One of the biggest talking points for Rivian(NASDAQ: RIVN) has been that it will generate positive gross profit in the fourth quarter -- and it's a big milestone worthy of celebration. But the truth is when you look at the progress the company has made so far, it becomes evident how much work the company has remaining. This becomes a little more nerve-wracking when deliveries are expected to be roughly flat year over year. Let's take a look at the progress made so far, and Rivian's plan to take the final steps toward its gross profit goals.
Numbers never lie
One of the numbers that made for a great talking point in quotes, interviews, and articles came from the fourth quarter of 2023. In its shareholder letter, Rivian pointed out that it improved its gross profit per vehicle by a staggering $81,000, roughly. While accurate, when you look at Rivian's progress over time it doesn't show progress in a straight line, and another accurate number could be that Rivian's gross profit per vehicle got worse from the second quarter of 2023 to the second quarter of 2024.
Chart by author. Data source: Rivian shareholder letters.
That's not to say Rivian hasn't made progress; it certainly has. It's also fair to say that any comparison would have looked pretty good compared to the fourth quarter of 2022. Rivian also has to wring out every possible delivery and realize production improvements gained from its plant retooling.
Can Rivian do it?
Of course Rivian can squeeze out a small gross profit in the fourth quarter; management wouldn't set investors and analysts up for the disappointment if it weren't confident it could achieve its goal. Fortunately, Rivian has also given us a small road map to how it could bridge the gap to gross profit.
There are three primary drivers for Rivian to bridge the gap between the fourth quarter of 2023 and the positive gross profit in this year's fourth quarter.
First, roughly 15% of that gap will come from nonvehicle revenue. More specifically, with roughly 97,000 Rivian vehicles on the road through the second quarter of 2024, there's an opportunity for increased revenue in service, accessories, finance, insurance, and software-enabled services. While this might make up the smallest part of the bridged gap, it's core to the company's long-term margin targets.
Second, roughly 35% of that gap will come from fixed and semi-fixed cost efficiencies. Thanks to the plant shutdown, retooling, design changes, and optimization initiatives, management expects to significantly reduce fixed costs per vehicle. When Rivian made design changes to the R1 vehicles, it re-engineered hundreds of hardware improvements, and eliminated 65 parts and nearly 1,500 joints. The second-generation R1 also includes the new in-house Ascent Tri drive unit, which lowers manufacturing costs by roughly 32%.
Last, but certainly not least, 50% of the gap will come from improved variable cost per unit. Rivian's optimization initiatives have improved commercial supplier negotiations and lowered raw material costs.
What should investors think?
This ultimately serves as a good reminder that progress rarely happens in a straight line, and that investors should always dig into the numbers for better context. If Rivian turns a gross profit during the fourth quarter, it'll have taken a large step in proving it can one day generate a net profit. It's also important for investors to look at an investment like Rivian as highly volatile and speculative, because the company has a long way to go before it delivers a net profit.
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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.
