Tesla's killer is instead killed, and Volkswagen can't save the shattered Rivian?

$Rivian Automotive(RIVN.US) released its Q3 2024 financial report after the U.S. stock market closed on August 6, 2024. Here are the key points:

1) Revenue below market expectations: After the delivery of the 2025 R1, the revenue per vehicle this quarter still fell short of market expectations. However, according to Dolphin, the production sequence for the 2025 R1 is from low-priced to high-priced models, resulting in a relatively low proportion of high-priced new R1s this quarter, which is why the revenue per vehicle did not increase as expected.

2) Gross margin continues to decline, also below expectations: The gross margin for Q3 was -45%, down from -39% in Q2, and lower than the market expectation of 34%.

However, Dolphin is more concerned about the actual gross margin from vehicle sales (excluding the impact of LCNRV - inventory and contract impairment, as well as one-time costs from changing suppliers). This quarter, the real gross margin from vehicle sales improved from -52% in the previous quarter to -46% this quarter. After the delivery of the cost-reducing 2025 R1 in Q3, this improvement in gross margin is still below Dolphin's expectations.

3) Supply chain production disruptions, lowered full-year production/Adjusted EBITDA expectations: Rivian is experiencing production disruptions due to a shortage of components driven by Enduro, which is expected to last at least until Q4. Based on this, Rivian has lowered its full-year production forecast from the original 57,000 units to 47,000 units for Q4.

Given the lowered production expectations, it is anticipated that fixed costs related to existing plants will be difficult to reduce, and Rivian has also lowered its full-year Adjusted EBITDA expectation from -$2.7 billion to -$2.875 billion.

4) Difficulty in improving gross margin, protecting cash flow through cost control: This quarter, both R&D expenses and selling expenses were significantly lower than market expectations, with a substantial quarter-on-quarter decline. This is partly due to the reduction in SBC expenses and partly due to the completion of upgrades to the R1, which reduced related technical costs. The slow expansion of new stores also reflects Rivian's strategy of protecting cash flow through strict cost control when gross margins are difficult to improve.

Dolphin's overall view:

Overall, Rivian delivered a disappointing performance in Q3, with both revenue and gross margin below market expectations.

If the lower-than-expected price increase is due to production rhythm issues—moving from low-priced to high-priced models, resulting in a relatively low proportion of high-priced new R1s this quarter—then the small increase in real gross margin after the delivery of the 2025 R1 may reflect that the reduction in variable costs per vehicle after the R1 upgrade is likely not as expected (the real variable costs in Q3 were almost flat compared to the variable costs before the R1 upgrade in Q1) The variable cost per vehicle is not expected to decrease by 20% as previously stated by the management.

The management still reiterated the plan for a positive gross margin in the fourth quarter, but Dolphin believes this is merely a polished version of the reported gross margin (which includes a contribution from a 140 million LCNRV accounting adjustment and a 280 million large regulatory credit that will be accrued in the fourth quarter, contributing approximately $32,000 to the fourth quarter's gross margin per vehicle, while also achieving this by increasing the proportion of high-margin EDV vans). However, the actual gross margin for vehicle manufacturing, especially in light of the largest cost reduction item—variable costs not decreasing as expected—will almost certainly not turn positive (Dolphin estimates that the actual gross margin for vehicle manufacturing in the fourth quarter will still be around -30%, even with the contribution from the increased proportion of high-margin EDVs).

The management has lowered the full-year production expectations and Adjusted EBITDA guidance based on the production halt, which raises doubts about Rivian's management execution capabilities for Dolphin. It also raises concerns about Rivian's demand slowdown, especially since the production-sales gap (production - sales) this quarter is still 3,139 vehicles, reaching the second-highest level in history, unrelated to the slowdown in production.

If the upgraded high-priced R1 struggles to achieve a positive actual gross margin, the R2, starting at $45,000, achieving a positive gross margin will only be "a bigger pie" for investors.

As we move towards 2025, Rivian will face even more severe challenges, and it will still be a blank year for Rivian (the R2 won't begin production until 2026). Currently, there are signs of demand slowing down, and Trump's administration is not friendly to the U.S. electric vehicle industry; IRA subsidies are likely to weaken or be canceled, which may further negatively impact demand.

With external demand further slowing and the internal management execution capabilities being questioned by the market, Rivian's current situation is not optimistic. If the fourth-quarter gross margin cannot turn positive as expected, the market will find it hard to believe in the "pie-in-the-sky" claims that the low-priced R2 can achieve a positive gross margin, and the stock price will likely decline further, with significant risks remaining.

Although Rivian currently has funding support from Volkswagen, which can sustain its cash flow at least until 2026, Rivian's stock price corresponds to a P/S ratio of 2.3-2.4 for the next year, indicating that the valuation is still not low, and the downside risk for the stock price remains significant.

Specifically:

1. Third-quarter gross margin fell short of expectations, actual variable cost reduction is low

This quarter, Rivian's reported gross margin decreased sequentially, from -39% in the previous quarter to -45% this quarter. However, Dolphin is more concerned about Rivian's actual gross margin (the reported gross margin excludes the impact of LCNRV—inventory and contract impairment, as well as one-time costs from changing suppliers).

The actual gross margin for vehicle sales this quarter improved from -52% in the previous quarter to -46% this quarter. After starting deliveries of the 2025 R1 aimed at cost reduction in the third quarter, this improvement in gross margin is still below Dolphin's expectations.

From the perspective of the unit economics disassembly (excluding the impact of LCNRV and one-time costs), the actual gross margin has increased on a quarter-on-quarter basis but remains below expectations, mainly due to the lower-than-expected decline in actual variable costs per unit:

a) Average price per unit: Increased by $0.4 million quarter-on-quarter

After excluding the impact of carbon credits, the average price per unit this quarter is $86,000, an increase of $3,700 compared to the previous quarter. This is lower than the market expectation of $90,000;

The market believes that the increase is mainly due to the delivery of the 2025 R1 series starting this quarter:

① The starting price of the 2025 R1 series will be higher (e.g., R1S);

② In the second quarter, discounts were given to clear the inventory of the first-generation R1 vehicles. However, since the 2025 R1 began sales in the third quarter, the proportion of sales from the previous generation R1 inventory is expected to decrease.

③ The 2025 R1 series has launched max/large battery versions and three-motor versions, improving the sales structure.

However, according to Dolphin Jun, although the delivery of the 2025 R1 began this quarter, the production sequence is from the lower-priced versions to the higher-priced versions, so the proportion of the higher-priced 2025 R1 series this quarter remains low: starting with the standard version (low-priced LFP version), followed by the large battery version, while the three-motor version will only begin production at the end of the third quarter and the beginning of the fourth quarter.

b) Unit cost: Actual unit cost is basically flat compared to the previous quarter

The actual unit cost in the third quarter is $127,000, which is basically flat compared to the previous quarter. Breaking down the variable and fixed costs:

1) Fixed costs per unit have increased:

Sales volume this quarter decreased by 27% quarter-on-quarter, causing the fixed cost per unit to increase by $3,800.

2) Variable costs per unit decreased less than expected: The variable cost per unit this quarter decreased by $4,000 to $108,000. Although the 2025 R1, aimed at cost reduction, was delivered this quarter (though not a complete delivery season), the extent of the decline in variable costs remains small, lower than Dolphin Jun's expectations.

c) Unit gross profit: Actual unit gross profit increased by $3,900

The average price per unit increased by $0.4 million after the delivery of the 2025 R1, but the unit cost remained basically flat quarter-on-quarter, resulting in an increase in actual unit gross profit of $4,000. The actual gross margin this quarter improved from -52% in the previous quarter to -46% this quarter, with the increase being lower than expected.

2. Serious supply chain disruption issues, Rivian lowers full-year production expectations

In the third quarter, Rivian's vehicle deliveries were only 10,000 units, a quarter-on-quarter decline of 27%. Rivian stated that the reason is due to a supply shortage from a single-source supplier for the Enduro drive, leading to production interruptions. The impact of the supply shortage began in the third quarter of this year and has become more severe in recent weeks, and it is still ongoing

Based on this, Rivian has lowered its full-year production forecast from the original 57,000 units to 47,000 units in the fourth quarter.

On one hand, Dolphin is questioning the management and execution capabilities of the management team, as the automotive supply chain issues in the U.S. stabilized last year, making supply chain problems increasingly rare in the industry. However, Rivian's Enduro-driven components rely on a single supplier, lacking immediate alternative options for parts supply (no backup suppliers), which raises concerns for Dolphin about the management and execution capabilities of Rivian's management team.

Reflecting on Rivian's recent significant supply chain transformation in the second quarter aimed at cost reduction (changing most suppliers), Dolphin is worried that the new suppliers may not be reliable.

On the other hand, Dolphin is also concerned about Rivian's demand issues. Although vehicle production this quarter was affected by production interruptions, the decline in sales seems unrelated to supply issues. The production-sales gap (production - sales) reached 3,139 units this quarter, marking the second-largest production-sales gap since Rivian's deliveries began, still reflecting a trend of weak demand. According to Dolphin's calculations, Rivian's inventory vehicles (calculated as inventory of finished products / cost per vehicle) have increased from about 5,700 units in the previous quarter to 7,800 units this quarter.

3. The plan to achieve positive gross margin in the fourth quarter is difficult to accomplish

Rivian continues to emphasize the plan to achieve positive gross margin in the fourth quarter of 2024, while Dolphin believes that what the management refers to as positive gross margin is merely a "cosmetic" adjustment, based on accounting adjustments (adjusting for LCNRV impact) and significant regulatory credit contributions. However, achieving a real positive gross margin from vehicle sales in the fourth quarter seems almost impossible:

① The reduction in variable costs may not meet expectations

Rivian previously attributed the main factor for achieving positive gross margin to the reduction of variable costs: According to Rivian's previous guidance, it is expected that the 2025 R1 will see a 20% decrease in raw material costs compared to the first-generation R1 (requiring a real reduction of 22,000 yuan in variable costs compared to Q1), mainly relying on ① in-house development + downgrading; ② switching to cheaper suppliers (updating about 50% of parts and materials).

This quarter, after delivering some of the 2025 R1 (not a complete delivery season), the real variable costs only decreased by 4,000 yuan compared to the previous quarter, and compared to the R1 before the update (compared to Q1), the variable costs have remained almost flat, leading Dolphin to question whether the reduction in variable costs for the updated 2025 R1 will meet expectations.

Dolphin closely examined Rivian's updated guidance, which not only reiterated that the 2025 R1 update would reduce variable costs but also indicated that the proportion of EDV vans would increase in the fourth quarter, which would also promote the reduction of variable costs (EDV itself has lower production costs, and EDV has already achieved positive gross margin). Dolphin believes that this may still imply that the reduction in variable costs for the remodeled R1 may not meet expectations

② Due to the downward adjustment of production expectations, the reduction in fixed costs is still expected to be limited:

Rivian is experiencing supply chain disruptions, which are expected to last at least until the fourth quarter of this year. The adjusted production expectations imply a fourth-quarter output of only 10,000 to 12,000 vehicles, continuing to decline compared to the third quarter. It is anticipated that the reduction in per-vehicle amortized costs will still be limited.

③ The increase in unit price revenue is expected to be hindered:

Dolphin Jun is also concerned about Rivian's weak demand. Although Rivian's unit price in the fourth quarter may benefit from an improved sales structure—the overall unit price of the 2025 R1 will be higher, and the high-priced version with three motors will be launched in early fourth quarter—Rivian will also increase the proportion of low-priced EDV vans in the fourth quarter.

With an annual sales expectation of 50,500 to 52,000 vehicles, the implied fourth-quarter sales are 13,000 to 15,000 vehicles. Dolphin Jun believes that based on the current trend of weak demand for Rivian, the expected fourth-quarter sales are only 11,000 to 12,000 vehicles (with annual deliveries of 49,000 vehicles). After failing to meet sales targets, Rivian may still adopt a price reduction promotion strategy, and the demand for high-priced versions may also be eroded by low-priced versions.

Some accounting adjustments: such as the reversal of LCNRV (which contributes positively to gross margin), only 140 million remains this quarter. If fully reversed, it is expected to contribute about 10,000 yuan to per-vehicle gross profit. Meanwhile, Rivian guides that regulatory credit contributions will confirm 300 million for the year, implying that 275 million will be confirmed in the fourth quarter, contributing about 21,000 yuan to per-vehicle gross profit. The total contribution of these two adjustments to the per-vehicle gross profit on the financial statements is 31,000 yuan. After these adjustments, the "beautified" gross profit on the financial statements may turn positive, but the real gross margin is still difficult to achieve breakeven (Dolphin Jun estimates the real gross margin for vehicle sales to be around negative 30%).

4. Gross margin is difficult to improve; reduce expenses to protect cash flow

1) R&D expenses: In this quarter, Rivian's R&D expenses were only 350 million, a decrease of 80 million compared to the previous quarter, lower than the market expectation of 420 million, marking the lowest R&D expenses in Rivian's history.

The reduction in R&D expenses is partly due to a decrease of 40 million in SBC expenses related to R&D, and partly because the upgrade of the R1 platform has been completed, leading to a reduction in engineering, design, and development costs related to the design and technology upgrades of the R1 platform.

2) Sales and administrative expenses: This quarter, sales and administrative expenses were 430 million, also down 70 million compared to the previous quarter, lower than the market expectation of 460 million.

The decrease in sales and administrative expenses is partly due to a reduction of 30 million in SBC expenses related to sales administration, and partly due to the slow expansion of Rivian's offline stores, with only 4 new service centers and service spaces added this quarter The reduction in the three expenses also reflects that Rivian is protecting its cash flow by strictly controlling operating expenditures, even as it struggles to improve gross margins.

5. Operating Loss Rate Continues to Widen

In this quarter, Rivian reported an operating loss of $1.17 billion, with an operating loss rate of -134%. Compared to the previous quarter, the operating loss decreased by $200 million, mainly due to the reduction in the three expenses, but the operating loss rate increased again, primarily due to the decline in gross margin and a sequential decline in sales this quarter, which did not release operating leverage.

From a cash flow perspective, Rivian had $6.7 billion in cash this quarter, down $1.1 billion from the previous quarter, with free cash flow at -$1.15 billion, a decrease of $120 million from the previous quarter, mainly due to the continued expansion of cash losses this quarter, while capital expenditures were $280 million, nearly flat compared to the previous quarter.