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How Rivian will accomplish its greatest achievement in 2024

Investors in electric vehicle (EV) startups are accustomed to tracking production and deliveries to monitor their growth and better understand industry demand. Rivaans (NASDAQ: RIVN) disappointed its shareholders when it announced that production and deliveries would remain flat year over year through 2024, but that doesn’t mean investors shouldn’t pay attention to something crucial.

Rivian’s biggest achievement in 2024 – if it can achieve what it hopes to achieve – will be positive gross profit. Here’s a look at the drivers behind the prior gross profit improvement of approximately $81,000 per unit, and the next three drivers that could allow the company to achieve gross profit by the end of this year.

Drastic improvements

During the fourth quarter of 2022, Rivian was gross loss per checked unit for as much as $124,162. Such numbers do not inspire investor confidence, and management knew some dramatic improvements needed to be made.

Fortunately, for investors and Rivian, the company was able to reduce its gross loss per unit by approximately $81,000 to $43,372 in the fourth quarter of 2023.

About 45% of that improvement was achieved by reducing fixed and semi-fixed costs. That was in large part due to the company’s 75% year-over-year production increase in the fourth quarter. Rivian also achieved a reduction in depreciation and losses on firm purchase commitments during the year.

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Another 40% of that improvement came from reducing variable costs, particularly material costs for the R1 vehicles and commercial vehicles. More specifically, Rivian achieved more than 35% savings in material costs after it started using the internally developed Enduro drive unit and LFP battery in the first quarter of 2023. The introduction of the Enduro drive unit also removed a supply bottleneck from the company’s production.

The final 15% of the improvement came from rising unit sales as the company delivered vehicles with a greater mix of new variants and options, leading to higher average price tags.

Achieving a positive gross profit

While that $81,000 reduction in gross loss per vehicle was huge, the company still has much further to go if it wants to achieve gross profit. Management expects to achieve positive gross profit in the fourth quarter of 2024 thanks to three key factors.

The biggest improvement for the company in 2024 will be in variable costs. In fact, management expects that 50% of this year’s gross profit/loss improvement will come from changes to R1’s technical design, raw material cost reductions and negotiating better deals with suppliers.

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Another 35% of this year’s gross profit improvement would be due to fixed and semi-fixed costs. Management believes it will significantly reduce costs and improve production efficiency with the changes it will make to the manufacturing process during the planned closure of the Illinois plant in the second quarter. Production line speed is expected to increase by 30%. Perhaps most interestingly, the company expects that this, rather than losses from fixed purchase commitments, will actually hurt gross profit in 2024.

Last but not least, management expects 15% of this year’s gross profit improvement to come from non-auto revenues. More specifically, with more than 71,000 Rivian vehicles in the wild, there are opportunities for the young EV maker to generate revenue from service, accessories, insurance and software services.

What it all means

While it is extremely important for investors that the company believes it can achieve positive gross profitability by 2024 even without production and revenue growth, ultimately the story is bigger than that. The point is for Rivian to improve its operations and supplier prices to pave the way for its R2 and R3 vehicles.

By the time these vehicles are ready to launch at prices better suited to mainstream consumers, Rivian will need to fine-tune its business and get it ready to scale, and it will need to dramatically improve gross profit even further to match those lower offset prices.

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If Rivian can execute as it expects in 2024, it will be in much better shape to convince investors that it can achieve its long-term vision and become a major player in the EV 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 Accomplish Its Greatest Achievement in 2024 was originally published by The Motley Fool

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