Rivian – The contortionist pt. II.

Rivian is not a growth company. It is a start-up.  

• It looks like Rivian has a great product on its hands which combined with its relationship with Amazon puts it in a strong position, but how a company with zero revenues is worth $80bn remains a total mystery.
• Rivian has filed its S-1 (see here) and while there are no surprises on the revenue front (there are none), it turns out that Amazon is not as locked into Rivian as one might think from the hype and the noise.
• The headlines read that Amazon will buy 100,000 electric vans from Rivian between now and 2030 but the reality is that this is a frame order.
• Hence, Amazon does not actually have to buy any of them from Rivian and can go elsewhere should it choose to do so.
• This does not mean that Amazon is likely to walk away from Rivian but it does mean that the 100,000 in vehicles sales are by no means guaranteed.
• Consequently, the market to supply the last mile vans to Amazon is still open and if someone comes up with a better and cheaper alternative, then Rivian might lose out.
• However, if the early reviews of its 1^st truck, the R1T, are to be believed, Rivian has produced a sensational truck that may even give the F-150 Lightning a run for its money even though it is more expensive.
• Assuming that this is the product of great design and engineering then it is not unreasonable to expect that the electric vans it makes will be of a similar standard and that Amazon will fill every unit of the order that it has made and even buy more.
• Amazon also has the right of first refusal on Rivian electric vans for 2 years after the 100,000 vehicles have been shipped.
• The net result is that Rivian has a good product but its ability to manufacture, sell and service these vehicles at scale is completely unproven.
• In my opinion, companies at this stage of their development have no business going public.
• This is because the company is not mature and stable enough to withstand the harsh market reality when it inevitably runs into a problem scaling-up and misses estimates one-quarter.
• At the kind of valuation being discussed ($70bn – $80bn), there is no margin for error and the shares will be very badly punished as a result.
• This is the last thing that an untested management team that is trying to scale a business needs as it will serve as a great distraction and may even cause further delays to delivering on its promises.
• The issue here is clearly highlighted by Rivian’s statement (misleading in my opinion) on page 19 that states that Rivian is a growth stage company.
• It is not growth stage. This is a start-up because with no revenues for the last 5 years, growth has been 0%.
• In order to be growth stage, one needs to be already selling product and moving into the period where the product has been accepted and operations are ramped up to enable the product to enter a period of rapid growth.
• Rivian is almost at this stage but is not there yet and the risks that are attached to this company are much greater than the S-1 would like us to believe.
• This leads us back to the valuation which at $70bn – $80bn will require some heavy gymnastics and twisting of valuation methodology to justify.
• If we assume that the company succeeds in selling 20,000 vehicles next year (of which 10,000 go to Amazon) at $67,500 per vehicle, the shares will still be on 50x 2022 EV / Revenues.
• This is a ludicrous valuation to pay for a vehicle manufacturer when other manufacturers who already sell millions of vehicles every year trade at 0.5x EV / Revenues or less.
• Furthermore, some of these OEMs are making good progress on electrification (e.g. Ford) and have a lot of experience when it comes to making and selling vehicles in volume all of which lies in front of Rivian.
• I would rather own Ford or almost any other regular vehicle maker over this.