA Auto Show the stealthy EV startup unveiled its first two offerings, the R1T and R1S an EV pickup truck and SUV. Since then Rivian has completed multiple funding rounds from the likes of Amazon, Ford, T. Rowe Price, and many others, totaling 10.5 billion in just the past few years. Rivian, having just built its first customer-ready vehicle, has been in the headlines as it once again looks to raise capital, this time perhaps through an IPO. At a rumored valuation of around 80 billion dollars(USD), it would make Rivian the fourth-highest IPO of the past decade. It would also put Rivian’s market cap around that of General Motors which as of writing is about 75 billion dollars.

In this post, I want to give some background on the company, investigate the rumored IPO valuation, and try to take into account some possible scenarios. Finally, I want to clarify that Rivian’s IPO is that of a new automaker. They recently filed their S-1 and in it made note of many uncertainties and risks due to being a startup. Therefore the reader should take everything with a grain of salt. This is also not financial advice and is merely an opinion and research by a curious person.

Rivian’s History

Founded in 2009 by RJ Scaringe, Rivian started as Mainstream Motors an automotive startup that initially set out to produce a hybrid coupe before shifting gears in 2012 to take a new approach. This new path would eventually lead to Rivian’s electric adventure vehicles the R1T and R1S. Rivian maintained a stealth approach, moving headquarters to Livonia Michigan to build relationships with automotive suppliers and began to develop their EV strategy. In 2015 Rivian started to kick into gear after receiving a large investment. This investment enabled the further development of the two future products and aid in the acquisition of a plant to produce them. In 2017 Rivian acquired the former Mitsubishi Motors manufacturing plant in Normal Illinois for 16 million dollars, which had a capacity for around 200,000 to 250,000 units annually before acquisition and its closure in 2015.

In 2018 at the LA Auto Show the company finally unveiled its first vehicle offerings, the R1T and the R1S and the Rivian brand, a company centered around the adventurous lifestyle and sustainability, not too dissimilar from the apparel company Patagonia. The R1T is the first electric truck to market in the US, and both the R1S and R1T offer an up to 400-mile pack range, 0-60mph in about 3 seconds, 4 electric motors(one per wheel), and a tech stack reminiscent of Tesla. And more recently Rivian has announced partnerships with Ford and Amazon. While it seems the recent Covid-19 pandemic has stalled the partnership between Rivian and Ford on a Ford/Lincoln EV, the partnership with Amazon has charged ahead with an order of 100,000 Amazon Prime delivery vans. The van designed jointly between the two companies incorporates Rivian’s skateboard technology(found on the R1S and R1T) and will be produced by Rivian alongside the R1S and R1T at the Normal facility.

Now that manufacturing of the R1T has begun Rivian will be focused on executing the production ramp. Rivian has stated its goal of producing 40,000 in 2022 of the R1T and R1S for the company’s first full year of production and stated in their S-1 an annual capacity of 150,000 and planned expansion to 200,000 at their Normal facility which includes the Amazon van. For Amazon, Rivian is slated to produce 100,000 vans by 2025. Rivian is also rumored to be in talks for the location of its second manufacturing facility which may be built-in part using funds from its IPO. This facility is rumored to produce lower-cost models and have battery production at a rate of 50GWh annually, which at an average pack size of around 75KWh would be enough for 650,000 vehicles a year assuming no outside cell supply or additional future capacity. Scaringe has also mentioned the plans for Rivian to release a total of six models by 2025.

Rivian has taken a less flashy approach to the EV startup space when compared to the likes of Faraday Future, Lucid, Tesla, and others. This approach seems to be going well, as it enabled Rivian to bring the first EV truck to market, beating out the Cybertruck, Lightning, and Hummer EV. But first to market isn’t everything and in the end sales and customer demand will be the key indicators. Rivian is also off to a great start in terms of reviews like the one Motor Trend recently gave it. I hope they can keep up the positive news as I would like to see EV sales expand, and to see an acceleration of society’s move towards renewable energy, more competition in the automotive and renewable energy sectors, and an expansion of EV manufacturing capability.

### Current State of the Automotive Industry

An important topic to consider before evaluating Rivian more is to get some background on the current state of the Automotive industry. I’ll mainly focus on the US as that is where Rivian will be competing in the near term, but I do expect Rivian to expand internationally over time and they have noted their intentions to do so in their recent S-1 filing. The US auto market took a dip in 2020 due to the Covid-19 pandemic, and many automakers are still having production issues due to many lingering supply chain issues. There were about 14.2 million cars registered in 2020 down from 16.7 million in 2019. Of that only 1.8% or about 252 thousand registrations were EVs(This doesn’t include Hybrids). With only 2.5% of sales electric in the first half of 2021, there is plenty of room for EV growth which is still a small percentage of the total market. The total US market breaks down as follows.

GM, Toyota, Ford, and FCA are currently the leaders in terms of sales. I expect Tesla to be in similar levels of production within the next few years as they are rapidly expanding capacity at both their Fremont and soon to come online Austin factory. On this chart Rivian running at full capacity from just their Normal plant would sit in between Mazda and Volvo, respectable but quite a long way to go if they plan on being a top automaker.

Next, it is important to look at how the current market is broken down by segment. Here we can see SUVs dominate the market followed by sedans and trucks, with vans in last. While the R1S and R1T target a decent portion of the market I expect their next vehicle to target the largest segment which is the crossover SUV segment. Being the most popular segment will allow for a larger TAM(total addressable market) which will grow as Rivian offers future products in new segments. This is the same approach Tesla took with the Model Y and Model 3 which combined both target a significant portion of the US TAM compared to the much more expensive Model S and Model X.

Commercial Vans

With the Amazon Van, Rivian is also attempting to enter the commercial van segment. This segment accounts for just shy of half a million vehicles sold in 2020. The Segment is led by Ford and its popular Transit which has about a 30% market share selling about 150,000 last year. Rivian with their 100,000 unit order from Amazon and three variants as shown in their S-1 filing could become a significant player in the commercial van segment which greatly favors EVs because of lower lifetime costs due to lower fuel and maintenance expenses. Rivian has the potential to lead this space in terms of electrification as Tesla appears to be focusing more on the Semi-Truck side of commercial vehicles, and the Ford E-Transit doesn’t begin production until next year.

Brand

In terms of comparisons between brands Rivian’s approach draws clear lines between itself and other automakers. No other automakers give quite the same outdoor sustainability vibe as much as Rivian, with the closest comparison being Jeep(of FCA) or Subaru. This is just my opinion though and is very subjective. As mentioned before I think the closest comparison would be to the apparel company Patagonia. But this brand approach is quite different from that of traditional auto, and Rivian’s EV competitors. Tesla has quite often been referenced as the Apple of automakers, and Lucid motors another EV startup gives more of a Mercedes-Benz feel. This leaves clear space in the EV segment for a brand focused on the outdoors which also incorporates well with their goals around sustainability.

Rivian’s Valuation

So to begin to evaluate Rivian’s valuation let’s first analyze the key information from Rivian’s S-1 filing.

Rivian has about 48K preorders between the R1S and R1T with a one thousand dollar refundable deposit. That would represent about 3.6 billion worth of preorder revenue at a 75K ASP.
Current estimated annual production capacity of 150K at Normal Illinois, expanding to 200K in near future.
Amazon has ordered 100K vans to be delivered through 2025, representing 5-8 billion in sales depending on ASP.
Rivian is going after lifetime vehicle revenue by offering products for charging, repairs, mobile servicing, resale, insurance, safety/autonomy software(Driver+), and software as a service with their subscription models around FleetOS, and Rivian Membership.
Rivian estimates an additional 8 billion of capital expenditures through 2023 to fund the rapid expansion of all aspects of their business.
Rivian has 3.6 billion of cash on hand through Q2 2021, and only 3 million in debt (2.5 billion in convertible notes).
Rivian had net losses of 426 million in 2019 and 1.0 billion in 2020. In 2021 losses through Q1 and Q2 combined at about 1 billion, and Q3 had losses of 288 million.

A few things to note from the S-1. First, from a financial standpoint, there has been much criticism of Rivian’s significant losses. Many people have commented that Rivian doesn’t have the operating efficiency which Tesla had but let me offer a counter perspective for a moment. Tesla launched the Model S and Model X in 2013 and 2016 respectively. At max capacity, Tesla has only ever produced just over 100K for a full year for S and X combined. From 2012 through 2016 Tesla raised 10.3 billion while Rivian has raised about 10.5 billion to date. But given that at this stage Rivian has roughly 50% more capacity once ramped and soon to be 100% more than Tesla had for the S and X, perhaps these numbers don’t look as bad. In addition, Rivian may be attempting to scale faster than Tesla which would be a monumental feat if they can accomplish that.

There is also another takeaway. Rivian’s ability to raise significant amounts of capital at a high pre-revenue valuation is due mainly to Tesla’s success which has seen EV startup valuations soar in recent years. But large amounts of capital early in a companies life can be a double-edged sword. It allows for a faster ramp because it is easier to raise capital, but with too much money a young company could become inefficient by not having to endure the struggles of a company like Tesla. Tesla had many moments where it nearly ran out of money, mainly that in 2008 during the financial collapse, and in 2017 during its production hell ramp of Model 3. These moments of stress acted as a forcing function for capital efficiency which Tesla appears to now be using to its advantage(Tesla’s ROIC). But as Rivian has noted and was seen with Tesla, to expand capacity the automotive industry requires a lot of capital. And until Rivian is cashflow positive it will either need to issue more stock or take out debt to finance this rapid growth.

Rivian appears to be targeting multiple revenue streams which could enable higher levels of gross margin and total revenue compared to the likes of traditional auto per vehicle sold. Since many of these possible revenue streams are unknowns I will focus on vehicle production and revenue from sales, but over time I expect the other revenue streams to increase their percent of Rivian’s total revenue. This approach is similar to how Apple has used the iPhone as a platform for many additional products and services in its ecosystem(Airpods, Watch, Music, etc.). Rivian like Tesla also does not have to split margin with dealers and do not have existing combustion engine infrastructure which will be a cost for traditional automakers to bear.

We know that Rivian has capacity for 150K units at their Normal Illinois plant with plans to expand to 200K. While 2022 will see the bulk of production ramp which given what RJ has said seems like they will be targeting around 40K vehicles thus getting through most of the current preorders. I’d expect that for full-year 2023 Rivian is mostly ramped with current capacity enabling them to produce around 100K to 150K units. Finally, in 2024 the Normal facility should approach its expanded capacity at 200K.

The next key piece to value Rivian is their plans for a second US factory. While mostly absent from their S-1 filing, rumor has put production starting in late 2023. That may be optimistic so I’ll put them starting and executing their production ramp throughout 2024, perhaps around 50K-100K of the lower-cost vehicles produced. The rumors also suggest local battery production capacity could be around 50GWh which as I stated before is enough for about 650K units annually at an average pack size of 75KWh. This number is highly variable as the rumored capacity could be quite a bit off, and is dependent on both battery supply and average pack size for the vehicles produced. But as mentioned in the S-1 Rivian wants to expand to additional segments and the only way to do that is by going to lower-cost mass-market vehicles. Thus we can begin to simulate a price target for 2026 when I think Rivian’s Normal facility will be running at 100% and their second factory will have completed a large portion of its ramp. We can then discount it back to estimate a current-day valuation.

Simulation Time

To predict Rivian’s production numbers it is important to consider a range of probabilities. All of my predictions are based on what appears to be possible for Rivian, but I typically make the distributions negatively skewed. This is to produce a bias towards underperformance due to the lack of track record and challenges the company is likely to face as it scales. As the graphs depict below these are what I think are the most likely outcomes(median) where Rivian executes well but may be slower than is theoretically possible(Elon time?). The two ranges above and below the median are 10th and 90th percentiles, which represent underperformance and overperformance. Outside of these bounds are possible but in my opinion, are not as likely but still entirely possible.

Don’t forget that these predictions are assuming Rivian executes well, if the company runs out of money, had demand issues, or encounters some other extrema it would probably have a profound impact on the company, a white swan or black swan event. These charts are also available on Plotly Chart Studio where you can play around with them and modify the data to your liking.

As is shown in the graph I have production scaling up aggressively. In the more conservative scenario next year I have them producing 22K vehicles, scaling to around 375K in 2026. That would only be an additional 175K from the planned 200K output from normal. In this scenario, I would expect Rivian to have delays with the second factory, or battery constraints. 175K vehicles over three years seem slow as Tesla was able to achieve 150K units in just 2018 while they were ramping the Model 3. My median scenario puts production around 600K vehicles produced in 2026. This would still leave some room for full utilization of the combined factory capacity was 850K units. And finally in a possible scenario where Rivian overperforms I have them producing 780K vehicles. Now, this could either be achieved by an impressive ramp or perhaps more likely a third factory or additional capacity expansion in Normal.

For my revenue estimates, I multiply the production and ASP probabilities. It is important to note that while initially, ASP should start quite high around 78K USD, the average price will drop especially as the mass market models become a large percentage of sales. In 2026 my estimate is around 50K ASP which may not be too far off of the US market ASP for a new vehicle. With these values, my revenue projections from just vehicle sales would be from 18.6 billion on the low end, 40 billion on the high end, and a median somewhere around 30 billion.

Valuation

Valuation here may be the trickiest part because it is dependent on many interacting variables. Let’s first look at the automotive industry for a guide to valuations. Looking at the price to sales ratios of other automakers there is a clear separation between Tesla and the rest. Traditional auto hovers around a 0.5 P/S with Toyota being the main leader around 0.85. Tesla on the other hand is priced at around 20 P/S. The clear difference between the two groups is as follows.

Tesla has a high growth rate compared to traditional auto, which is mainly stagnating or shrinking.

Tesla has the best ROIC which is approaching that of top quality tech companies like Apple.
Tesla is going after multiple markets in addition to automotive such as home solar, grid storage, self-driving, and more general machine learning infrastructure and robotics.
Tesla has higher gross margins due to manufacturing efficiency and high margin software sales.

Because of these reasons, Tesla can command a higher P/S ratio. But the question is what will Rivian’s P/S ratio be? While I think Rivian can command a higher margin on its vehicles due to software and could target the energy market longer term, it seems unlikely at present that Rivian will attempt to enter the tech sector like Tesla is with machine learning infrastructure and robotics. A positive that Rivian shares with Tesla though is that it doesn’t have some of the existing costs that traditional auto has such as obsolete manufacturing capacity and dealers. Rivian plans to offer a software and charging membership to start, but longer-term I would expect a product offering self-driving which would also provide high margin software as a service revenue. This I wouldn’t expect though for at least a few years after Tesla at the earliest. If I were to guess at a fair P/S ratio for Rivian I think it could end up around a 5. Not as low as 0.5-1 of traditional auto, but also not nearly as impressive as Tesla’s 20. This is a simplification but I think it does well enough to show where Rivian should be priced in relation to other automakers.

If the P/S ratio is 5 in 2026 for Rivian and we and want a five-year valuation at 15% return, that can be calculated as follows. First, note the 15% return is a premium return for a few reasons. For the stock to be a buy it must beat the expected market average, factor in future dilution, and command a premium due to the riskiness of the company being a startup. For the IPO to be a buy at 80 billion I would hope to see the market cap be around 80 * (1.15^5) which equals 161 billion dollars five years from now in 2026. At a 5 P/S my low, median and high estimates would be 93, 150, and 196 billion. This means that my low, while still above IPO value, would barely appreciate. This would also mean that there are a decent amount of scenarios where the stock loses value over that period. My median estimate isn’t too far off of 161 billion but does fall just short, and my high expectation does surpass it with a solid amount of upside. The market cap five-year CAGR for each scenario would be as follows.

Low = 3%
Median = 13.4%
High = 19.6%

I think the 80 billion dollar valuation could pay off, and my valuation doesn’t factor in any additional revenue sources. But the future valuation depends heavily on how well Rivian is able to execute its production expansion, its integration of new products and services, and what multiple the market assigns them.

Future Plans

Rivian is in the early stages as a company, but they are taking a new and interesting approach to the automotive industry. Below are some interesting and important possibilities to look out for in the future.

RJ has mentioned their intention to release multiple more models in the near future and they will probably follow the construction of new factories.
Rivian has referenced in their S-1 expectation of in house battery production.
Entering the Energy storage business, perhaps residental and/or commercial.
Software could provide high margin SaaS through innovative features. FleetOS could provide leading telematics and logistics.
Adventure accessories/options could produce a significant ASP bump compared to other vehicles.
Their self driving is most likely behind most traditional automakers and Tesla but could leverage vertical integration/software stack to catch up and pass traditional auto. But I don’t think they (or frankly anyone) can catch up to Tesla.
They are bringing sustainability to the forefront with their Forever fund and Rivian membership, both of which contribute to funding sustainability and the preservation of nature.

Conclusion

Rivian is an interesting startup with a lot of potential. Their product looks sensational, in a market full of vehicles which don’t look much different than they did last decade. Not only that but Rivian aims to create vehicles that allow people to better experience the world while harming it less. They are targeting what has traditionally been the segment that pollutes the most, trucks and SUVs, and to make it sustainable through electrification. I’m not sure whether one will make money buying their IPO, or whether the company will succeed or go bankrupt trying. What I do know is it will be an interesting adventure either way.

I'm on Twitter if you want to follow for more updates. Cheers!