Recent changes in the automotive sphere have marked a turning point. While the demand for battery-powered electric vehicles (EVs) was flourishing not long ago, the sector is now at a standstill. The growth rate for EVs dropped from 51% year over year to zero in Q1 of 2024. In contrast, plug-in hybrids are witnessing a surge, showing a robust growth rate of over 50% annually and dominating the automotive market’s expansion this year. These dynamics have led Ford (NYSE: F) to alter its plans, opting for plug-in hybrids over an all-electric SUV model.
This strategic shift raises questions about the implications for emerging players in the EV arena, like Rivian Automotive (NASDAQ: RIVN), focusing on all-electric pick-up trucks and SUVs. Let’s delve deeper into this matter.
Ford’s Strategic Pivot
A few years back, Ford ventured into significant investments in battery technology and EVs, launching models like the Mustang Mach-E and F-150 Lightning. In 2021, it unveiled an $11.4 billion commitment towards new American factories for battery and electric vehicle production. However, a recent announcement indicates a shift in this approach.
Instead of an exclusively electric vehicle, Ford’s upcoming SUV range will incorporate plug-in hybrid technology. This move doesn’t render the $11.4 billion investment redundant, as plug-in hybrid vehicles still rely on substantial lithium-ion batteries. Yet, they require less raw materials for batteries, cutting down costs. Consumers are demonstrating a preference for plug-in hybrids, as evident by a 59% surge in sales year over year in Q1 2024.
Currently, there is a visible inclination towards the flexibility offered by plug-in hybrids over fully electric vehicles, produced by players like Rivian or Tesla. But what does this adaptation signify for these companies?
A Conundrum for Rivian
On one side, supporters of Rivian could argue that the company stands on the right side of history. Rivian focuses on producing all-electric SUVs and pick-up trucks, aligning with the increasing consumer demand for environmentally friendly vehicles, predicting the eventual decline of traditional internal combustion automobiles.
Nevertheless, Rivian’s exclusive emphasis on not offering plug-in hybrids places it at a disadvantage, given the current market trend favoring such vehicles. This situation is reflected in its production and delivery statistics, with production figures stagnating around 60,000 vehicles annually, and deliveries indicating minimal growth recently.
Additionally, the company faces challenges with larger vehicles like SUVs and pick-up trucks, necessitating sizeable batteries that inflate input costs. Despite starting prices at $75,000 for its pick-up trucks, Rivian exhibits a staggering negative 41% gross margin.
RIVN Gross Profit Margin data by YCharts.
Assessing Rivian Stock
The current shift towards plug-in hybrids in the automotive market poses a significant challenge for Rivian. The company requires a customer base willing to invest in premium EVs and an expanded production scale to transform its negative gross margins into positives, mirroring Tesla’s journey with the Model 3.
Introducing a new car model demands substantial capital investment, covering design, supply chain establishment, and manufacturing plant enhancements, without shortcuts. Rivian’s annual spending of $5 billion, coupled with under $8 billion in cash reserves, indicates a slim window to explore plug-in hybrids without securing additional external financing.
Until recently, Rivian displayed gradual progress in gross margins, though still distant from profitability milestones as production scaled up. However, stagnating gross margins alongside limited production and delivery growth signal the challenges posed by the escalating demand for plug-in hybrids in the U.S.
If the plug-in hybrid trend persists, Rivian’s operational viability might continue to face hurdles. Consequently, investors should exercise caution before considering investment in this volatile and unprofitable stock at present.
Is Rivian Automotive a Worthy Investment?
Prior to investing in Rivian Automotive, it’s crucial to consider the following:
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Brett Schafer 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.