Rivian Automotive: Stalling Speed

Judging by the level of short interest, it seems there is already plenty of bearish sentiment on this stock, much of it related to weakening demand and cash outflows. Looking purely through our forensic lens, we see additional concerns mounting in the 10-Q filing, pushing the stock up to a risk rating of ‘9/10’ on our system.

Key among these is the sharp increase in finished goods inventory, which we can observe in the 10-Q disclosure below. We see a 67% increase in finished goods inventory in the space of just 3 months to nearly $1.5bn. The percentage weighting of finished goods within inventory (56%) is now far higher than the normal 30-40% range seen in previous quarters.

The increase is a function of the fact that Rivian produced 14,611 vehicles in Q1 but only delivered 8,640 vehicles. Management were open about the level of over-production on the analyst call, and it was framed as an intentional increase in order to manage the planned facility closure in the second half:

“we had produced more vehicles than we delivered in Q1 to help offset some of the lost production in the back half of the year as we shut down our manufacturing facility for roughly a month to integrate R2 into the plant.”

Claire Rauh McDonough, CFO

However, note that the guidance on deliveries was downgraded after the end of the quarter. As at April 2, when Rivian released production and delivery numbers, the company was still expecting deliveries in 2025 of 46k - 51k. However 1 month later (May 6), this was downgraded to a range of 40-46k.  This suggests a risk that Rivian is carrying too much inventory based on expected deliveries for the rest of the year (even accounting for the one month shut-down) and will have to reduce the rate of production significantly to clear the excess inventory.

This matters because COGS per unit ultimately depends on the level of production. When production is high, fixed costs are spread across more units, benefitting the gross margin. Over the past 3 quarters, production has been relatively high (an average of 13,500 per quarter), which is helping to keep COGS/unit low.  This was one of the factors that allowed Rivian to generate a second consecutive quarter of gross profit in Q1 and in the process unlock $1bn of funding from VW (see quote below from the Q1 call - our emphasis added)

“the key driver for us in Q1 [of per unit improvement in COGS] was predominantly driven by some of the improvements that we've made in operational efficiency as well as the fixed cost leverage that we had in the quarter given the higher production volumes with just over 14,600 units produced as a whole”

Claire Rauh McDonough, CFO

However when production falls, those same fixed costs must be spread across fewer units and COGS/unit is likely to increase.  Based on the mid-point of guidance (43k for 2025), deliveries for the last 3 quarters of the year will average around 11,500 units per quarter.  Even accounting for the 1 month shut-down this implies that the normalized production rate must come down just to keep finished goods inventory steady.

Lower production in the coming quarters would represent a headwind for margins, potentially reversing some of the progress made in the past 2 quarters.  In addition, investors should be aware that the longer excess inventory sits on the balance sheet the greater the risk of obsolescence (particularly in the fast moving market for EVs). As in previous quarters, Rivian may be required to take write-downs on the value of inventory where they find they cannot sell it above cost.