Will the "angel in white" Volkswagen's investment become the savior of "Tesla killer" Rivian?

Rivian released its third-quarter financial report for 2024 after the U.S. stock market on August 6, 2024. Let's look at the key information:

1. Revenue below market expectations, further decline in actual gross margin: While the reported gross margin appears to have improved this quarter, it is inflated by LCNRV (inventory and contract impairment effects) and one-time cost factors. If we look at the actual gross margin, it has declined significantly from -39% in the previous quarter to -51% in this quarter.

2. Discounts on the first-generation R1 leading to a decline in ASP and gross margin: Due to the production upgrade of R1 in the second quarter, Rivian offered discounts on the first-generation R1, resulting in a significant decrease in unit price, which is a major reason for the revenue falling below market expectations. Additionally, the direct shutdown of the Normal factory this quarter led to a decrease in production, causing labor costs to rise, indirect cost absorption efficiency to decrease, and variable costs to increase, dragging down the gross margin.

3. Continues to maintain the 2024 guidance unchanged, expecting a 20% decline in raw materials for the second-generation R1 compared to the first-generation R1: Rivian continues to maintain its 2024 guidance unchanged, as well as the goal of achieving a positive gross margin in the fourth quarter of 2024. Based on calculations, Dolphin believes that Rivian's target of achieving a positive gross margin in 4Q24 on the reported side is significant, but the demand for the upgraded R1 remains a key factor in whether the target can be achieved.

4. Sales and management expenses stable, research and development expenses under control: Rivian has shown various strategies such as controlling operating expenses, reducing inventory, and shifting R2 production to the Normal factory to protect cash flow. This quarter, research and development expenses have decreased due to the completion of the R1 upgrade, while sales expenses have remained stable due to the previous increase in sales personnel.

5. Volkswagen's investment directly alleviates Rivian's cash flow issues: Volkswagen's $5 billion investment, even under Dolphin's most pessimistic estimate, can support cash flow until the first half of 2026 for R2's SOP. According to Dolphin's normal estimate, the previously projected $6 billion cash shortfall from 2025 to 2027 has been largely filled by Volkswagen's $5 billion financing, with the next round of financing possibly postponed to late 2027 to around 2028, mainly for the expansion of R2 production capacity at the Georgia factory and R3 production.

Dolphin's Overall View:

Overall, Rivian once again delivered a mediocre performance in the second quarter, with revenue slightly below market expectations and gross margin slightly exceeding expectations.

However, behind this slightly better-than-expected gross margin is a gross margin inflated by LCNRV (inventory and contract impairment effects) and one-time cost factors. If we look at the real gross margin (excluding the impact of LCNRV and one-time costs such as supplier contract changes and accelerated depreciation due to the R1 upgrade), the real gross margin has continued to decline from -39% in the previous quarter to -51% in this quarter, showing a significant decreaseThe main reasons for the downward trend are as follows:

1) The decline in single-car ASP is mainly due to Rivian offering discounts on the first-generation R1 to clear inventory. Although the production and sales gap decreased this quarter and destocking achieved some results, it also led to lower-than-expected revenue.

2) The direct shutdown of the Normal factory in the second quarter led to a decrease in production, resulting in lower labor costs, lower absorption efficiency of indirect expenses, and consequently an increase in variable costs.

However, both of these factors are effects caused by the upgrade shutdown and are relatively understandable by the market. The market is still most concerned about the extent of cost improvement of the second-generation upgraded R1. Whether the company can achieve the fourth-quarter gross margin positive plan emphasized repeatedly by the company. This quarter, Rivian also provided specific guidance, expecting a 20% reduction in raw material costs for the second-generation R1 compared to the first-generation R1. With the impact of the decrease in raw material costs, depreciation expenses per car, regulatory credit contributions, and the impact of LCNRV reversal, Rivian's fourth-quarter gross margin positive target can be achieved.

It is important to emphasize that demand for the upgraded R1 remains the most critical factor. Weak demand will lead to further reduction in ASP, higher depreciation expenses with lower sales volume, making it difficult for Rivian to achieve the fourth-quarter gross margin positive plan.

Fortunately, Rivian has received a total investment of up to $5 billion from Volkswagen (directly investing $3 billion in Rivian and $2 billion in a joint venture between Volkswagen and Rivian). Rivian's most critical cash flow shortage issue has been basically resolved, and a safety cushion for the stock price has been established. However, with a current P/S multiple of nearly 3.4 times for 2024, the valuation is already high. Dolphin believes that the future potential for the stock price to continue rising lies in seeing improvements in demand for the new generation R1 and significant cost reductions to achieve the gross margin positive plan.

Specifically, in the main text:

I. Gross margin slightly exceeds expectations in the second quarter, but the actual gross margin is still on a downward trajectory

This quarter, Rivian's reported gross margin improved slightly from -44% in the previous quarter to -39% this quarter, slightly higher than the market's expected -41%. However, behind this slightly better-than-expected gross margin is the gross margin embellished by LCNRV (inventory and contract impairment effects) and one-time cost factors. If we look at the real gross margin (excluding the impact of LCNRV and one-time costs such as supplier contract changes and accelerated depreciation due to R1 upgrades), the real gross margin continued to decline from -39% in the previous quarter to -51% this quarter, a significant decrease.

From the breakdown of per-car economics (excluding the impact of LCNRV and one-time costs), the main reasons for the decline in real gross margin on a quarter-on-quarter basis are:

a) Per-Car Price: a quarter-on-quarter decrease of $4600

In the second quarter, the per-car price was $84,000, a decrease of $4600 compared to the previous quarter. With the contribution of regulatory credits this quarter, the real per-car price decreased by approximately $5900 to $82,700 this quarterThe main reason for the month-on-month decline is that Rivian, in order to clear the inventory of the first generation R1 vehicles, sold the upgraded R1 in the second half of the year, offering discounts on the first generation R1. Although the production and sales difference decreased this quarter and achieved certain results in destocking, it also led to lower-than-expected revenue, the main reason for the decline in the actual gross profit margin.

b) Per-Car Cost: Real per-car cost increased by $3,100 than the last quarter

In the second quarter, the real per vehicle cost was $126,500, and the per vehicle cost continued to increase by $3,100 month-on-month, mainly due to:

1) Increase in per vehicle variable costs: After excluding the $194 million LCNRV impact and the $59 million supplier contract change losses related to the R1 upgrade and one-time impact of accelerated depreciation of the Normal factory on the cost side this quarter, the actual per vehicle variable cost in the second quarter increased by $3,900.

The increase in per vehicle variable costs was mainly due to the direct shutdown of the Normal factory in the second quarter, resulting in a decrease in production, lower labor costs, lower absorption efficiency of indirect expenses, and thus an increase in variable costs.

2) Decrease in per vehicle amortization costs: Due to a slight increase in sales volume this quarter compared to the previous quarter, the per vehicle amortization costs decreased slightly by $700 compared to the previous quarter, slightly offsetting the negative impact of the increase in per vehicle variable costs on the gross profit side.

c) Per-Car Gross Profit: Real per vehicle gross profit decreased by $7,800

Due to the decline in per vehicle revenue caused by destocking and the increase in per vehicle variable costs due to the suspension of R1 upgrades, the real per vehicle gross profit decreased by $7,800. The actual gross profit margin for this quarter continued to decline from -39% in the previous quarter to -51% in this quarter, a significant decrease.

II. Second-quarter suspension of production for destocking reduced the production and sales difference, and the cash consumption rate slowed down

Consistent with the original management plan, Rivian introduced a new technology architecture to the R1 platform in the second quarter by suspending production for several weeks, renegotiating supplier contracts, resulting in a significant decrease in BOM, and contributing to a positive gross margin in the fourth quarter of this year, which is also the most concerning point for investors in Rivian in 2024, but it will cause temporary pressure on production in the second quarter.

In order to sell the upgraded R1 in the second half of the year, Rivian offered discounts on the first generation R1 in the second quarter, adopting an active destocking strategy, resulting in a production and sales difference of nearly 4,200 vehicles in the second quarter, and overall inventory decreased from $2.8 billion in the previous quarter to $2.6 billion in this quarter.

The cash consumption rate slowed down this quarter, with operating cash flow decreasing from -$1.36 billion in the previous quarter to -$750 million in this quarter, mainly due to reduced raw material purchases and inventory reduction due to discounts on the first generation R1.

At the same time, Rivian received a $1 billion convertible bond investment from Volkswagen this quarter, and cash and cash equivalents reached $7.9 billion this quarter, basically unchanged from the previous quarter

III. Will the gross profit margin turn positive as planned in the fourth quarter of this year?

Investors' main concern this year is still the extent of cost reduction due to the production halt in the second quarter, as well as whether the plan to achieve a positive gross profit margin in the fourth quarter will be successful. This quarter, Rivian provided a specific guidance, estimating a 20% cost saving in raw materials for the second generation R1 compared to the first generation R1 (compared to Q1 2024). Based on the unit economics, Dolphin made a preliminary calculation:

1) Looking at the variable costs per unit: Rivian previously attributed the main factor for achieving a positive gross profit margin to the improvement in variable costs.

Rivian provided guidance this quarter, estimating a 20% decrease in raw material costs for the second generation R1 compared to the first generation R1. Rivian also indicated in the investor meeting that materials costs account for 75% of total costs under steady-state conditions. Dolphin estimates the actual raw material cost in the first quarter to be approximately $92,500, and with a 20% decrease in raw materials, the estimated actual raw material cost in the fourth quarter is around $74,000, resulting in a cost reduction of about $18,500 in raw materials.

The main factors contributing to the reduction in raw material costs are:

a) In-house development + component optimization: Rivian currently self-develops electric control and drive systems, while procuring battery cells from Samsung and assembling modules and packs in-house.

In terms of the powertrain, Rivian's new in-house produced Enduro (dual motor)/Ascent (triple/quadruple motor) further reduces costs by using a redesigned inverter. Additionally, the most significant improvement is the self-developed second-generation electronic architecture for control units, reducing the number of ECUs from 17 in the first generation to 7, a 60% reduction, and shortening wiring harnesses by 25%. This technology is being applied to the R1 platform.

b) Redesigned battery pack structure/chassis, improving structural efficiency and optimizing components to reduce costs.

c) Renegotiation of core supplier procurement contracts: With the R1 platform upgrade, Rivian has replaced approximately 50% of parts and materials. Switching suppliers can leverage potential sales volume from the upcoming R2 platform to bring about procurement premiums. Previous contracts were signed when the R1 platform was first launched, with high procurement costs due to uncertainties in R1 production volume increase.

Due to the large LCNRV reversal provision made in this quarter (194 million), the remaining amount available for LCNRV reversal is only 179 million. Assuming a provision of 100 million LCNRV reversal in the fourth quarter, it will contribute approximately 7,000 yuan positively to the gross profit per vehicle.

Rivian also indicated in the investor meeting that besides the drop in raw material costs, the positive gross margin will still rely on other driving factors, including the reduction in per vehicle fixed costs, decrease in other variable costs (freight/warranty), and increase in unit revenue. Specifically:

2) Reduction in per vehicle fixed costs: Due to accelerated depreciation of production equipment by Rivian before the production halt in the second quarter, as well as the scale effect brought by the recovery of production and sales in the fourth quarter, it is expected that the per vehicle fixed costs in the fourth quarter will decrease from 15,500 USD in this quarter to 12,000 USD in the fourth quarter.

3) Increase in per vehicle revenue: As the updated R1 price remains basically the same as before the update, but the real per vehicle revenue decreased by 5,900 USD in the second quarter, Dolphin Jun expects that the selling price per vehicle in the fourth quarter of 2024 will remain consistent with the second quarter (indicating stable demand for Rivian without further price reductions). In addition, Rivian emphasized that it will recognize approximately 200 million USD in regulatory credit revenue in 2024, with only 20 million USD recognized in the second quarter. Assuming the remaining portion will be recognized in the fourth quarter, it is expected to contribute nearly 13,000 USD positively to the per vehicle revenue.

According to Dolphin Jun's calculations, if the company's expected 20% decrease in raw material costs is considered, along with the impact of regulatory credits/per vehicle fixed cost reduction, the real gross margin is unlikely to turn positive. However, considering the LCNRV reversal, the reported gross margin is expected to barely achieve positivity, estimated at around 1.6%.

It is worth noting that the demand for the upgraded R1 remains the most critical factor. Weak demand will lead to further ASP reductions and higher amortization expenses for lower sales volumes, making it difficult for Rivian to achieve the fourth-quarter gross margin turnaround plan.

IV. Reasonable Control of R&D and Sales Expenses

1) R&D Expenses: Based on this quarter's situation, Rivian's R&D expenses reached 430 million USD, lower than the market's expected 490 million USD, and a decrease of 30 million USD compared to the previous quarter.

The decrease in R&D expenses this quarter is mainly due to the basic completion of the R1 upgrade, resulting in a decrease in related R&D design expenses, as well as a reduction in the number of R&D personnel due to a 10% workforce reduction in the first quarter by Rivian.

Looking ahead to the second half of the year, Rivian's R&D focus will be more on the development of R2 and the Medium-Sized Platform (MSP), focusing on vertical integration of hardware and software, as well as addressing cost reduction issues with the launch of R2 (management expects a 45% further decrease in raw material costs compared to the second-generation R1).

2) Sales and Administrative Expenses: Sales and administrative expenses in this quarter amounted to 496 million USD, basically in line with the market's expectation of 490 million USD, mainly due to the slight increase in sales personnel from the previous quarter, with corresponding compensation remaining stableAt the same time, Rivian opened 3 new spaces and one new service center this quarter.

Rivian expects overall operating expenses to decrease in the second half of the year compared to the first half, reflecting Rivian's strategy to protect cash flow through controlling operating expenses and inventory management.

This quarter, Rivian achieved an operating loss of $1.38 billion, with an operating loss rate of -119%. The operating loss rate decreased compared to the previous quarter, mainly due to the improvement in gross profit margin on the financial statements and the reduction in research and development expenses.

V. Volkswagen's Direct Investment Eases Rivian's Cash Flow Difficulties

In the past two years, new energy vehicle companies share a common feature: if they have good vehicle platform assets (previously had successful models) and certain intelligent research and development capabilities, and are relatively independent without being attached to a specific traditional automotive giant.

When these companies face cash flow crises and the market prices them as having no investment value, it may actually be a turning point because these new forces may attract the attention of major companies, providing real hidden acquisition value support. After XPeng, Leapmotor partnered with major companies, and Nio climbed to the Middle Eastern gold owner, Rivian once again validated this logic.

Before receiving investment from Volkswagen, Rivian had a total market value of only $11 billion, so this $5 billion investment can be considered a level of financing akin to selling the company:

A. Initially, a $1 billion convertible bond was invested (which will mostly convert to shares after 2024); if investment targets are met in 2025 and 2026 (depending on financial milestones in 2025 and technological milestones in 2026), Volkswagen will continue to invest $1 billion in Rivian each year by purchasing Rivian common stock.

B. Additionally, a joint venture company will be established with each party holding a 50% stake to research the electronic architecture of electric vehicles. Volkswagen will invest $1 billion directly in equity (to be paid by the end of 2024) and provide a $1 billion loan to the joint venture company in 2026.

It can be seen that Volkswagen appears to be a white knight, saving Rivian from cash flow difficulties and the brink of bankruptcy. However, this joint venture format essentially means that Rivian has sold its core technology to Volkswagen. Nevertheless, it directly alleviates Rivian's cash flow issues and establishes a safety cushion for the stock price.

Based on the current cash burn rate and considering Volkswagen's $5 billion investment, according to the most pessimistic estimates, cash flow can support Rivian until the first half of 2026 for the R2 SOP. According to more normal estimates, the original $6 billion cash shortfall from 2025 to 2027 has been largely filled by Volkswagen's $5 billion financing, and Rivian expects to achieve positive EBITDA with the ramp-up of R2 at the Normal factory in 2027, thereby solving the cash flow issue.

Dolphin predicts that Rivian's next round of financing may be delayed until the end of 2027 to 2028, mainly for the expansion of production capacity at the Georgia factory R2 and the production of R3.

Dolphin's in-depth research and analysis on Rivian include:

Financial Reports

February 22, 2024 Financial Report Analysis "Pressure on Gross Profit and Sales Volume, Can 'Tesla Killer' Rivian Survive?"

February 22, 2024 Conference Call "Significant Decrease in Order Volume, But Still Maintaining 24Q4 Gross Profit Turnaround Plan"

November 8, 2023 Financial Report Analysis "Rivian Exceeds Expectations Again, Does the 'Tesla Killer' Have Hope to Cross the Survival Line?"

November 8, 2023 Conference Call "Rivian: Continuing Efforts for Gross Profit Margin Turnaround in 24th Year (3Q Conference Call Summary)"

In-depth Analysis

December 6, 2023 In-depth Analysis "Rivian: Cybertruck Sentenced to Death? Premature Disability is the Fatal Blow"On December 4, 2023, in-depth analysis "[Rivian (Part 1): "Injured before the battle", Tesla's killer becomes the killed?"(https://longportapp.com/zh-CN/topics/10536425?app_id=longbridge)

On July 7, 2022, in-depth analysis "Amateur" or "Superman"? The dilemma of Tesla killer Rivian"

On March 8, 2022, in-depth analysis "Little Superman's Pickup: Rivian's Ambition"

Risk Disclosure and Disclaimer of this article: Dolphin Research Disclaimer and General Disclosure