Ford expected to sell overvalued Rivian shares in 2022

Back in 2019, Ford Motor Company (NYSE:F) invested $500 million in the start-up of an electric truck Rivian Automotive (NASDAQ: RIVN). Along with this investment, Ford announced plans to build an electric vehicle (EV) based on Rivian’s vehicle platform.

As a financial investment, Rivian’s participation generated a huge windfall for Ford. However, the strategic aspect of the investment fell apart, with the two companies no longer planning to collaborate on vehicle development. With Rivian shares trading at an extraordinarily high valuation for a glorified start-up — even after a sharp pullback from its November high — Ford is likely to look to sell its Rivian shares in 2022.

Collaborative Plans Fail

Before the pandemic, Ford planned to build a Lincoln-branded crossover on Rivian’s platform, complementing the electric vehicles it planned to develop entirely in-house. It canceled that project in April 2020, but the companies said at the time that they would develop a different Ford vehicle on Rivian’s platform.

Ford previously planned to build a Lincoln crossover on Rivian’s vehicle platform. Image source: Ford Motor Company.

However, last November – shortly after Rivian’s IPO – Ford and Rivian acknowledged that they no longer intended to work together on vehicle development or platform sharing. Companies will instead focus on their separate EV product roadmaps. This change removes the strategic aspect of Ford’s investment in Rivian stock.

The case of collection

Following the cancellation of Ford’s plans to collaborate with Rivian on an electric vehicle, CEO Jim Farley said Ford was still optimistic about Rivian’s future and wanted to maintain an investment in its budding rival. For now, he has no choice: Pre-IPO investors in Rivian shares are subject to a 180-day lock-up agreement that prohibits share sales for several months.

But when that lockup period expires, Ford should seriously consider selling some or all of its roughly 102 million Rivian shares.

Rivian stock ended last week at $79.95, near its IPO price of $78 but down more than 50% from its mid-November high. Despite this decline, Rivian’s valuation is not much lower than Ford’s.

RIVN chart

Ford vs Rivian stock price and market cap data by Y-Charts.

It doesn’t make much sense. Rivian’s sole factory has an annual production capacity of 150,000 units, which the company is currently expanding to 200,000. Last month, Rivian selected a site in Georgia to build a second factory with an annual production capacity of 400,000 vehicles. However, it won’t even start production there until 2024. Until both plants are running near capacity, Rivian is likely to burn cash year after year.

Longer term, Founder and CEO RJ Scaringe said Rivian aims to hit annual production of at least 1 million units by 2030. That’s not huge by auto industry standards. . Fierce competition in the EV space will likely limit Rivian’s free cash flow potential unless it can grow well beyond the 1 million vehicle per year level.

Ford should bet on itself

While Rivian will take years to ramp up production, Ford expects to have the capacity to build 600,000 electric vehicles a year by the end of 2023. The in-demand Mustang Mach-E and F-150 Lightning will account for more than the half of this production. Production will continue to grow from there.

In short, Ford is on track to build a high-volume EV business much faster than Rivian. Meanwhile, the legendary automaker’s legacy businesses continue to generate cash, including about $4 billion to $5 billion in adjusted free cash flow in 2021.

It’s certainly possible that Rivian will reach its market cap of over $70 billion in the next decade (and much more likely than when Rivian’s market cap peaked at over $150 billion two months ago) . But it faces hard work until then, and there’s no guarantee it’ll be able to make big inroads into the pickup truck market, where brand loyalty remains extremely strong.

Today, Ford’s 102 million Rivian shares are worth more than $8 billion. The cashout would give the company a large cash injection that it could use to accelerate growth investments, fund restructuring efforts that would boost future profitability, or even simply buy back Ford stock. Ford has a solid foundation for its future success in the electric vehicle market, and it should bet on its own future rather than holding Rivian stock as a long-term investment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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