Rivian: the dangerous game of excessive expectations Rivian: the dangerous game of excessive expectations Rivian: the dangerous game of excessive expectations

Rivian: the dangerous game of excessive expectations

Equities 5 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  Rivian has become a new phenomenon we have never seen before getting a $153bn market value with zero revenue booked. However, the company has pre-orders for around $9.4bn in revenue but even with optimistic assumptions the estimated cash flow from these orders can not even remotely justify the current valuation. Too high expectations are always a dangerous thing for investors and Rivian has taken speculation to a new level in EV stocks.


In yesterday’s equity update, we wrote about the current bonanza in EV stocks with the 11 largest EV-makers in the world now worth more than the 11 largest ICE-makers. The recent IPO of Rivian has taken equity valuation and high expectations of the future to a whole new level. Rivian reached a market value of $153.3bn on yesterday’s close more than double the IPO valuation in just a few trading sessions. But here is the kicker, the EV-maker has never booked any revenue. This dwarf anything we have ever seen before and makes our bubble stocks look cheap.

Source: Saxo Group

Expectations are so high that Rivian can only disappoint

Let’s look at some facts. Rivian is backed by Amazon which has made an order for 100,000 EDV (Rivian’s electric delivery van) with an attached exclusivity for the next 4-6 years from the first delivery with an option of first refusal. This is a key execution risk and could impact Rivian from diversifying their revenue. In addition, they have around 55,000 pre-order for their R1T and R1S trucks/SUV (for passengers). If we assume an average selling price of $50,000 for the vans, which is close to the normal price for a Ford van, and $80,000 on average for their passenger vehicles, then they have orders worth $9.4bn.

If we assume that they can get to the same operating margin as Tesla has had in the last 12 months (9.6%) and we assume 25% cash tax rate, then this revenue constitute net operating income after taxes of $677mn. Assuming cost of capital of 10% (primarily equity financed with a high beta and early-start risk premium) and we play with the thought that this revenue/orders were a perpetuity and it could pass on inflation of 3% in the future, then this cash flow is worth $10bn today, a far cry from the current $153bn valuation. While these estimates are crude and not meant to provide the definitive answer to Rivian, it gives an idea of the expectations that the current share price reflects relative to what the company has in terms of orders. Expectations are so high that there is an elevated probability that EV-maker will disappoint investors. Ramping up production of EVs has proven to be difficult with only Tesla and Volkswagen looking to have found a way.

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.