Investors reacted with disappointment when Rivian Automotive (NASDAQ: RIVN) provided its fourth-quarter 2022 financial and operational update yesterday evening. It wasn't because of its growing losses -- that was expected from the electric vehicle (EV) start-up. Rather, it was what the company said about 2023 that spooked investors and sent the stock down.
But savvy readers of its shareholder letter may find that what some took as negative could turn into an opportunity for long-term investors. The company is throttling its investment spending and provided an outlook for 2023 vehicle production below Wall Street expectations. That could be the right long-term move.
Strategic shift
A look back through the last year helps show why Rivian might now have a winning strategy. The company's first full year of production was marred by supply chain disruptions, manufacturing struggles, and rising raw material costs.
Rivian's first mistake was trying to recoup those costs by raising vehicle prices for customers who had already been holding reservations last spring. That brought an onslaught of complaints and canceled preorders for Rivian's critical R1 consumer platform trucks. But the company quickly reversed that decision to help support demand for its flagship vehicles, and absorbed those rising input costs.
That helps put Rivian's difficult 2022 financial performance in perspective. The company just reported an operating loss of $6.9 billion on sales of $1.7 billion for 2022. Rivian had $17 billion in cash and equivalents as of March 31, 2022, but that was down to about $12 billion by the end of the year. So the company has decided to shift its ramp-up strategy.
Image source: Rivian Automotive.
Focus on efficiency
Rivian had originally planned to spend $2.6 billion for growth investments in 2022. As it bled cash, it slowed those capital expenditures and ended up investing just $1.4 billion as it realized a negative free cash flow of $6.4 billion for the full year. The company now plans to invest $2 billion to grow the business in 2023.
After nearly achieving its goal of producing 25,000 vehicles last year, Rivian plans to double that in 2023. That fell short of Wall Street's expectation for 60,000 to 65,000 units, but there are good reasons for Rivian's 2023 goals.
While it will continue to develop its future technologies for the next-generation R2 platform, Rivian will focus more on its core business this year. It has already slowed production of its commercial vans for Amazon in the first quarter. That will allow it to more quickly implement a new motor and lithium iron phosphate (LFP) battery pack system that the company says will lower costs and add to performance.
Management also said it has scheduled downtime in the fourth quarter of 2023 on both its consumer and commercial production lines to integrate technologies it plans to apply in 2024. So while higher production volumes closer to equipment capacity would help Rivian improve margins, it is taking a more measured approach with a long-term view right now.
Don't put the (electric) cart before the horse
That is not to say the company will be a rousing success or that the stock is a great value at this point. Management pointed out that it expects more supply chain disruptions to continue in 2023 even as the situation improves. Additionally, although it produced nearly 25,000 vehicles last year, it only delivered 20,332 to customers. Rivian has to solve logistics challenges and improve delivery times.
It also has to successfully get input costs more in line with the current manufacturing environment. Management is working to improve supplier contracts, stating in the Q4 shareholder letter, "We are in the process of updating our supplier partnerships to be more reflective of Rivian's commercial maturity, scale, and growth profile."
But what matters to investors are returns on their money. Even after today's post-earnings stock plunge, Rivian still has a market capitalization of $16 billion. So there is plenty of room for that to decline as the company works on its new, more efficient strategy.
But those with a long-term outlook should monitor how Rivian executes this year as the company seems to be taking the right approach. If it continues to incrementally improve production and contain costs as it plans, it looks to be a good candidate to invest in gradually over time.
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