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Rivian has structural, demand challenges to overcome 'to unlock real value' of the EV stock: Analyst

Barclays Senior Autos Analyst Dan Levy joins Yahoo Finance Live to discuss the state of the EV market, the drop in Lucid shares, a look ahead to Rivian and Fisker earnings, the outlook for Tesla, and Warren Buffett's comments on the auto industry.

Video transcript

AKIKO FUJITA: Well, Lucid Groyp kicking off a busy week of earnings in the EV sector this week. Lucid shares trading lower in after hours, down more than 7% here after the EV maker's Q1 results missed estimates on both the top and bottom lines. Joining us now is Dan Levy, Barclays Senior Autos Analyst.

Dan, I realize you don't cover Lucid, and they compete at a higher price point, but I'm curious what you make of the number that we're getting there. And what does that say about the momentum within the EV space right now as a whole?


DAN LEVY: Yes. Thank you, Akiko, for having me. Look, I think that what we've seen with Lucid is guiding to the lower end of its production guidance. I think one of the broader trends that we've seen in the EV world is that some of these production ramps are challenging. And it's not just Lucid.

We've seen it at Rivian. We've seen it with the legacy automakers, where there's been some lumpiness in the ramps. Obviously, there are supply questions as well. So I think part of this gets to some of the questions of ramping on EVs, which hasn't been easy, frankly.

AKIKO FUJITA: You mentioned the challenges that we've seen at other EV companies-- Rivian one that you just mentioned there, certainly one that you seem pretty bullish on, though, saying that it has the best potential to pursue the title as the next Tesla. They've also got some challenges there on supply side as well as ramping up right now.

I mean, what do you see there that makes you positive? You've got an overweight rating on the stock right now.

DAN LEVY: Yes, I do. And I think what keeps us positive on Rivian is that it's connected to all the right trends. We know that the world is electrifying. We can debate the shape of the curve. We know that it's electrifying.

We know that in the path to electrification, some of the legacy automakers have real challenges they need to address in terms of manufacturing, transition, and transitioning out of combustion engines. Rivian doesn't have any of those. The product is amazing. And they own a lot of their technology.

So we appreciate all of those pieces that make it, we think, to be real structural strengths. But to unlock the real value of the stock, we also acknowledge that it's going to have to overcome a number of challenges. Notably, the losses have been quite high. They lost something like $5, $6 billion of EBITDA last year. They're going to do another $4 billion EBITDA loss this year.

The pace of cash burn has been something to watch. And then, obviously, what we're watching for, demand has not been an issue. But it's something that we're monitoring given that is one of the newer developments in the EV realm today is questioning the health of demand. This was previously an industry that was defined by supply. It was fully supply constrained, now it's demand constrained. And that's something we want to just be watching with Rivian to make sure that the demand is still there, the backlog is still healthy.

AKIKO FUJITA: No question investors have turned a more critical eye on the sector as a whole. It isn't just about the growth anymore. It is about profitability. When you look at a name like Rivian, how do you think the company steers things in that direction?

DAN LEVY: Well, Rivian is pivoting in some ways from the approach that they took at the time of the IPO. Clearly, the message of the market at the time of the IPO, which was just over 18 months ago now, was grow at any cost. And so, accordingly, they took on certain approaches that they've since pivoted away from. And so part of the path ahead for Rivian is certainly ramping on volume-- that's certainly a key piece of it is the volumes are still constrained.

We need to see them going above 10,000 units a quarter. They've guided to 50,000 units this year. I think there's some hope that, potentially, they could produce closer to 60,000 units. I mean, that has been out in the media already.

But then there's also questions about reducing some of the content or getting some breaks on pricing from suppliers, really, to help reduce some of the cogs. I mean, this is a company that last year, even if you strip out the cost of labor and DNA, lost $40,000 per vehicle. And so there's definitely some work ahead. Our hope is that they're taking the right steps to address that profitability and to achieve their target of getting to gross margin break even next year.

AKIKO FUJITA: Dan, let's talk about the leader in the space. That is, of course, Tesla. You've still got an overweight rating on the stock right now. But this is a company that has gone through multiple price cuts this year, until most recently, they had a price hike. Does that suggest we've finally seen the floor on pricing?

DAN LEVY: No, we don't think that this is the floor. The most recent price hike may have just been a way to signal to consumers that there is a little bit of stability for now. But our view is that as they continue to ramp on supply, which has been-- Elon made it pretty clear on the last earnings call that they want to ramp on volume-- the more supply you have hitting the market there's probably going to have to be more price cuts to unlock that supply.

Our view on the stock is that, look, the current fundamentals are challenged. We are seeing the question of, what's the floor on margins? What's the elasticity of demand? These are all real questions, and it's making the fundamentals somewhat challenging.

Now, we do think that there's negative EPS revisions ahead for 2024. We're at roughly $4 of earnings next year. Consensus, I see, is closer to $5. What keeps us positive, though, is that they are still the leader in this transition.

We know this transition is happening. We think they're going to soak up a lot of share. And, really, the name of the game for them is aggressively reducing costs. So there are some challenges on fundamentals right now, just given what's happening on demand. But we think that, eventually, they will get past this.

AKIKO FUJITA: Finally, I want to ask you about some comments that we got from Warren Buffett over the weekend when he was asked about EV investing. He said specifically, you won't see anyone that owns the market. It's partly why he's not very bullish on the sector itself.

You talked about Tesla being the leader here, Rivian potentially one to follow. But as we see more and more competitors flood the market, are we going to see it increasingly fragmented? Or is this a market that will still see big leadership from a name like Tesla-- if not Tesla, another name?

DAN LEVY: We think that Tesla is going to continue to grow a lot of its volume. Look, I think Warren Buffett's comments are correct that the auto industry has historically been very challenging industry. And it's one where automakers have been challenged in really differentiating themselves. I think what we've seen from Tesla, though, is a very clear lead in approaching cost, driving costs down, really figuring out the dynamics of the software defined vehicle in ways that others have struggled.

And so it's not to say that they're going to completely displace others, but there is a lot share that they will gain. That's what we think is the real opportunity for them is they're just still so far ahead on cost and in unlocking that potential that they're still a winner in this race.

AKIKO FUJITA: Barclay's Senior Autos Analyst Dan Levy, good to talk to you today. Got a busy week ahead of you. Thanks so much for that.