The auto sector has long been one with very high barriers to entry. But the transition to electric from internal combustion engine has attracted lots of new players and capital to this sector. The entry of young companies with agile operations and a focus on innovation is surely good news for car buyers. For investors, this transformation brings more opportunities, as well as risks.
Rivian ( RIVN 8.24% ) has surely managed to attract tons of attention from investors. Let's discuss if the stock can generate multibagger returns in the long run.
Sensing market demand, several new companies are trying to build electric vehicles. However, not many companies had the kind of early success that Rivian has achieved. Making automobiles is a challenging task. Start-ups such as Canoo, Lordstown Motors, Fisker, and Arrival are yet to deliver their first vehicles.
Companies may face troubles even before delivering any vehicles, as was the case with Nikola or Lordstown Motors. Even after deliveries, a company's products may not perform as expected, or it might not meet delivery timelines, as happened with Workhorse Group.
Image source: Rivian.
By comparison, Rivian not only delivered first electric pickup truck ever, but also received overwhelmingly positive response from media and users for its quality. MotorTrend's head of editorial, Ed Loh, describes Rivian's truck as one that "astonishes with a quality of design, engineering, materials, and technology unmatched in trucks today."
There's more to like about Rivian. The company has 71,000 pre-orders for its truck and SUV combined. Further, it has an initial order of 100,000 electric delivery vans from Amazon ( AMZN 2.55% ).
After a solid start, Rivian is busy preparing to deliver its pre-orders and delivery vans. It delivered its first SUV, R1S, in December, as planned. As of Dec. 15, the company has produced 652 vehicles and delivered 386 of those vehicles. That puts it behind its initial target of around 1,200 vehicles for 2021. However, such delay isn't too uncommon in the auto segment. Successful deliveries of the first few hundred vehicles add to Rivian's credibility as a company that can deliver on its plans. Rivian expects to deliver its first vans to Amazon this month.
The company is expanding the annual capacity of its Normal, Illinois, facility from 150,000 to 200,000 vehicles. Moreover, it has announced its second facility near Atlanta, Georgia, with an annual capacity of 400,000 units. Rivian continues to invest in improving its battery technology and plans to make batteries in-house, in addition to sourcing from suppliers. At the same time, the company is investing in developing its own charging network. Overall, Rivian is progressing well on its plans.
Another key positive about Rivian is that it is backed by prominent investors. Amazon holds a roughly 20% stake in Rivian as of Sept. 30. The company first invested $700 million in Rivian in 2019 and subsequently added to its position to acquire a 20% stake. Other notable investors include Ford Motor Company ( F 1.69% ), which invested $500 million in Rivian in 2019. Ford now holds a roughly 12% stake in Rivian. T. Rowe Price Associates, BlackRock, Third Point, Fidelity Management and Research Company, Dragoneer Investment Group, and Coatue are among other notable investors in Rivian.
Rivian stock right now has a market capitalization of more than $80 billion. That's after the stock has fallen roughly 48% off its all-time high. Though initially vehicle sales will constitute the majority of Rivian's revenue, over time, the company hopes to generate revenue from services including membership and software services, financing, insurance, charging, vehicle maintenance and repair, and its resale program. From commercial customers, it expects to generate a recurring subscription fee for its fleet management platform, FleetOS.
As the company expands its production, it hopes to generate economies of scale. That, along with its planned services, should help Rivian generate stronger margins compared to traditional auto companies. This expectation is behind Rivian's massive valuation.
Indeed, if Rivian manages to accomplish what it is hoping, the stock's price could surge higher. However, it is too early to say how all of this will play out, and how strong will be the margins the company can realistically generate. Competition in the space also should not be overlooked, as leading players including Tesla, General Motors, and Ford will launch their own electric pickup trucks in the coming months.
All in all, while Rivian looks promising, the stock's valuation doesn't look enticing. You might not lose much by waiting to see how this story evolves before jumping in.