By Michael Elkins
Morgan Stanley reiterated an Overweight rating on Rivian Automotive (NASDAQ:RIVN) and cut the price target on the stock to $24.00 (From $26.00) as analysts believe the electric automaker's challenges move from operational to strategic.
The analysts wrote in a note, "Rivian's challenges move from operational to strategic. The R1 'hypertruck' delivers serious driving thrills. It also delivers serious gross margin losses. The Georgia plant may be profitable, but Rivian may lack the capital to build and ramp it. Something has to give, right?"
After a rocky start to 2023 Rivian is, in Morgan Stanley's view, at a strategic crossroads. The company has been struggling to ramp the Normal plant amid supply chain challenges, rising rates, and increasing raw material costs.
To help bridge the gap to breakeven, Rivian is looking to raise price but also to sell lower contented versions of its R1 electric truck. However, any price increases are happening in the face of a generational price-war across much of the global EV industry.
At the same time, Rivian is looking to ramp utilization of the Normal plant from approximately 30% today to >70% 1 year from now. However, higher priced vehicles may work against utilization, and the time lost with the supply chain issues has weathered any timing advantage Rivian once had.
The R1 and EDV may possibly never generate much better than a break-even gross margin and is unlikely to generate positive FCF after opex/capex in the standalone Normal facility. Hence, the company wants to move swiftly to build, launch, and ramp R2 production in Georgia. But, in the analysts' view, the company does not have the cash resources to build, launch, and ramp the Georgia facility.
"We are still constructive on Rivian for three key reasons," wrote the analysts. "1) Rivian has a differentiated product lineup in a, so far, niche segment of the EV market, 2) the company has scalable end markets and 3) there is significant cost-cutting potential. On valuation, following the trade down, the stock is the cheapest of the US EV OEMs on our forecast. At its current valuation, Rivian trades 0.4x our 2030 EBITDA, significantly below US peers."
Shares of RIVN are up 0.58% in pre-market trading on Tuesday.