Rivian Has No Choice; It Has to Find a Way to Reduce Costs

In some ways, Rivian (NASDAQ: RIVN) is a smashing success. In others, it is still a risky work in progress. This year, the automaker is embarking on a major cost-cutting initiative that will actually take precedence over expanding its production. That’s an interesting downshift for the company, but one that makes total sense if you take a second to examine its financial performance.

Rivian has done great things

It is not easy building a manufacturing company from scratch. It’s not cheap, either. Rivian had to create a very complex product (a road-safe vehicle) and the means to produce it at scale (a large factory). To the company’s credit, it achieved each of these goals, with production hitting roughly 57,000 electric vehicles (EVs) in 2023. Over 70,000 of its vehicles are now on the road today.

Image source: Getty Images.

That’s great, though it needs to be pointed out that Rivian is nowhere near as large as the major automakers. And it trails well behind electric vehicle leader Tesla (NASDAQ: TSLA), which produced nearly 495,000 vehicles in the fourth quarter of 2023 and 1.8 million for the full year. That means that Rivian is little more than a rounding error compared to Tesla. But even getting to that point is an impressive feat given the massive costs required to start a car company.

There’s another notable issue to consider in the comparison between Tesla and Rivian. Tesla, which also built its business from the ground up, became reliably profitable around 2020. Rivian, on the other hand, is mired in losses that drastically exceed any red ink that Tesla ever bled. This is a problem, and Rivian’s management knows it.

TSLA EPS Diluted (Quarterly) Chart

TSLA EPS Diluted (Quarterly) Chart

Time for Rivian to tighten the belt

Getting to the point where it had a factory up and running at a meaningful production rate was really a key step for Rivian. It wasn’t until then that it could step back and start to work on increasing efficiency. That is probably the most important company goal that investors need to monitor in 2024. It could actually be a make-or-break moment for the business.

Management’s plan is to hold production steady at around 57,000 vehicles a year in 2024. There’s going to a midyear plant shutdown for its main line. It expects to put in place changes that will increase the plant’s efficiency by as much as 30%. Rivian is also going to be focusing on the cost of its supplies and reducing its salaried employee count by 10%. These are all good things for the company to be doing.

But a quick look at Rivian’s financial statement shows that it really has no choice in the matter. If it doesn’t cut costs quickly, its business model won’t be sustainable. To put some numbers on that, in 2023, Rivian generated $4.4 billion in revenue from selling its EVs. But its cost of goods sold, or what it cost the company to make the EVs it sold, came in at $6.4 billion. For the full year, it posted a negative gross profit of around $2 billion. And that doesn’t even include other costs that companies have to face — like selling, general, and administrative expenses or research and development — which together totaled $3.7 billion. Those costs pushed the loss from operations to a huge $5.7 billion in 2023.

Rivian’s balance sheet had nearly $7.9 billion in cash and $1.5 billion in short-term investments on it at the end of 2023. There’s no immediate worry here. But it can’t continue to post operating losses of $5.7 billion for very long. It has no choice but to start cutting costs. In fact, it probably needs to be fairly aggressive on that front or it could end up in financial trouble before too long.

Rivian built a car company, but it isn’t sustainable yet

Rivian is a large and complex business. But you don’t need to know how to run a large company to understand the very basic problem it faces. All you need is simple math. If Rivian can’t start generating more revenue from its products than it spends to produce them, it won’t survive. More conservative investors might want to wait on the sidelines here until management proves it is moving in the right direction on this front.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

Rivian Has No Choice; It Has to Find a Way to Reduce Costs was originally published by The Motley Fool