*This article was reproduced from the autocarweekly WeChat Official Account.
Author: Li Laoyi from Financial Street
Backing the right tree increases the chances of success, as demonstrated by Rivian’s market value.
While everyone was waiting for the New Year’s market for A-shares of new energy vehicles, on November 10th, the American new car manufacturer Rivian landed on NASDAQ. As one of the top ten largest IPOs in the history of the American stock market, its $12 billion financing scale exceeded the total IPO financing scale of Tesla, NIO, Li Auto, and XPeng, which captured everyone’s attention.
Rivian rose sharply for two days after its IPO, and its total market value exceeded $100 billion, making it the third highest market value automobile enterprise in the US, after Tesla and Toyota. Many American investors saw this coming, but Chinese investors did not, as as early as 2018, many Chinese investors thought that Rivian had “poor quality” and voted against it at the investment committee meeting.
Few people are familiar with Rivian, but Li’s partner has a close relationship with the company. Today, Li will talk with us about what kind of company Rivian is, why it has been able to leap to the top three in the industry within three years, and whether the high market valuation given to it by the market is a bubble. How has Rivian made the intelligent electric vehicle era endless?
Rivian Backs the Right Tree for a Cooler Life
Founded in Michigan, USA in 2009, Rivian initially developed vehicle technology. In 2011, the company’s business was adjusted to focus on new energy vehicle research and development, but for the next five years, Rivian remained stagnant and made no substantive progress. During the same period, Tesla was the only one shining in the field of new energy vehicles, and a group of Chinese new carmakers emerged, entering into an era of intense competition.
In 2017, after Rivian acquired the Mitsubishi Illinois manufacturing plant, it began a new round of development. In 2018, the company announced the launch of SUV and pickup truck models, kicking off a crazy path of financing.
As for Rivian’s financing, Li has a sense of feeling. In 2018, at the start-up stage, Rivian came to China for financing and visited many well-known domestic funds. Many fund managers maintained a skeptical attitude towards Rivian, and even some FA (financial advisor) did not want to undertake financing services for them. The reasons were two-fold: Firstly, the overseas electric vehicle market was not mature enough, and there was no clear track; secondly, Chinese investors take the products and development path of Chinese new carmakers as benchmarks, and think that electric pickups are still far away.
Interestingly, many fund managers and investment committee review experts have expressed regret that they did not invest in Rivian after it went public.
Investment relies on timing, location, and people. In 2018, Rivian did not have the timing or location advantage in the EV market, which was far less heated in the US than in China. Luckily, Rivian had the people advantage.
Old Li remembers it vividly. After failing to raise funds in China, Rivian adopted a “super god mode” fundraising strategy in 2019, attracting numerous “big trees.” In February, Rivian secured a $700 million strategic investment from Amazon; two months later, Ford invested $500 million in Rivian; in September, the well-known US automobile service company Cox made a strategic investment of $350 million; in December, BlackRock, Amazon, and Ford added another $1.3 billion in investment. In 2019 alone, Rivian received more than $2.85 billion in investment, and its pre-IPO total accumulated financing exceeded $11 billion.
What does this mean? The pre-IPO total financing of NIO was about $2 billion, and that of XiaoPeng was about $2.5 billion. Whether in China or the US, many enterprises need to rely on big trees to grow. If Amazon and Ford had invested in Rivian back then, Old Li believes that Chinese investors would also have followed suit, but the world is realistic.
Returning to reality, from the perspective of shareholders, Amazon and Ford are important shareholders, with the former holding more than 20% of the shares before the IPO, and the latter holding 14.4%. Old Li will not delve into the details of Amazon and Ford’s investment in Rivian, but here he mainly discusses the deep logic of Amazon, Ford, and Cox’s strategic investment in Rivian.
One reason the market is bullish on Rivian is its reliance on big trees, and more importantly, Rivian cleverly integrated the resources of the three parties, achieving technological and ecological integration.
The first is technological integration. Rivian and Ford have a lot of room for technological complementarity in the areas of lightweight, electrification, and intelligence. The combination of Ford’s advanced traditional technology and Rivian’s innovative technology can realize mutual communication. Technological integration is the basis for Rivian’s entry into the automotive field, and the market will certainly not give it high valuation for this alone.
The second is ecological integration. Amazon has all the user data, while Cox is an excellent value-added service provider in the automotive field. The full life cycle ecosystem system that Rivian promotes is essentially the integration of both shareholders’ ecosystems, integrating fleet management services for B-end users and single-car experience services for C-end users into Rivian Cloud, and then carrying out big data analysis to achieve communication and feedback with consumers, expanding commercial value.Rivian is a very smart company. Among China’s new car-making forces, strategic investors are hardly seen except for BAT, and most of them are financial investors. Rivian is the world’s first new car-making force to integrate automotive strategic investors, internet strategic investors, and automotive service strategic investors.
Is a high valuation backed by giants a bubble?
Many Chinese friends are discussing whether Rivian’s valuation of over 100 billion is a market bubble. From different perspectives, it is necessary to consider the long-term valuation and business. Rivian’s market value may not be high. According to the current order situation, three years later, Rivian’s delivery volume will exceed 100,000 units. If calculated based on the market value of 150 billion, its valuation-to-price ratio exceeds that of Tesla. As a new car-making force, Tesla, with a market value of one trillion, only sold 500,000 units in 2020.
However, from the perspective of short-term valuation and performance, its market value is indeed relatively high. Rivian currently has no revenue. Its operating losses were $409 million and $1.021 billion in 2019 and 2020, respectively, and $990 million in the first half of 2021.
On the day of its listing, some fund peers joked that Rivian was very similar to Evergrande: without delivering a single car, capital pushed it to become one of the top three automotive companies in the US stock market. From this perspective, high valuation is not a problem with Rivian but a problem with all new car-making forces, and bubbles are unfounded. In Li’s view, there are three driving forces behind Rivian’s high valuation:
One is that the company is in the best IPO opportunity period. After Biden announced the vigorous development of new energy vehicles, “under the background of carbon neutrality, the new energy automobile industry will be a long snow slope,” a “truth” that Chinese investors love to talk about, it also applies to the US new energy vehicle industry, and many US investors believe that new energy vehicles are a long-term track.
In terms of market prosperity, although China’s new car-making force is in the doldrums, the profitability of new energy vehicle manufacturers in the United States is very good. In the past month, Tesla’s market value has exceeded $1 trillion, Lucid’s market value has exceeded $70 billion, and it is not surprising that Rivian’s market value has exceeded $100 billion.
The second factor is that the company had a good financing situation before its IPO. Tesla and “Nio” have experienced financing difficulties in the capital market, but Rivian has been smooth sailing all along. In the pre-IPO fundraising, Rivian raised more than $11 billion, and the IPO fundraising was $12 billion. In comparison, “Nio’s” IPO fundraising sizes were $1 billion, $1.5 billion, and $1.1 billion respectively, and Lucid’s fundraising amount was only $4.4 billion.
Lao Li believes that the key factor affecting the bubble is not the size of the fundraising amount, but the market’s continued approval of Rivian.
The third factor is the support of Wall Street financial companies behind Rivian, which is the most direct reason for its high valuation. In July of this year, the largest round of pre-IPO fundraising for Rivian was $2.5 billion, and D1 Capital and Primecap Group appeared on the investment list in addition to Amazon and Ford’s strategic follow-up investment.
In May of this year, star companies including Goldman Sachs and Morgan Stanley competed for the position of lead underwriter for the IPO. Interestingly, in the end, Morgan Stanley, Goldman Sachs, and JPMorgan jointly served as lead underwriters for this IPO, and the three companies will certainly play all their cards to raise the market value.
People always say that A-shares are a market for value speculation, and US stocks are a market for value investment. Strictly speaking, there are also speculative behaviors in the US stock market. When it comes to bubbles, Lao Li thinks of “Nio.” During the rapid increase in market value of Nio last year, some speculative capital entered, which brought Nio to a higher position.
Generally speaking, as long as a star company goes public, speculative capital will enter the market. In Rivian’s high valuation, there must also be speculative capital, and the scale is not small. When the market sentiment cools down, it will definitely affect the valuation, but the company’s fundamentals will not change, just like the current Nio, which has a better quality.
Is Rivian’s future bright?
Under such a high valuation, what is the future of Rivian? Industry insiders have given conflicting opinions, and the capital market’s viewpoint is relatively neutral. Lao Li consulted some US stock analysts, and their answer was “wait and see.”
To look at Rivian’s valuation from its fundamentals, the company’s valuation is dynamic, and fundamentals are also dynamic. If the market and performance can meet expectations, the fundamentals can keep up with the valuation, and the prospects for the capital market will be very bright, perhaps it will become the next Apple, Microsoft, or Tesla. If the market and performance are slow to meet expectations, Rivian will most likely be short-lived.Talking about the fundamentals of automobile companies, Mr. Li talked about the basic plate strategy and technological transformation strategy of Great Wall Motors a while ago. In fact, the situations faced by Rivian and Great Wall Motors are similar. In the short term, Rivian needs to ensure delivery volumes while in the long term, it needs to see ecological effects. Mr. Li thinks that both are hard to achieve.
In the short term, Rivian’s market sales are mixed. According to the IPO prospectus, as of the end of October this year, the R1T pickup and R1S SUV of Rivian have accumulated 55,400 orders while EDV has won 100,000 orders from Amazon. From a financial perspective, these sales are not sufficient to support the company’s $100 billion market cap.
Looking further down the line to 2025, EDV’s market size is limited and the competition in the US pickup and SUV market is fierce. According to IHS’s report, in terms of size, the potential market size for pickups and SUVs over $80,000 in the US is at most 800,000 to 1 million units. The potential market size for this segment overseas is basically zero. If Rivian’s market share is 50%, the volume will only be around 400,000 to 500,000 units, similar to Tesla’s current volume.
When investing in companies, one should have a sense of the ultimate goal i.e., the final commercial form of the industry. Three years ago, when Tesla was booming, people believed that new energy + autonomous driving was the ultimate form of intelligent electric vehicles. After Rivian’s emergence, people believe that intelligent electric vehicles + cross-border ecology may be the ultimate form of the industry. In Mr. Li’s view, in the world of the Internet of Things, there may no longer be a final form for various industries. As long as there is integration and innovation, the commercial form will be different.
Rivian’s biggest potential lies not in the new four modernizations technology since everyone’s technology, including Tesla and “Little Wei Li”, is only different in degree and not in kind. The factor that can create differentiation is the commercial form behind the technology.
Rivian’s commercial form stems from its deep integration with Amazon and Cox. Amazon is deeply tied to Rivian, while Cox explicitly stated in its investment in Rivian that it wants representatives to enter the board of directors and engage in decision-making in areas such as automobile production and R&D, service operation, logistics, and digital retail.Ecology has been a buzzword in China for many years, but its implementation has been limited. The commercial value of ecology lies in the restoration and prediction of users’ behaviors throughout their entire lifecycles based on cross-industry data and information interconnectedness, in order to seek commercial value. In layman’s terms, artificial intelligence and big data compare our personal information with that of others, and guide our behavior based on the behavior of different groups, thereby creating value.
This is not just accurate recommendations and big data for price discrimination, but the optimization of social productivity. Amazon and Rivian, one with retail information data and the other with vehicle information data, combined with Cox’s historical data, may have greater imagination when merged.
Domestic enterprises have also promoted similar ecological business, but they have fallen apart after achieving some results due to the lack of deep binding with capital and strategy. Amazon, Rivian and Cox have the potential to create a magical ecosystem, allowing the intelligent electric vehicle industry to have no endgame.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.