Rivian’s Valuation is a Piece of Nonsense

Asset growth effects tell us that low-growth stocks tend to outperform high-growth stocks. To defy the gravitational pull of asset growth effects, a business has to have competitive advantages, chief of which are barriers to entry. This allows the business to defend its profitability and support high valuations. The hype around EV companies like Rivian is that they can build the car of the future because they can create vertically-integrated ecosystems suited to the production of EVs and for capturing revenue across the lifecycle of a vehicle.

The EV market is massive. Rivian estimates that it has a serviceable addressable market of $1 trillion and a total addressable market of $9 trillion.

The narrative is that EV makers like Rivian are disrupting the traditional automobile industry and that international combustion engine vehicle makers will decline as consumers shift to EVs. However, a company like GM can leverage a century of manufacturing expertise to develop enough EVs to satisfy actual demand, while remaining profitable. A company like Rivian, on the other hand, because it's a pure play, does not have the ability to hedge its capital allocation and earn profits from traditional sources of income. It has to be prepared to spend a long time in the red while it grows in pursuit of minimum viable profitability.

In 2020, just 3 million EVs were sold across the world, which is around 46% of the number of cars that GM sold that year. GM and other incumbents understand that EVs are still a niche market and talk of a mass pivot to EVs is way ahead of schedule. The business case for GM or Ford pivoting to EVs just isn’t there. It makes more sense for them to enter the market in full force when they can leverage their scale to earn superior profits.

That time is now. BloombergNEF estimates that the EV market will produce 26 million vehicles in 2030. In 2020, global car sales were 64 million. Rivian does not have the track record, expertise or capacity to compete in what fans believe is its natural territory. Importantly, markets like these attract competition, and the effect of that is that operationally efficient manufacturers who can produce at low cost are more likely to succeed because competition drives prices down. A startup like Rivian has higher costs than a traditional car maker because it has to build everything from scratch, whereas a traditional car maker just has to adjust its infrastructure and processes. Rivian does not have the competitive advantages to support high profitability and will fall prey to the gravitational force of asset growth effects.

Comparisons to Tesla are far off. Whatever you think of Tesla, it actually earned revenues from vehicle sales before it went public. In 2010, when it went public, it delivered more than 1,500 vehicles. Have you ever seen a Rivian car? Rivian’s core earnings were -$398 million in 2019, falling to -$982 million in 2020, with the company burning -$2.5 billion in free cash flow (FCF) in 2020. Rivian has all the fingerprints of a startup, not an IPO-ready business.