Could This Amazon-Backed EV Manufacturer Become The Next Tesla?

Could This Amazon-Backed EV Manufacturer Become The Next Tesla?
Stéphane Renevier, CFA

over 2 years ago6 mins

  • Rivian has plenty of potential: its trucks are slick, it could establish itself as a leader of a disruptive industry, and it's backed by top investors.

  • Then again, it hasn’t proven anything yet, competition is hot, its reliance on Amazon is a risk, and its valuation is stretched.

  • It’s up to you to weigh the upside against the downside, but one thing is certain: everything has to go perfectly to plan for Rivian to justify a Tesla-like valuation.

Rivian has plenty of potential: its trucks are slick, it could establish itself as a leader of a disruptive industry, and it's backed by top investors.

Then again, it hasn’t proven anything yet, competition is hot, its reliance on Amazon is a risk, and its valuation is stretched.

It’s up to you to weigh the upside against the downside, but one thing is certain: everything has to go perfectly to plan for Rivian to justify a Tesla-like valuation.

Mentioned in story

Rivian has just beaten Tesla, General Motors, and Volkswagen in the race to produce the world’s first electric truck, so cue the victory lap: the American startup just filed paperwork to list on the stock market by the end of the year. And given that it counts Amazon, BlackRock, and even Ford among its investors, it must be doing something right. So let’s look at why those high-profile names are onto something – and, uh, why they might not be.

✅ Rivian’s trucks are pretty slick

Rivian is in the business of building electric trucks, but not just any trucks: in the words of an analyst who visited the plant, “it’s like Google and Toyota had a baby”. In other words, great handling, slick design (they definitely look better than Tesla’s Cybervan, which isn’t due to go into production until 2022), and lots of cool features – from self-driving functionality to… an in-built barbecue.

🚫 … but the EV-maker hasn’t sold any yet

Open Rivian’s S-1, go to the income statement, and look for its revenue. Can’t find it? That’s because the company hasn’t sold a single truck yet. And given that Elon Musk refers to his own experience manufacturing EVs at scale as “production hell”, that should serve as a reminder that it ain’t so easy – both because a lot can go wrong operationally, and because the firm might require ever-larger injections of capital. So perhaps Elon’s suggestion that companies should have to deliver “at least one vehicle per billion dollars of valuation before the IPO” isn’t so unreasonable after all…

✅ The EV industry is at an inflection point

With regulations tightening in an effort to fight climate change, the EV industry has grown much bigger and much faster than even the optimists were expecting. And as combustible engines are gradually phased out, global sales of EVs are forecasted to reach almost 11 million by 2025 and 26 million by 2030, while 50% of the European market is expected to be fully electric by 2030.

🚫 … but that’s made competition boiling hot

Rivian might’ve beaten its competitors to producing the first electric truck, but the competition hasn’t been waiting cross-armed: General Motors is about to start producing its GMC Hummer EV, Ford has recently doubled production plans for its electric F-150 lightning truck, Volkswagen has one coming too, and, of course, Tesla’s Cybervan can’t be forgotten. Rivian might get the upper hand initially, but it’s going to be an uphill battle to maintain a major market share.

✅ Rivian has the potential to disrupt the EV market

When markets transform as quickly as the EV market has done, new companies – often more innovative and adaptable – have a real shot at disrupting the existing order and gaining new market share rapidly. And Rivian does seem to have all the ingredients to succeed: it’s vertically integrated, its management team is “top-class” (Jeff Bezos’s words), and it’s demonstrated that it can quickly pivot to new products and new markets. Oh and it’s backed not just by Amazon, but by Ford, BlackRock, T. Rowe Price, and many other deep-pocketed investors.

🚫 … but the company might be over-fueling its own hype

It’s very common in the months leading up to a major IPO to see management overselling itself in order to justify as high a valuation as possible. But reading its S-1, Rivian might be pushing that a tad far: a total addressable market of $9 trillion for its pickup truck alone? “Lifetime revenues” – that is, the extras on top of the $70,000 truck – of as much as $15,000 from every vehicle? Software services that actually improve its total margins, when breaking even is generally considered a good outcome in the industry? Communicating an attractive business plan is the easy part: delivering it might be a different story.

✅ Rivian’s top client is none other than Amazon

Amazon not only owns between 10% and 25% of Rivian (we’ll have to wait a bit longer to know its exact stake), but also ordered 100,000 of its trucks for its fleet. The direct revenue of that sale could be as high as $4.5 billion, according to PitchBook, while the fact that Amazon is eating its own dog food will surely convince additional customers. But perhaps more important is the long-term collaboration potential: this might be just the first of many more orders if Amazon is upgrading its fleet to reach its carbon emissions targets.

🚫 … but Amazon is a risk in and of itself

Let’s face it, Rivian’s valuation is driven in large part by the deal it has with Amazon. But here’s the thing: even if Rivian completes the tech giant’s order successfully, there are no guarantees of exclusivity. In fact, Amazon has mentioned the possibility of collaborating with several of Rivian’s competitors in its latest earnings report. And while Amazon does have a significant stake in Rivian, Rivian is so heavily reliant on its customer that it has a lot more to lose.

So is Rivian the next Tesla?

To answer that question, let’s do a back-of-the-envelope calculation.

Rivian’s reportedly seeking a valuation of around $80 billion. But since the company doesn’t make a single dollar of revenue and shares barely any data, we’ll have to combine a couple of simple assumptions with common sense to assess whether that valuation is justified.

Let’s start with a simple enterprise value-to-/sales (EV/sales) multiple. Tesla’s is 8x its revenues by 2025, and while Rivian’s no Tesla, we could arguably justify a multiple of 6x based on its growth potential. If you then apply this multiple to Rivian’s $80 billion valuation, you get a revenue of $13.3 billion by 2025. Rivian sells a variety of trucks, but for these purposes, we’ll assume it focuses on its pickups, which sell for an average of $70,000. That means the company will need to sell about 200 thousand vehicles – almost 2% of the total electric vehicle market – to justify its valuation. That seems optimistic, even if it’s building the production capacity for it.

Of course, you could argue that 2025 is too soon, and that we should look to when the market is more stable. So let’s assume that Rivian does manage to capture a whole 5% of the total $26 million electric vehicle market by 2030: the average vehicle price of $70,000 then implies $54.6 billion of sales for 2030. And if you assume an EV/sales multiple of 1.5x – which itself is optimistic given that current carmakers trade at less than 1x their revenues – you get an enterprise value of $136.5 billion by 2030. Discount that back to today – which is a good proxy for your return on capital, if you assume its capital structure is unchanged – and you only get a return of 5.5% a year. That’s better than bonds, sure, but not exactly what you’d expect from a high-growth company.

It’s still too early to have a definitive view until we get more data, but everything will have to go perfectly to plan if Rivian wants to justify its Tesla-like $80 billion valuation – if that is indeed the one it settles on, of course. So while the rewards could certainly be high, it’s up to you to decide whether they outweigh the risks.

Just remember that you don’t have to back Rivian directly to back Rivian: you could always buy into a more diversified basket of EV-makers, many of which are bound to add Rivian to their ranks when it hits the stock market.

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