Since its initial public offering (IPO), Rivian (RIVN -0.63%) has become one of the most prominent names in the electric vehicle industry (EV). With its sleek lineup of electric pickups and SUVs, many investors likely hoped that Rivian would follow a similar trajectory to the champion of EVs, Tesla (TSLA -0.18%).
Although both stocks are currently struggling amid a waning EV market in the U.S., Rivian's stock has done nothing but fall since its IPO, while Tesla remains up more than 800% in the last five years. Down more than 90% and currently sitting just off its all-time low of around $8, Rivian has plenty to do before it becomes the next Tesla. Here are three things that might give the stock a turn around.
Image source: Getty Images.
The elephant in the room
The most glaring difference between Rivian and Tesla comes down to profitability. While Tesla brought in more than $15 billion in profits last year, Rivian lost a whopping $5.4 billion. However, not generating income is the norm in this industry. It took Tesla nearly a decade before it was able to turn an annual profit.
While Tesla benefited from a less competitive EV market in the early 2010s and enjoyed a wider margin of error, it was during this stretch that it was able to refine its supply chain and solve the problem of mass producing EVs efficiently. Rivian is in a similar situation today. It needs to increase production, maximize efficiency, manage expenses, and hopefully one day turn a profit.
Becoming more efficient
Although Rivian's stock has been utterly decimated, there is evidence that it is becoming more efficient as the company's fixed asset-turnover ratio is growing at an impressive rate. Sitting at 1.06 today, the fixed asset-turnover ratio is a financial metric used to evaluate how efficiently a company utilizes its fixed assets, such as property, factories, and equipment, to generate sales revenue. It is calculated by dividing net sales by average fixed assets.
A higher fixed asset-turnover ratio indicates that a company generates more revenue per dollar invested in fixed assets, reflecting greater efficiency in asset utilization. While not quite at Tesla's 2.36, Rivian has been increasing its efficiency over the years.
RIVN Fixed Asset Turnover (Annual) data by YCharts.
The path to become Tesla
While several factors go into achieving profitability, the fixed asset turnover ratio provides a glimpse into how Tesla became what it is today -- an efficient manufacturer with a vertically integrated business model that helped it become the most valuable automaker in the world.
When Tesla first reached profitability on an annual basis in 2020, its fixed asset-turnover ratio was at roughly 1.4. As its investments to create a vertically integrated supply chain where batteries and other key components were built in-house began to materialize, Tesla was finally able to turn a profit and with that, its stock soared.
Rivian's current fixed asset-turnover ratio of 1.06 is an improvement, but it still has some work to do to match Tesla's level of success. The most obvious way it can increase its efficiency is by continuing to invest in a vertically integrated supply chain. In doing so, Rivian will be able to control critical components internally, such as battery production, vehicle assembly, and software development. Rivian has come a long way, but it still relies on other companies to produce some of these components.
Much of Tesla's success comes from its battery development. The batteries are often the most challenging aspect of EV supply chains, as they require rare earth materials such as lithium, nickel, and others. By manufacturing its own batteries, Tesla has a significant edge over the competition.
A few years ago, there was hope that Rivian would start to manufacture its own batteries. It has since scrapped those plans and instead will focus on working with suppliers to utilize a simplified battery pack that could "take thousands of dollars of cost out" and effectively make manufacturing easier as CFO Claire McDonough explained. While straying from in-house development, continued progress in the battery arena should help the company reach a break-even point.
Furthermore, Rivian seems to be doing the right thing by focusing attention on increasing production capabilities at its lone factory in Illinois. At the end of 2023, the company had its sights set on breaking ground at a new $5 billion factory in Georgia that was expected to increase annual production to 400,000 vehicles by 2026 -- a significant increase from its 57,232 vehicles produced in 2023. However, with some lackluster quarterly earnings and shaky finances, the company decided to pause development of the factory and turn its focus to scaling at its Illinois factory.
While disappointing hopeful investors, this decision will likely bode well over the long term. By choosing to further refine its business model on a smaller scale at its Illinois factory, it will help Rivian replicate at other factories in the future.
What to expect in the near term
It will be a long and winding road for Rivian to reach Tesla levels of success. The nature of EV manufacturing is capital intensive and often takes years to reach break-even levels of production.
For now, I am waiting to see if Rivian can continue to make progress on its efficiency before giving it a spot in my portfolio. There are some potential headwinds forming in the EV market, such as weakened growth forecasts. That could spell trouble for an up-and-coming start-up like Rivian.
But if it is able to weather this storm, solve its supply chain, and maintain healthy levels of cash reserves, Rivian could turn things around. Don't get your hopes up, but for investors looking to capitalize on the growing trend of EV adoption, it's worth keeping an eye on Rivian.
