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Investment Thesis (Big Change Since My Last Article)
In a major change, since I wrote my last Rivian (NASDAQ:RIVN) piece in November, Rivian has taken a major strategic development step from an exclusive partnership with Amazon to a broader commercial vehicle market outreach that, in my opinion, cements its position as an attractive investment in the electric vehicle (EV) sector. Rivian recently unveiled a partnership with AT&T to sell its electric vans to the cable giant and grow its commercial customer base. This bold move showcases Rivian’s confidence in its technology and commitment to expanding sustainable transportation. And launching this bold move before the new year necessitates an update on coverage because I believe this is a multi-billion dollar opportunity that is now just starting to come into focus for shareholders as we approach 2024. The company’s electric vans, specifically, offer a huge advantage to businesses who adopt them: significant cost savings, exemplified by potential savings for organizations like the USPS. Rivian’s in-house component production and strong supplier relationships further enhance its cost-efficiency and production scalability. With its recent expansion into new markets and a strong product lineup, Rivian is well-positioned for continued growth. The company’s ability to adapt and capitalize on market opportunities, paired with prudent financial management, makes it a compelling investment choice in the rapidly evolving EV landscape. I believe the stock is a strong buy and think this development is an accelerant for the company (and the stock).
Background
Rivian, an emerging force in the electric vehicle (EV) market, is changing the future of sustainable transportation. The company was first founded by RJ Scaringe in 2009. Rivian quickly made headlines due to their cutting-edge approach to EV technology. Rivian has also made large contributions to the commercial vehicle sector with its Electric Delivery Vans (EDVs), developed in partnership with Amazon to revolutionize last-mile delivery. Recently, as I touched on earlier in the fall, Rivian ended its exclusive partnership with Amazon and has vastly grown its customer base. I predict they will soon become a dominating company within the EV sector as they give companies the option to reduce their carbon footprint while also saving a vast amount of money. In order to maintain its commitment to sustainability, Rivian highlights eco-friendly manufacturing processes and the goal of reducing carbon footprints via transportation.
Again, while I wrote about Rivian last month, I made a distinct point that the EV maker’s decision to end its exclusive strategic partnership with Amazon meant 2024 could be a big year for commercial sales. To my pleasant surprise, the automaker has taken a big leap before the new year and inked a key partnership with AT&T.
More Detail On What’s Changed in the Last Month: The Van Program
Rivian’s bold move to end its exclusivity with Amazon and open its electric vehicle (EV) technology to a broader market is a game-changer, and in my opinion, it solidifies my ‘strong buy’ thesis for the company. Let me explain why this move is so significant for Rivian and the electric vehicle industry as a whole.
The termination of the exclusivity deal with Amazon marks a pivotal change in Rivian’s strategy. Initially, this exclusivity provided Rivian with a reliable and sizable customer in Amazon (100,000 unit order), validating its technology and market potential. However, in breaking away from the exclusive deal with Amazon, Rivian has greatly expanded its horizon of opportunities. Now, any company that aims to participate in more sustainable transportation methods can work with Rivian. Due to the current environmental climate, companies all across the globe are looking for ways to reduce their carbon footprint. Rivian’s electric vehicles can provide them with a way to do so.
Not only are Rivian’s electric vehicles attractive to businesses due to its environmental components, but these vans will save companies millions of dollars (more details on how EV Vans save commercial customers money below).
Details on the AT&T Contract
Rivian’s recent announcement that AT&T will be purchasing electric vehicles from Rivian represents a crucial point in the corporate push, diversifying its commercial customer base.
Firstly, the significance of this deal lies in its timing and context. Like I mentioned Rivian, having just ended its exclusive agreement with Amazon, quickly was able to find more commercial vehicle contracts. I think this quick turnaround is a testament to market demand.
This deal with AT&T, a major player in the U.S. telecommunications sector, is a testament to Rivian’s appeal and marketability beyond just using its vehicles in the delivery space. It suggests that Rivian’s commercial product – the electric commercial vans, is versatile and desirable across different industries.
How Electric Vehicles Lower The Cost For Commercial Van Buyers
Electric vehicles (EVs) like Rivian’s commercial vans offer significant cost savings for commercial buyers, primarily due to lower lifetime costs and significant tax credits. An analysis finds that over a five-year ownership period, the total cost of owning a battery-electric van ranges from $69,000 to $92,000, compared to $71,000 for a gasoline van and $82,000 for a diesel van. This is largely because EVs are much cheaper to operate per mile, with national averages showing them to be 3-5 times less expensive to drive than gas-powered vehicles.
Maintenance costs for EVs are also substantially lower, attributed to fewer moving parts in EVs and the absence of oil changes. The total cost of ownership parity for electric vans with a 200-mile range is already lower than a diesel version and by 2025 it will be cheaper than a gasoline version.
In terms of tax credits, businesses purchasing electric commercial vans can benefit significantly. The IRS offers a Commercial Clean Vehicle Credit of up to $7,500 for qualified vehicles like Rivian’s vans. Furthermore, the lifetime cost of ownership for EVs can save owners between $6,000 to $10,000 over the lifespan of the vehicle compared to gasoline vehicles. These savings are primarily due to lower fuel costs, as electricity is significantly cheaper than gasoline.
How Does The Van Impact Rivian Stock
Rivian Automotive has made significant progress in 2023, especially when it comes to its commercial vans, which has had a solid impact on their stock performance. As of late 2023, Rivian’s stock (RIVN) peaked for the year at $25.63. This surge can be credited to vehicle deliveries, more specifically its commercial vans, with over 15,564 vehicles delivered in the second quarter. This uptick represents a 33% year-to-date rise year to date.
Analysts have come to a general consensus about Rivian’s trajectory. They are optimistic about Rivian’s future, in fact, Wedbush analysts have raised their price target to $30 from $25. This jump in price target certifies the confidence in the company’s future. Wall Street brokerages have determined the median price target at $24, which suggests a positive outlook on Rivian’s future.
As I mentioned earlier in the article, a significant development for Rivian in 2023 was the end of its exclusivity agreement with Amazon. This move allowed them to expand their commercial van customer base. AT&T became the first non-Amazon buyer, planning to incorporate Rivian’s vans into its fleet as part of its strategy to achieve carbon neutrality by 2035.
Although there have been positive developments for Rivian in 2023, their stock has still seen some challenges. While it has risen 12% following the AT&T deal and about 30% over the past month, over the past 12 months, it is still down 10%. Along with that, it is still lower than its all-time high post-IPO in November 2021. I think this is a great spot to hop in.
Valuation
I want to first determine the market size of Rivan’s vans before we consider its impact on valuation.
The Market Size Opportunity for Rivian Vans
Given the annual sales of approximately half a million Class 2b-3 trucks in the United States, Rivian’s electric vans are positioned in a substantial market with significant growth potential. Assuming a long-term market penetration of 20%, Rivian could aim to capture 100,000 sales annually within this segment. With an MSRP of $80,000 for its electric vans, this penetration rate would translate into a potential revenue of $8 billion annually. This estimate underscores the significant opportunity for Rivian to capitalize on the growing demand for sustainable and efficient commercial vehicles, particularly in the light to medium-duty truck market, where electrification is gaining traction.
How Does this Revenue Translate to Stock Price?
Rivian trades at a forward price to sales multiple of 5.14. While this is significantly higher than the sector median of 0.94, this is below the forward price to sales multiple of Tesla (TSLA) of 8.33 (I think Tesla is also a buy but goes to show how Rivian is more reasonably priced among market innovators).
If Rivian is able to capture this $8 billion/year opportunity, this could equate (at a price to sales ratio of just ½ of the current forward price to sales of 5.14) to over $20 billion in market cap growth for the company meaning about 88.5% upside in share prices (assuming no further dilution).
Risks to The Thesis
In my opinion, a key concern for Rivian is the intense competition, particularly in the commercial van segment. Established automakers, such as Ford with its 2023 E-Transit, are central to this challenge, especially with their ability to secure contracts like the one from the United States Postal Service. Ford, however, lost their tax credit on their EV van due to lacking enough US-made parts to qualify.
Moreover, the EV sector is witnessing an influx of new entrants, ranging from traditional automakers to innovative startups. This burgeoning competition underscores the need for Rivian to continually innovate and distinguish itself in the market. Pivotal to Rivian’s future success will be a continued rapid pace of technological advancements, which demands constant innovation and agility.
Despite these hurdles, Rivian’s journey is marked by resilience and adaptability. The company is actively working to enhance its production capacity, refine manufacturing processes, and strengthen supply chain relationships. These efforts are critical steps towards surmounting previous challenges and achieving higher production volumes with improved efficiency.
While Rivian confronts significant risks, I remain optimistic about Rivian’s ability to navigate these challenges and seize the opportunities presented by the evolving EV market.
The Bottom Line
Rivian’s journey into the electrical vehicle market, specifically with their commercial vans, demonstrates a strategic blend of innovation, market adaptation, and financial acumen. After ending their exclusive deal with Amazon, they have now vastly grown their customer base. By doing so they are opening up new opportunities within the EV market, further locking in their position. As the demand for their vehicles grows, their focus on profitability and cost-efficiency can be shown through the production of in-house components and building relationships with suppliers. Collectively, these efforts determine Rivian as a promising investment with a positive outlook. Rivian is heading towards becoming a trailblazer and a key player in sustainable transportation, along with providing companies an opportunity to shift to a more eco-friendly future and the opportunity to vastly cut costs. I believe the stock is a strong buy. I am looking forward to management providing commentary on this in the new year.
