Rivian Automotive has shown significant progress, achieving positive gross margins for several consecutive quarters. The electric vehicle (EV) manufacturer plans to broaden its market appeal early next year with the launch of three new models, all priced under $50,000.
However, the company’s positive trajectory faces a significant challenge from new legislation that could eliminate a vital $325 million revenue stream.
For years, government subsidies have been instrumental for EV manufacturers, helping to stimulate demand and offset the high costs of scaling production. A recently passed budget bill, however, signals a shift in this support system. The new law will phase out federal EV tax credits of up to $7,500 for consumers by the end of 2025, a move that is expected to increase the effective price of EVs and has already led to analyst downgrades for several stocks in the sector.
While the loss of consumer tax credits presents a headwind, a more direct threat to Rivian’s profitability lies in the elimination of the automotive regulatory credit program. In 2024, Rivian generated $325 million by selling these credits. The system allows EV makers to earn credits for producing low-emission vehicles and sell them to other automakers that fail to meet their own emissions targets. This revenue comes at nearly a 100% profit margin.
The importance of this income is starkly illustrated by the company’s fourth-quarter 2024 performance. Rivian sold approximately $300 million in regulatory credits during a period when its total gross profit was just $170 million. Without these sales, the company would have reported a substantial negative gross profit. The new bill effectively dismantles this market by eliminating the fines for noncompliant automakers, thereby removing their incentive to purchase credits.
The critical question is how much of Rivian’s revenue will be affected, as the legislation targets only federal credits, leaving state-level and international programs intact. Rivian does not disclose the source of its credit sales, creating some uncertainty.
However, analysts estimate that for a company like Tesla, roughly half of its U.S. credits stem from federal programs. Applying this rough benchmark to Rivian suggests the company could see its profits reduced by about $120 million. Based on last year’s $170 million gross profit, this would leave Rivian with approximately $50 million, keeping the company in positive territory and demonstrating its ability to sell vehicles profitably.
With its stock trading at a modest 2.8 times sales, market expectations for Rivian are already low. The loss of federal credits will not cripple the company, but it will likely extend its growth timeline. Rivian will have less cash to reinvest and may need to adjust its growth initiatives to prioritize the launch of its mass-market vehicles. For patient investors with a long-term perspective, Rivian remains a promising, though now more challenging, growth opportunity.
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