Shifting winds have hit the automotive market. After years of unit growth for battery-powered electric vehicles (EVs), the sector has begun to stagnate. New unit sales for EVs were growing 51% year over year less than a year ago. In the first quarter of 2024, that growth rate collapsed to zero, meaning the number of EVs sold in the United States was the same as a year ago.
What is replacing this growth? Plug-in hybrids. The versatile technology that brings battery charging and gasoline-powered engines to the same vehicle is growing north of 50% year over year, making up the majority of growth for the automotive market in 2024. This has inspired Ford (NYSE: F) to scrap plans for an all-electric SUV, replacing the upcoming model with a plug-in hybrid.
Does this spell trouble for full EV upstarts such as Rivian Automotive (NASDAQ: RIVN), a company betting on all-electric pick-up trucks and SUVs? Let's investigate further and find out.
Ford's changing product strategy
A few years ago, Ford began investing heavily in battery power and EV technologies. It came out with the Mustang Mach-E and F-150 Lightning. In 2021, it announced an $11.4 billion investment into new American factories set to pump out batteries and electric cars. Now, it has announced a pivot to this strategy.
Instead of a fully electric vehicle, Ford's upcoming SUV models will be plug-in hybrids. This doesn't mean Ford's $11.4 billion investment will go completely to waste, as these vehicles still require sizable lithium-ion batteries. They just don't need nearly the amount of raw materials for the batteries, which saves on costs. People are saying they want the flexibility of a plug-in hybrid as well. While full EVs are not growing in the United States, plug-in hybrid sales jumped 59% year over year in Q1 2024.
For right now at least, people want the flexibility of a plug-in hybrid over the fully electric vehicles produced by the likes of Rivian or Tesla. But what does it mean for these businesses?
A double-edged sword for Rivian
On the one hand, investors could argue that Rivian is on the right side of history. The company produces all-electric SUVs and pick-up trucks. People are now saying they want more environmentally friendly cars to drive, and that eventually traditional full internal combustion vehicles will go extinct.
The problem is, Rivian has limited itself to not selling plug-in hybrids, which is where all the growth is today. You can see it in its delivery and production figures. Rivian's production has not grown over the last few quarters and seems stuck at around 60,000 vehicles a year. Deliveries have climbed slightly, but that is due to Rivian selling through some inventory that built up in late 2023. The trailing rate of deliveries has only just caught up to the trailing rate of production.
This growth slowdown coincides perfectly with the uptick in plug-in hybrid sales. The problem is that -- especially with larger vehicles like SUVs and pick-up trucks -- you need extra-large batteries. Larger batteries mean higher input costs, which consumers are not willing to pay up for. Even though the average Rivian pick-up truck starts at $75,000, the company has a shocking negative 41% gross margin.
Is Rivian stock a buy?
An automotive market trending to plug-in hybrids is a disastrous development for Rivian. The company needs customers willing to pay up for premium EVs, and to reach a larger production scale to bring its gross margins from negative to positive. This is what happened to Tesla when it ramped up Model 3 production, for reference.
Bringing a completely new car model to market costs billions of dollars. From design to supply chain procurement to capital investments in the manufacturing plants, there is no way to shortcut the automotive production process. Rivian is burning $5 billion a year and has less than $8 billion in cash on the balance sheet. It likely does not have the time or the money to invest in a plug-in hybrid unless it can secure billions more in financing from outside investors.
Up until late last year, Rivian's gross margin was moving in the right direction. It still had a long ways to go, but you had a line of sight to improvement and eventual profits as the company scaled up production. Now, gross margins have stagnated at well in the negative territory, along with production and deliveries to customers. This coincided with the growth in demand for plug-in hybrids in the United States.
If the growth in plug-in hybrids continues, Rivian's business will continue to struggle. From my seat, this means investors should avoid buying this risky and unprofitable stock at the moment.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
Ford Ditches Its Electric SUV: Here's What That Means For Rivian Stock was originally published by The Motley Fool