In November of 20121, the Electric Vehicle company Rivan went public at a nearly $100 billion valuation. Institutional and Retail investors alike were buying into the stock on the hopes that had become the next. Tesla at the time we published this video saying it was perhaps one of the most overvalued IPOs in history. Given the fact that the company had not yet generated meaningful revenue and its prospects were highly uncertain, It's now been more than 2 years and the company has delivered over 70,000 cars, it's high time to check in on them and see how they're doing.

Since its IPO its share price has lost almost 90% of its value. In their IPO they raised about $12 billion, making it one of the largest IPOs in history. In their first 2 years as a public company, they've already burned through almost all of this and have already had to tap the capital markets for more funding. They've ramped up production to 57,000 cars in 2023, but despite the fact that their average selling price is $86,000 they're still losing almost $30,000 for every car they sell In this video, we'll take a deep dive into Rivian's first 2 years as a public company and see whether or not they still have any chance of becoming the next.

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Sign up today at Public.com WSM This is a paid endorsement foru.com 5.1% Apy is subject to change. Full disclosures in terms and conditions can be found in the video description. High Yield Cash accounts are available for Us members only. Rivan currently produces three vehicles.

The R1t is a fully electric pickup truck with a starting price of $773,000 The R1s uses the same platform as the R1t, but is an SUV. It has a starting price of $78,000 The sale price can increase substantially if you add additional features and specifications. Finally, they have the electric delivery van which they sell to. Amazon While they have not officially published, the pricing is beli that they sell for around $80,000 The starting prices of the R1t and R1s are $73 and $78,000 However, it appears that they have conducted a stealthy price increase.

They no longer sell cars with a standard battery pack as of the last time. I Checked their website. You have to get at least a large battery pack, which costs an extra $6,000 So, the cheapest R1t you can get is $79,000 For the R1s, it's even more expensive. They also no longer offer the standard battery pack.

Additionally, it appear appears that they no longer sell the dual motor all-wheel drive, so you have to get the quad motor all-wheel drive. This adds another $8,000 bringing the total price up to $992,000 for the cheapest option. According to pretty much all the automobile reviewers, Rivan are very highquality cars with great performance, high-tech features, and a spacious interior. Of course, this should be expected for a car that cost almost $100,000 The problem for Rivian is that even despite the high price point, they still lose almost $30,000 for every car they sell.

Of course, this is to be expected when a new car company enters the market. They will inevitably lose money at first as it takes time to ramp up production. Rivan currently has one Factory in Illinois with a theoretical production capacity of 150,000 cars per year. In 2023, they produce 57,000 cars, which is only 40% utilization.

So will they become profitable once they achieve full utilization? Let's look at the numbers. to turn a gross profit. you need your Revenue to exceed your cost of goods sold. For an automobile company, the the cost of goods sold is mostly the cost associated with operating their production facilities.

This can be broken down into fixed and variable costs. Fixed costs are the cost of keeping the lights on. Even if you produce zero cars in a given quarter, you will still incur some cost to keep the factory in working order. Then there are the variable cost.

This is the cost of raw materials Parts labor Etc that go into producing each car. The more cars you produce, the more raw materials and workers you need. Variable costs will increase more or less linearly with production volume. This chart shows Rivan's cost of good sold per car delivered.

When they first started deliveries, this was very high, almost half a million dollars per car. Their production volume was very low, so the large fixed costs of the factory were divided by a very small number of cars. As they ramped up production, the cost per car declined rapidly as the fixed costs were spread out over more cars. As of the third quarter of 2023, their cost per car is $116,000 This is still well above their average selling price of $86,000 per car.

So so how much further can the cost per car drop? Rivan does not disclose their fixed versus variable cost, so we have to make some estimates. In the fourth quarter of 2021, they sold 920 cars and incurred $437 million of cost of goods sold. By the third quarter of 2023, their production increased to 15564 cars and their cost of goods sold increased to 1.8 billion. The number of cars produced increased by 13,642 while their cost of goods sold increased by $1.38 billion.

assum ass uming their fixed costs and variable costs remain constant. Their variable unit cost is $94,000 per car. The fixed cost of the factory is $350 million per quarter. As they ramp up production, the cost of goods sold per vehicle will ASM totically approach the variable cost per car.

Unfortunately, for Rivan, their variable cost of $94,000 is above their average selling price of $86,000 So, at the current trajectory, they will never make a positive growth profit. This isn't even accounting for their corporate overhead, which amounts to almost $1 billion per per quarter. With that being said, our estimates could be wrong. Rivan claims to be reducing the variable cost per vehicle.

For example, in 2023, they switched to an in-house motor in a new Lithium iron phosphate battery pack, which is cheaper than the batteries they used to use. However, theyve given very little quantitative disclosures about how much these changes save. The most concrete information we've received so far has come from Rivan's CFO CLA McDon In the company's conference call for the third quarter of 2023, she claimed that their electric delivery Vans have finally achieved positive contribution margins. While the R1t and R1s still have negative contribution margins, contribution margin is revenue minus variable costs, we know that the variable cost must be greater than $86,000 for their contribution margins to be negative.

Thus, our estimate of $94,000 of variable cost per car is probably pretty close. For an automobile company To have negative contribution margins is disastrous. It basically means that the more cars they sell, the more money they lose. They claim that they are working on reducing variable costs and plan to achieve positive contribution margins in 2024.

Rivan started selling these vehicles in 2021, knowing that they would lose money. Now, they're desperately trying to find ways to cut cost, but if it were really so easy to reduce costs, why didn't they? Implement these changes before they started production. Is it even possible to build these cars for less than $86,000 Another issue is demand. These cars are very expensive now, costing a minimum of $79,000 for the truck and $992,000 for the SUV.

Only a very small percentage of the population can afford these. As Rivan has ramped up production, it seems like they are having increasing difficulty selling their cars. If we look at the difference between production and deliveries, we can see how many unsold cars are piling up in their parking lot. As of the end of 2023, they had 11,000 unsold cars as early as August of 2023.

This unsold inventory has caused concern amongst investors. Here's Rivan. CEO RJ Scaring Trying to address these concerns on Bloomberg We mentioned that deliveries jumped 60% quarter on quarter, but if you go back over the last four quarters, production outpaces delivery by about 5,500 units. You and I have discussed this before, but at this point is this an issue of demand? the unsold portion of production? No one of the one of the challenges with where our plant is located.

It's physically in the middle of the country and there's not a lot of large markets immediately adjacent to it. And so as we're as we're ramping uh, we have vehicles that are coming off the line you know, being produced and then they get loaded onto rail cars and the Ra that inserts many weeks of time between when the vehicle leaves the production plant, when the vehicle's delivered, and particularly when the the production rate is is or the ramp is is steep. You get this quarter over quarter Delta Um, and over time that will. that'll be di Minimus You know we won't even notice it.

but given the the scale of our ramp and given the overall magnitudes, it's something that you do see a little bit more of right now. So Rivan is still Supply constrained. There is no demand crunch. Yeah, and in fact I mean the our biggest challenge from a customer point of view is the weight times associated with the vehicle.

So uh, you know this question will probably generate a bunch of customer uls to say hey, wait a second If there's vehicles in the system, how come I'm not getting my vehicle sooner So well, what he said might have been true at the time. It's certainly not true now. Their factor is located in: Central Illinois As of the time of recording this video on January 28th, 2024 I Check the delivery times on Rivian's website for four different cities: Los Angeles Seattle Miami and Augusta Maine These are on four corners of the country, all very far away from Rivan's Factory. For all of them, the SMA delivery time was just 1 to 2 weeks.

In a recent interview with Jim Kramer, the Rivian CEO came up with a new excuse for their increasing pile of unsold inventory. He attributes the inventory buildup to the delivery Advance they sell to Amazon. He claims that during November and December Amazon doesn't accept deliveries of of new Vans as they don't want to be distracted from their busy holiday season. This might be true, but now that the wait times for their R1t and R1s are so short, this should have been offset by selling off their inventory of these cars.

All things considered, it's hard to believe that the R1s and R1t are selling well. Given the continuing buildup of inventory, Rivan knows the market for their high Pric, R1t and R1s will be limited. They plan to spend 5 billion dollar to build a new Factory in Georgia where they will build a new model called the R2. While we have few details, the company has indicated the starting price will be between $40 and $60,000 Given that after 2 years of mass production, they're still generating negative contribution margins on their $80,000 cars, it's very difficult to imagine how they could sell $40,000 cars profitably.

We will likely see their losses accelerate once they launch the R2 which is expected to begin deliveries in 2026. Some of the Rivan Bulls compare the company to Tesla in its early days. Tesla lost money for many years before finally becoming profitable. We've been very critical of Tesla on this channel channel before, but this is mostly for their autopilot and full self-driving disasters in terms of being able to mass-produce electric cars at a cheap cost.

Tesla's accomplishments are undeniable and extremely difficult to replicate. When Tesla ipoed all the way back in 2010, they already had positive gross margins selling their high-priced low volume. Roadster In fact, their first year of positive gross profits was in 2009 their second year of significant production. The Tesla Model S was launched in 2012, but they only delivered 2,600 units that year.

In 2013, they delivered 22,400 Model S's This was their first full year significant deliveries. The average selling price was about $80,000 but Tesla also received about $10,000 per vehicle from government subsidies. they made $456 million of gross profit. If we exclude government subsidies, they would have made about $250 million of gross profit.

Thus, in their first full year after the launch, of the Model S Tesla was making about $111,000 of gross profit per car even after deducting government subsidies from from the very beginning. Tesla never sold a car for less than a cost to produce. Despite this, it took them more than a decade to achieve positive operating profits. Making a gross profit is only the first baby step towards profitability because you still need to cover your corporate overhead.

Not only does Rivan not have positive gross profits, they don't even have a positive contribution profit. They might as well sell $10 bills for $5 because that's effectively what they're doing. Let's compare the free cash flow of Tesla and Rivan during their respective production: Rams Between 2017 and 2019, Tesla was ramping up production of the Model 3. This is when they went through production hell and almost went bankrupt.

In 2017, they generated free cash flow of negative $3.5 billion. They were spending huge amounts of money to build out their Factory before they were selling significant numbers of cars in 2018. The second year of selling the Model 3, Tesla almost broke even. In 2019, they had successfully ramped up production and they generated over $1 billion of free cash flow.

Now, compare this to Rivan. They started selling their R1 cars in 2021. In 2022, despite production ramping, their losses actually increased to an ey popping $6.4 billion. In 2023, their production continued to ramp based on the Run rate.

from the first 9 months they were on track to burn another $6 billion of negative free cash flow. The difference is that Tesla had positive contribution margins, while Rivan has negative contribution margins. So unlike Tesla, Rivan cannot achieve profitability by ramping up production alone. When Rivan went public in 21, they raised 12 billion, making it one of the largest IPOs in history.

By October of 2023, they had already burned through most of that money and had to raise another 1.5 billion just 2 months prior. CEO RJ Scaring said, the company wouldn't need to raise Capital until 2025. They're burning money so fast, even their CEO can't keep up with it. Investors were initially captivated by Rivan because the cars look cool and have good performance.

but after 2 years, the numbers speak for themselves. Rivan is a cash incinerator. It'll burn whatever cash Wall Street gives it all right guys. That wraps it up for this video.

What do you think about Rivan? Let us know in the comment section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.