The electric vehicle (EV) landscape, once a fertile ground for growth, is now encountering headwinds. The robust annual increase of 51% in EV sales saw a sharp decline to zero in the first quarter of 2024, signaling a plateau in the United States market. Conversely, plug-in hybrids have emerged as the new frontier, experiencing a remarkable surge of over 50% year over year, becoming the primary growth driver in the automotive sector this year. This market shift has prompted Ford (NYSE: F) to forego an all-electric SUV in favor of a plug-in hybrid model.
With Ford altering its product strategy, what implications does this have for players like Rivian Automotive (NASDAQ: RIVN), specializing in all-electric pick-up trucks and SUVs? Let’s delve deeper to uncover the repercussions.
A Strategic Shift for Ford
A few years back, Ford made significant investments in battery technology and EVs, launching models like the Mustang Mach-E and F-150 Lightning. Their announcement of an $11.4 billion investment in US factories for battery and electric vehicle production in 2021 showcased a commitment to electric mobility. However, the company has now pivoted from entirely electric vehicles to a lineup of plug-in hybrid SUVs. This shift does not render Ford’s prior investments redundant, as plug-in hybrids still necessitate substantial lithium-ion batteries albeit in lesser quantities, leading to cost savings. The shift reflects consumer demand for the versatility offered by plug-in hybrids, a segment that witnessed a 59% increase in sales year over year in Q1 2024.
Rivian Caught in a Conundrum
Rivian finds itself at a crossroads. While the company champions all-electric vehicles, increasingly seen as the environmentally conscious choice for consumers, its reluctance to offer plug-in hybrids compromises its growth potential in the current market. This dilemma is evident in its production statistics, which stagnated around 60,000 vehicles annually, accompanied by negligible growth. Despite a modest uptick in deliveries, driven primarily by clearing existing inventory backlog, the pace of deliveries aligns closely with production rates.
Furthermore, the heightened demand for plug-in hybrids presents challenges for Rivian, particularly concerning the production costs of large batteries essential for SUVs and pick-up trucks. Despite commanding premium prices starting at $75,000, Rivian faces a daunting 41% negative gross margin. This financial strain is vividly portrayed in the graphic indicating a stagnant and negative gross profit margin trend.
The Rivian Stock Conundrum
The market trend favoring plug-in hybrids spells trouble for Rivian’s future. Rivian requires a substantial customer base willing to invest in premium EVs to scale up production and turn its negative gross margins positive, similar to Tesla’s transformation with the Model 3 rollout. Launching a new vehicle model necessitates massive capital investments covering design, supply chains, and manufacturing facilities, a process lacking shortcuts in the automotive industry.
Rivian’s annual cash burn of $5 billion alongside a dwindling cash reserve of under $8 billion raises concerns about its capacity to venture into plug-in hybrids without securing additional financing. Until recently, Rivian showcased a positive trajectory in gross margin improvement, albeit distant from profitability. However, recent figures painted a stark picture, with gross margins remaining in negative territory amid stagnant production and delivery rates, coinciding with the surge in plug-in hybrid demand. If this trend persists, Rivian’s prospects remain challenging, making the stock a risky investment choice currently.
Before pondering an investment in Rivian Automotive, consider the insights provided by the Motley Fool Stock Advisor team, highlighting investment opportunities outside the EV realm that offer significant growth potential.
Disclaimer: This article is solely for informative purposes. The author possesses no positions in the mentioned stocks. The Motley Fool has holdings in and endorses Tesla.