Rivian (RIVN)

Introduction

Rivian is an Electric Vehicle (EV) Company. Their description:

We design, develop, and manufacture category-defining electric vehicles (“EVs”) and accessories. We sell them directly to customers in the consumer and commercial markets. Our vehicles are complemented by a full suite of proprietary, value-added services that address the entire vehicle lifecycle and deepen our customer relationships. Starting with a clean sheet, we built a vertically integrated ecosystem comprised of our vehicle technology platform, cloud architecture, product development and operations, products, and services. Interconnected by our data and analytics backbone, our ecosystem is designed to deliver fast-paced innovation cycles, structural cost advantages, and exceptional customer experiences, all of which combine to create a self-reinforcing growth dynamic while serving our mission to Keep The World Adventurous Forever.

Founder and CEO Robert J. Scaringe in his letter at the beginning of their S-1:

Rivian exists to create products and services that help our planet transition to carbon neutral energy and transportation. Our society today will have a profound impact on the planet and the world our kids, and their kids, will inherit. We can spend a lot time debating the specifics of climate change, but the indisputable truth is that we, as humans, are rapidly changing the composition of our atmosphere. This is what inspired me to start Rivian, and it’s what drives every decision we make as an organization. The challenge is as big as it comes but we’re fortunate to get to help solve it with such passionate team members and partners.

That’s a pretty big statement. I’ll be watching to see if Mr. Scaringe holds up to it. What I don’t like about this is it binds the company to an ideal right out of the gate. I prefer my companies to be adaptable, but with vision. We’ll see how this one plays out.

What I Like

Talent from Tesla and Apple

Ten percent of their 6,000+ employees come from Tesla, and another four percent from Apple. That’s not insignificant. It’s worth noting that Tesla has 70k employees and Apple has 147k.

Vertical Integration

Rivian is taking the entire relationship with the customer and owning it, which is very cool. This is a trend we see happening across all industries and companies of every size. The best example of this is todays solopreneur running their own HR, marketing, advertising, R&D, Customer Relations, and the list goes on. We’ll see more vehicle companies own the lifecycle of the vehicle from factory to the grave.

Off and Running with a large TAM and LTR

Rivian has an agreement with Amazon to supply 100,000 delivery vans which is good but not great for providing capital in the short term (up to 2025). This greatly depends on margins, which we’ll get into later.

One of the things I like about Rivian is owning everything between the product and the consumer. This is more relationship focused, and depends heavily on branding and story.

Here is a glimpse of their financing:

Insurance:

And service:

Tesla also offers most of these types of services, but Rivian is making it more common. I think Rivians target market is directly in line with this.

Top Level

Rivian makes Electronic Vehicles with an emphasis on environmentally friendly focus. They make two models: the R1T pickup and the R1S SUV.

From their S-1:

Our launch vehicles in the commercial space are a portfolio of EDVs designed in collaboration with Amazon. In September 2019, we entered into an agreement with Amazon under which Amazon has initially ordered 100,000 EDVs, subject to modification as described below under “Certain Relationships and Related Party Transactions.” We expect to deliver at least 10 vehicles in the month of December 2021. We plan to deliver 100,000 EDVs by 2025 and continue our relationship with Amazon thereafter.

Investment Thesis

Autonomous Ride Share

Rivian has been developing a proprietary autonomous driving platform to eventually support Level 3 autonomy. R1 vehicles have a dense sensor suite of 11 cameras, 12 ultrasonic sensors, and 5 radars and EDVs have 12 cameras, 16 ultrasonic sensors, and 5 radars. Note: Tesla’s vehicles have 8 cameras and 12 ultrasonic sensors (no radar). This is a clear sign that Rivian is attempting to “package protect” for L3 autonomy in the near future. Absent from the S-1 was any mention of the future usage of LiDAR, which we believe will be necessary in order for Rivian and others to achieve L3+ autonomy. (Note: LiDAR is the optimal sensor for measuring distance and detecting obstacles and is needed for autonomous vehicles to achieve higher levels of safety). We wouldn’t be surprised if LiDAR appears in future iterations of the R1T/R1S, especially as the technology becomes more accessible from a cost standpoint.

https://blog.g2vp.com/capitalizing-climate-s-1-teardown-rivian-7a29aac5914d

Autonomous driving is a when, not an if. If Rivian can be first on the market with a true autonomous experience then that will be a major game changer.

Here is their R1T ECU system components and communications network:

Tech Stack and Value

As the vehicle industry moves more towards Mobility As A Service (MAAS) companies like Rivian will be positioned very well to serve the market. For one price, and one ‘throat to choke’ owners can seamlessly finance, acquire, insure, and service their vehicles. This will help eliminate the pesky problem of owning a vehicle that always has a little something wrong with it. It will also eliminate the problem of shopping for insurance, service, and a host of other headaches that go along with traditional vehicle ownership.

Punching Up

While not a fan of ideal-backed companies, it is worth noting that the CEO is ‘punching up’ with the company. A good explainer of this is Elon Musk, one of the richest men in the world, who positions himself as an underdog taking on the traditional automotive industry, the SEC, NASA, and even local governments. This is a major brand solidifier. CEO Robert Scaringe should pluck this low-hanging fruit. All he has to do is get on Twitter and start picking fights with the environmental issues of the current automotive industry.

NOTE: This works regardless of Rivian actually helping to reduce environmental impact. We see this with Tesla and Elon as well, but it might take considerable social psychological strategy.

Competitors

Tesla

Tesla is the established leader in the EV industry, which is a prime target for Rivian ‘punching up’. Tesla also owns the market share for EVs.

Traditional Vehicle Companies

Rivian is now competing with all vehicle companies starting to make EVs. This is a small note, as traditional companies are not innovating quickly enough. They are too rigid in the traditional vehicle-to-consumer business model.

Apple?

Apple has been rumored to be working on a car. Knowing Apple, they will not bring something to market unless it squashes the current status quo. “According to CNBC, the first Apple car that’s released be designed to operate without a driver. The vehicles will be fully autonomous, and CNBC believes that the initial Apple Cars could be designed for food delivery operations and firms that incorporate robotaxis. Apple is talking with manufacturing partners and component suppliers as it gears up to start work on the Apple Car.”

“In 2014, Apple began working on “Project Titan,” with upwards of 1,000 car experts and engineers developing an electric vehicle at a secret location near the company’s Cupertino headquarters.”

https://www.macrumors.com/roundup/apple-car/

This is the sleeping giant that Rivian needs to beat before it wakes up.

Differentiation from Competitors

A fucking flashlight that’s stored in the door.

Seriously, that’s about all Rivian brings to the table.

In all honesty, the tech stack and vertical integrations that Rivian brings to the table are par the course. So is the environmental schtick.

Industry

The electric vehicle market in the United States has grown from a few thousand vehicles in 2010 to more than 315,000 vehicles sold annually from 2018 to 2020. In 2020, the electric share of new vehicle sales was approximately 2.4%, an increase from about 2% in 2019. https://theicct.org/publications/ev-us-market-growth-cities-sept21

The below visual shows the EV share concentration towards larger, more liberal, cities. Also from the above source: “The analysis finds that regulations that require greater electric vehicle model availability are essential to market growth.” 🚩🚩🚩

The following is from the S-1, and should be taken with a grain of salt:

  • EV Adoption is at the Tipping Point. With cost of EV ownership no longer a significant barrier to purchase, we believe the EV revolution has begun as approximately 90 million light vehicles sold globally each year transition to EVs.

  • Regulatory Requirements and Incentives Promote EV Adoption. Local, regional, and national governments are incentivizing or mandating the sale of EVs and eliminating the sale and usage of internal combustion engine (“ICE”) vehicles through targeted policies.

  • Trucks and SUVs are the Fastest Growing and Most Profitable Automotive Segments. Trucks and SUVs comprise over 70% of new vehicle sales in the United States and account for most of the profits generated by incumbent automobile manufacturers.

  • E-commerce Growth is Creating Demand for Delivery Vehicles. As consumer demand for e-commerce continues to accelerate, we expect demand for commercial delivery vehicles to increase at a similar pace. EVs are well-positioned for this use case due to short, predictable routes, criticality of efficient operations, and their ability to offer lower TCO relative to ICE vehicles.

  • Sustainability is Driving Purchasing Decisions. Consumers are increasingly emphasizing sustainability in their purchasing decisions in an effort to positively impact their communities and the environment.

  • Shift Towards Active Lifestyles. Consumers are shifting their lifestyles to include more wellness and outdoor-related products and activities, and are changing their buying preferences to reflect this trend.

Some of these could be more of a risk than a positive facet, especially the “shift towards active lifestyles”. I get more into this down below in the “Risks” section.

Now let’s look at “the top 10 best-selling electric vehicles in 2021 in the US through July”:

  1. Tesla Model Y: 93,708 units

  2. Tesla Model 3: 68,448 units

  3. Chevy Bolt EV: 21,898 units

  4. Ford Mustang Mach-E: 13,950 units

  5. Nissan Leaf: 9,445 units

  6. VW ID.4: 8,404 units

  7. Porsche Taycan: 6,071 units

  8. Hyundai Kona EV: 6,069 units

  9. Audi e-tron: 5,473 units

  10. Kia Niro EV: 4,091 units

https://electrek.co/2021/09/14/tesla-tsla-is-the-us-ev-market-change-new-incentives/

Note: A cornerstone in the Rivian thesis is selling 100,000 delivery vans to Amazon by 2025. With Tesla selling close to 100,000 Model Y EVs per year that’s hardly a dent.

Risks

Can’t Sell Hype

The biggest risk for Rivian is making vehicles on hype rather than quality, value, and/or brand. Marketing to climate-change conscious consumers eliminates a large percentage of the market:

Note: We can derive from the rough visual below that a little less than half of Americans will probably not make their vehicle purchase decisions based on environmental impact. (Not to be confused with MPG).

Stretched Responsibilities

Owning the stack is great and has a lot of opportunities, but if I live in the middle of nowhere in Montana then I am doubtful that Rivian is going to have a service center in my 6,000 population town. Rivian will be forced to consolidate towards larger towns, eliminating even more of the potential market.

No More Commuting in A Post Covid World

Amazon just announced that they are extending the WFH order indefinitely. People have woken up to the misery that is commuting, which of course means less vehicles on the road and less vehicles bought by consumers.

Dependent on Regulation

The analysis finds that regulations that require greater electric vehicle model availability are essential to market growth. States with zero-emission vehicle (ZEV) regulations had a combined new electric vehicle share of 5% and typically at least 13 more electric models available than states without such regulations, which had a 1.3% average electric vehicle share. States with ZEV regulations were responsible for about two-thirds of 2020 U.S. electric vehicle sales and less than one-third of overall light-duty vehicle sales. https://theicct.org/publications/ev-us-market-growth-cities-sept21

Relying on policy for industry growth is a huge red flag. We see it everywhere: “Electric vehicles are taking the automotive industry by storm!” But the numbers are extremely low. Of course it’s still early in this technological shift, but it’s something to keep an eye on. It’s still very possible that electric vehicles do not become the norm.

Leadership

Robert J. Scaringe. Dr. Scaringe founded Rivian in June 2009 and has since served as our Chief Executive Officer and member of our board of directors. Dr. Scaringe was designated as the Chairman of our board of directors in March 2018. While serving in these roles, Dr. Scaringe has led every major milestone achieved by the Company to date, including establishing the Company’s product and technology platform, scaling the team and operations, and securing substantial financing to support the Company’s growth. Dr. Scaringe holds a B.S. from Rensselaer Polytechnic Institute and an M.S. and Ph.D. in Mechanical Engineering from the Sloan Automotive Laboratory at the Massachusetts Institute of Technology. We believe Dr. Scaringe’s operational expertise, leadership and continuity that he brings as our Founder and Chief Executive Officer and his educational experience in the automotive industry qualifies him to serve on our board of directors.

“every major milestone achieved by the Company to date” except making a profit. This is a major red flag for investors. Rivian isn’t focused on the right things.

I like seeing someone like Robert as a CEO, but it can also cause problems. A CEO must marry vision and financial competence. So far it seems that Robert is steering the ship with pure vision.

Ms. McDonough has served as our Chief Financial Officer since January 2021. Before Rivian, Ms. McDonough was a Managing Director and Co-head of Disruptive Commerce at J.P. Morgan, a multinational investment bank and financial services company, where she worked from September 2014 to January 2021. From June 2013 to August 2014, Ms. McDonough worked as Vice President and Treasurer and Senior Director of Finance and Strategy at Fairway Market, a food retailer. Ms. McDonough holds a B.A. in Public Policy and Visual Art from Duke University and an M.B.A. from the University of Chicago Booth School of Business.

If Rivian is going to make it Ms. McDonough is going to have to put pressure in the organization for more focus on financial results. This doesn’t have to detract from the overall vision, but will actually help focus it.

Valuation

When valuing a business I want to know what they’ve done. For all intents and purposes, Rivian has done nothing except make a product and burn money. They just started rolling out vehicles last month, and we have yet to see any reports on these numbers.

Their consolidated financial data from the S-1:

Consolidated Balance Sheet Data:

When I look at this I hear one thing: “We have a product.”

While this is great, I want to see the product-market fit via results. I would like to see vehicle purchases, margins, and the road to Free Cash Flow.

Opportunities

If Rivian can effectively serve their target market and provide unparalleled value then I don’t see why they can’t crush it. The below visual shows the lifecycle, which I like.

The key here is providing that unparalleled value, which Rivian doesn’t seem focused on (yet). They are almost solely focused on brand. Again, these are not mutually exclusive. If we look at Toyota we can see how they combine value and brand with different options available to consumers: Toyota and Lexus.

Conclusion

Thin Vision

We can spend a lot time debating the specifics of climate change, but the indisputable truth is that we, as humans, are rapidly changing the composition of our atmosphere. This is what inspired me to start Rivian, and it’s what drives every decision we make as an organization.

Let’s compare this with the mission statement from Toyota: “To attract and attain customers with high-valued products and services and the most satisfying ownership experience in America.”

Their Vision Statement: “To be the most successful and respected car company in America.”

From the start, Rivian is not focused on vehicles, but an idea. This can spell a lot of trouble with economic downturn. Rivian will be forced to consolidate vision sooner or later, and then the hype bubble might not last.

Here I see Rivian fizzling out.

Pre Apple Car Competitor

Rivian doesn’t know it, but they are going to compete with the Apple car:

  • Full stack located in larger towns

  • Environmentally friendly consumer-oriented

  • Best in the world customer experience

  • Integration into established ecosystem

  • Cult following

  • Powerful balance sheet

Here I see Rivian getting squashed.

People Buy Brands

The main thing to realize is that in the US, people buy the car that is on brand with themselves. They do not buy on utility or value. So, the value or perceived value needs to be there in order for the consumer to buy on brand. I don’t see Rivian doing this long term.

Show Me

If I am to invest in something I want to see some results first. Rivian does not have any results, as they’ve only recently started rolling out vehicles. I hope they do well, but I do not invest on hope.

The main thing is, Rivian is a play on hype. We’ve seen this before with Tesla and how Tesla raised quite a bit of capital based on a an idea: Elon Musk. If CEO Robert Scaringe can step into the spotlight and play the ideas and popularity game like Elon did, then Rivian might knock it out of the park. This isn’t something measurable, as we are boiling it down to attempt to measure tomorrows’ popularity.

I will not be buying Rivian for the foreseeable future.

Supplementals

Samsung Battery Supplier

Samsung is the supplier for Rivians batteries. Here is a report on the sustainability of those batteries. Keep in mind that this report is from Samsung, and not a disinterested third party.

https://www.samsungsdi.com/upload/download/sustainable-management/EN_SUSTAINABILITY MEGATREND.pdf

“What Happened With Tesla?”

One of the burning questions that remains after all of this is a deep dive into Tesla. Thanks to my friend Alex Moris (https://thescienceofhitting.substack.com) I’m convinced that we can learn more about Rivian by learning about its much more “successful” counterpart: Tesla.

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