Rivian: The Projections Are Priced In, And The Projections Are Overly Optimistic

Summary

Rivian Automotive, Inc. had its IPO on November 10th, with a market valuation of $52 billion and a share price of 78$, it now trades at $119 per share.

RIVN has a valuation that is hard to justify, even in the best-case scenario.

The company faces a tough road ahead as competition in the industry is rapidly rising.

The lack of upside and increasingly challenging competitive landscape should make investors think twice.

Michael M. Santiago/Getty Images News Thesis

Rivian Automotive, Inc. ( RIVN ) had a celebrity-like IPO on November 10th, 2021. The company has very recently started production in a facility with a production capacity of 150,000 vehicles per annum and intends to produce 1,225 and deliver around 1,015 vehicles in the current year. This has incurred significant labor and overhead costs which resulted in a net loss of $1 billion for 2020, and the company expects a quarterly net loss of up to $1.28 billion for Q3 2021. The company doesn’t expect to be profitable for the foreseeable future and intends to use net proceeds from the IPO for working capital for funding growth and other general corporate purposes. ( Investor’s Business Daily )

Rivian has credible backing that is in part responsible for its massive valuation. That being said, even in the best-case scenario the price is hard to justify, and there are substantially more challenges facing RIVN than the market is willing to price in. Company Overview

RIVN designs, develops, & manufactures Electric Vehicles (EVs) and accessories. The company currently offers only 2 car models; The R1S Sport Utility Vehicle (SUV) which is set for production in December 2021, and the R1T pickup truck which has produced 68 and sold 58 aggregate units in September and October 2021, respectively.

RIVN had the 6th largest IPO in the United States on November 10th, 2021, with a valuation of $52 billion. The company raised almost $12 billion by issuing 153 million shares at $78 per share. The stock is currently being traded at around $112 with a market cap of around $100 billion. Valuation

While RIVN is definitely a forward-looking growth investment, looking at the valuation does still offer investors some insight into the price that they are buying in at. That being said, positive backing by big companies like Amazon (AMZN) and FORD (F) should provide investors with the confidence they need to buy at a higher valuation than they would normally.

Since there are currently no accurate figures to look at to come up with a valuation, I have taken their estimates and calculated how they would be valued if everything goes according to plan.

Let’s assume that the company reaches its goal of producing 40,000 vehicles within the first year of operation and sells all of them at $70,000 . That’s the total revenue of $2.8 billion or revenue per share of $3.28 ($2,800 million/853 million). At a WACC of 5.65% ( Average WACC for automakers ), it comes down to $2.65 billion or $3.10 in present value. This would denote P/S ratio of 36.13, which is over 13 times higher than the average P/S of 2.71 in the automobile industry, and substantially higher than Tesla’s (TSLA) P/S ratio of 23.38 .

This implies that the automaker’s stock would be over 13 times more expensive in relation to its sales compared to its competitors even in a best-case scenario.

Like I said above, currently, inflated figures do make sense, but eventually, they will have to hit those targets and obtain figures somewhat comparable to other automakers.

For a P/S ratio equal to that of the industry, the company will require revenue per share of $41 which means a total revenue of $35.24 billion. At $70,000 per vehicle, that means the company would need to sell 503,498 vehicles. The company is targeting to reach 1 million sales per year by 2030, meaning that starting next year, the company needs to increase its production capacity by about 50% every year, and in that scenario, the company surpasses a vehicle production of 500,000 between 2028 and 2029.

Everyone knows that the stock has a lot of growth priced in, and, in this case, as an investor, I am willing to excuse that. That being said, at current prices, even in the best-case scenario, RIVN will not hit the industry PS ratio until 2028 at best.

The future prospects of the company are still very blurry, but judging by the aforementioned numbers, the stock right now seems quite overvalued, and this hasn’t even taken the fiercely […]

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