Investors in electric vehicle (EV) startups are accustomed to tracking production and shipments to track their growth and better understand industry demand. Rivian (NASDAQ:RIVN) The company disappointed shareholders when it announced that its production and shipments in 2024 would be flat from last year, but that doesn’t mean there isn’t something important for investors to watch.
Rivian’s biggest achievement in 2024 – if the company can achieve what it hopes for – will be positive gross profit. Here’s a look at the driving forces behind the gross profit increase to date of about $81,000 per unit, and the next three driving forces that could allow the company to generate gross profit at the end of the year.
Drastic improvements
In the fourth quarter of 2022, Rivian’s gross revenue was Loss per unit checked in an incredible $124,162. Numbers like these don’t inspire confidence among investors, and management knew it had to make some dramatic improvements.
Fortunately for investors and Rivian, the company was able to reduce its gross loss per unit by around $81,000 to $43,372 through the fourth quarter of 2023.
About 45% of this improvement came from reducing fixed and semi-fixed costs. This was due in large part to the company’s 75% year-over-year production increase in the fourth quarter. Additionally, Rivian experienced a decline in depreciation and losses on firm purchase commitments during the year.
Another 40% of this improvement came from reducing variable costs, particularly material costs for the R1 vehicles and commercial vehicles. Specifically, Rivian achieved material cost savings of over 35% after the company began using its self-developed enduro drive unit and LFP battery in the first quarter of 2023. The introduction of the Enduro drive unit also eliminated a supply bottleneck in the company’s production.
The final 15% of improvement came from increasing unit revenue as the company delivered vehicles with a higher mix of new variants and options, resulting in higher average prices.
Achieving a positive gross profit
Although the $81,000 reduction in gross loss per vehicle was huge, the company still needs to go much further to achieve gross profit. Management expects to achieve positive gross profit in the fourth quarter of 2024 thanks to three key employees.
The biggest improvement for the company in 2024 will come in variable costs. In fact, management expects the 50% improvement in gross profit/loss this year to be due to R1’s technical design changes, reductions in raw material costs and negotiating better contracts with suppliers.
Another 35% of the gross profit improvement this year is expected to come from fixed and semi-fixed costs. Management expects that the changes to its manufacturing process will significantly reduce costs and improve production efficiency during the planned closure of its Illinois plant in the second quarter. The production line rate is expected to increase by 30%. Perhaps most interestingly, the company expects this to actually turn into a tailwind for gross profit in 2024, rather than losses from firm purchase commitments.
Finally, management expects 15% of gross profit improvement this year to come from non-vehicle sales. More specifically, with over 71,000 Rivian vehicles in use, there are opportunities for the young electric vehicle manufacturer to generate revenue from service, accessories, insurance and software services.
What it all means
While it’s of great interest to investors that the company believes it can achieve positive gross profitability in 2024 even without production and sales growth, the story is much bigger than that. This involves Rivian improving its operations and supplier pricing to pave the way for its R2 and R3 vehicles.
Until these vehicles can come to market at prices more suitable for the mainstream consumer, Rivian will need to fine-tune and scale its operations and dramatically increase gross profit even further to offset the lower prices.
If Rivian can perform as expected throughout 2024, the company will be in a much better position to convince investors that it can achieve its long-term vision and become a major player in the electric vehicle industry.
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Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
How Rivian Will Achieve Its Biggest Achievement in 2024 was originally published by The Motley Fool