Sometimes it seems that every company even vaguely associated with the electric vehicle (EV) space has been a momentum stock at some points. That makes it very hard to determine which companies will succeed in the space and which are just making a lot of noise.

Rivian Automotive looks to be the next potentially major player in the EV space. The company has not turned a profit yet — in fact, it lost $1 billion the first half of the year — but it may come to market with an $80 billion valuation.

That’s a huge number for a company that hasn’t sold any vehicles yet but Rivian isn’t just any company. This would-be EV player has Amazon (NASDAQ: AMZN) as an investor and it also has a deal in place to sell thousands, even tens of thousands of delivery vehicles to the retail giant.

Amazon has exclusive rights to Rivian’s delivery vehicles for four years after receiving its first one. It also gets the right of first refusal on any of those vehicles produced for two years after that. In theory, the retail leader has an order for 100,000 “last-mile” trucks due by 2030 with the first 10,000 coming this year, but there’s an important caveat to that deal — Amazon does not have to buy even a single vehicle.

It’s, of course, logical to assume that Amazon wants to end up buying every truck it has on order and then some because it means Rivian has delivered on its promises. The reality, however, is that a lot can go wrong that could result in that not happening.

Anirban Mahanti joined Dan Kline on the Oct. 6 edition of  “7investing Now” to break down the IPO and to fully examine just how risky it likely is to buy shares in an $80 billion startup.

A full transcript follows the video.

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Dan Kline: We’re going to talk next about Rivian. That is an electric vehicle company. It’s backed by Amazon (NASDAQ: AMZN) and they’ve filed for an IPO Anirban what’s the 10,000-foot overview of Rivian, a company that I am shocked to learn is worth as much as it’s worth.

Anirban Mahanti  29:56  Oh wow. you didn’t say how much I should reveal.

Dan Kline  30:01  I’m leaving it to you.

Anirban Mahanti  30:03  Apparently, this is what was published in Bloomberg, and what I read on Bloomberg and what I think you pointed me to in Bloomberg. Which apparently it’s looking to list at a market capitalization of around $80 billion. This company hasn’t yet produced a vehicle or they’ve just maybe produced some, let’s call it better than prototype vehicles.

So they are basically a pickup truck manufacturer. They’re also looking to produce a van so they’re not they’re not directly competing, let’s say with Tesla, but they’re competing in what I would say the most lucrative market in the USA, which is the pickup truck market. I believe, like some of the top the top five vehicles are sold in the US or I think in North America overall happened to be either pickup trucks or SUVs. So this is a very lucrative market and they’re a pure EV company. So they’re not an ICE age company trying to make EV’s is they are a pure EV company, just like the other EV company Lucid, which makes luxury sedans.

Dan Kline  31:15  There is a Lucid office or sales room down the street from me that used to be a pizza place. But it has been very nicely transformed. It’s not quite open yet, but it looks really really pretty. So they lost about a billion dollars in the first half of the year in the world of electric vehicles. That’s like me saying like Anirban lost a couple of T-shirts that he likes. Like, it is not a significant amount of money. But based on what they’re saying they’re looking at about an $80 billion valuation that is a massive valuation, is it not?

Anirban Mahanti  31:48  It is.  So I think my understanding is that they are looking to sell the trucks approximately priced around that $60-$70k sort of area with a 300 mile range. That’s the that’s the juicy market, right? That’s the Ford F150 market. And Ford is making the Ford Lightning right. So I mean, that’s again, a huge area. What I think is interesting here is the go to market strategy is something that I think is very interesting. And I think it’s interesting because they’re going for mass market. This is mass market right, the Ford F150 is mass market. And going for mass market typically means taking a slightly lower margin, typically means production at scale.

What I find interesting is that unlike say Lucid, or Tesla, so Tesla basically made the Roadster then made the Model S than made the Model 3 then made the Model Y In fact, it didn’t make the Model Y first it made the Model 3 before it made the Model Y. So it’s progressively gone from producing niche vehicles to larger and larger vehicles. These guys want to go all out to produce the truck. And Tesla has not yet gone to the truck it has unveiled that truck but has the monstrosity called Cybertruck. I have a feeling it’s going to be probably the biggest hit in Tesla’s career of making devices or making vehicles. But that’s what these guys have chosen.

So I think it’s very high risk strategy where the potential for upside is huge, just because they’re going to be one of the first ones to be out of the gate. One of the first ones maybe butting heads with the Ford Lightning. But they might also end up with them now, the Tesla’s Model 3 like sales ramp issues.

The other thing I want to say is, when you said losing money in electric vehicle market is not a big deal. But here’s the thing, Tesla did not lose a billion dollars until it actually started producing. Tesla’s biggest net income loss was about $2 billion in 2017. So yeah, I mean I don’t know what you want to say this is again very high risk strategy.

Dan Kline  34:07  Let me ask the question. We’ll get to the Amazon piece of this in a second. But I have a pretty deep history with pickup trucks. I live in a land where a lot of people drive pickup trucks that don’t have any logical reason to drive them. My family makes a line of pickup truck racks which is one of our more successful products, which I sold. So those are people are actually using their their pickup trucks. But that being said, are we sure that people want an electric pickup truck? Is that definitely a thing?

Anirban Mahanti  34:37  Well, I don’t know, I have a Cybertruck order, I am definitely not of the, I’ve never had a pickup truck, but I might actually really get a Cybertruck just because it looks cool. So do people need electric? We know for a fact that pickup trucks sell right and that there are two types of customers for pickup truck right? Those need it? Because they have to carry things. And those who don’t need it, but have it because it’s kind of cool. To drive this honking big thing. I think the market is there. The issue really for Rivian would be, can they actually attack that market? Can they get enough market share? And can they scale quickly in a profit? I mean, if you’re already losing a billion dollars, and you still have to produce, you haven’t yet really produced anything. I think you’re going to lose several more billion before you get there. Are they going to get enough scale? Are they going to be able to do it at volume and still have good margin on it and compete with the Ford F150? That’s going to be hard.

And the final thing is, I think, for the people who need an electric truck for work, I’m not really sure if 300 miles is enough range, because you will need it potentially, you’ll be driving all day, potentially, you won’t actually have power supply from it. You potentially need a charging network, you can say that there is a third party charging rules coming up. Are they still at? Are they yet there already in terms of infrastructure? I don’t think so. And one of the biggest assets Tesla’s got right now in its favor is basically supercharging network, right? So Tesla’s can use supercharging network of its own, plus all the others that are available while the others can’t. So that is a serious disadvantage.

Dan Kline  36:36  Yeah, I’ll speak anecdotally and say, if it’s a 300 mile range, pickup trucks tend to be used for local deliveries, contractors doing jobs. So I don’t know that 300 miles wouldn’t be enough. But there is the mental factor of, wait, there’s no place around to charge. And I do think that’s a factor for a few years, I’m not sure it will be. Because if this does become the norm, and pickup trucks are obviously very, very common in the construction space. I think you might see like porta chargers or other other things just become de-facto on big job sites and other places. And we’re seeing them. I’ve told you, there is a Tesla charger and an alternate charger at my resort place. The Tesla charger charges Tesla’s the alt one I’ve never seen a charge anything other than a golf cart, but in theory, it can charge other electric vehicles. But I do think Florida as a tourist state might be ahead of a lot of other states in terms of building our charger networks.

Anirban Mahanti  37:34  Right? Yeah. So I mean, I think it’s an interesting strategy. And the other thing with Rivian is they’re getting those big backers, right? It’s got some traditional, either Ford or GM is involved. One of them’s involved. Amazon is of course involved. Amazon also has a deal with them right to buy x1000 of these delivery trucks or delivery vans from them, and things like that. So, I guess the last thing I want to point out is, if $80 billion is the valuation, then I guess we need to, yes, the electric vehicle market has been has been now proven to exist as a real market by Tesla. So, yes, I understand that they deserve a higher valuation, but $80 billion sounds a tad high. Because if 10 years ago, Tesla went public at, I think less than $3 billion market cap, right? Inflation is not that big in 10 years, and the market has not been established to that extent. Tesla is still not producing a million, Tesla’s probably just at a million vehicle run rate at this point. $80 billion sounds a heck of a lot. There’s a lot of, I guess anticipation baked into that $80 billion right?

Dan Kline  38:49  Well then let’s close out with this. Well we need to talk about the Amazon piece first so we’ll get to the final thoughts but. So Amazon has the rights for four years to buy every delivery vehicle Rivian makes assuming Amazon likes how these delivery vehicles are. The only reason they don’t have to do it right, is to give them an out in case these turned out not the way they expect them to this is likely going to be a company buoying deal, is that fair to say?

Anirban Mahanti  39:20  So is Amazon’s gonna buy the vans right? Is Amazon buying the truck?

Dan Kline  39:34  Yeah, they just say delivery vehicle. they haven’t been perfectly clear, but that’s clearly not the pickup truck.

Anirban Mahanti  39:40  Unless they’re going to take the pickup truck and actually modify it and put a storage space on it, which does actually sound terribly inefficient way of doing it. Look, I think it’s neither here, like that’s just a guaranteed customer but I mean, how many of them is Amazon gonna really buy? And maybe it makes sense.

Okay, so here’s the thing that maybe it makes sense for Amazon. Because if you are Amazon, you could actually put your own chargers in your various warehouses and various points you need to do. It will work for Amazon, it is not going to work for the common person. Right? And therefore, does that give you scale? Right? I think those sort of things. So it’s good to have a marquee client. And it’s good to have some guaranteed sales. And it’s not like guaranteed says they have to like it, right? So it’s not like they’re saying we’ll buy whatever you make, we’ll buy it if we like it. And if we still need it.

Dan Kline  40:37  It’s 100,000 vehicles by 2030 assuming they like it. They don’t actually have to buy one. But I just don’t think they intend to. There are Tesla chargers, at most Whole Foods. That’s not an Amazon strategy. I think that’s actually more a whoever owns the land where Whole Foods are on strategy. But that’s a good point, that when you have a big footprint, I don’t know if you’ve seen an Amazon distribution center. But it basically looks like a college campus where you’d spend your whole time lost, because every building is one giant building that looks the same. lots of places there you can put in a charging station or multiple charging stations.

Anirban Mahanti  41:14  Yeah, so for commercial folks, I think electric vehicles, electric vans, and electric pickups, and all those sort of things, electric buses, and all those would make a ton of sense. Because they would pretty much control satellite campus A to satellite campus B satellite location A to satellite location B. That sort of the travel, you’re going back and forth, back and forth, back and forth. I think it works really well in that context. And overall, maybe the cost of ownership is low. There is nothing else really that competes with Rivian at this point, Amazon really doesn’t have an alternative to compare against. The question is, it’s by 2030, right? A lot of things can change between now and, that’s like eight years. So that’s a long, long, and a lot of things will change. If we have autonomous, we didn’t talk about autonomy, but if there’s autonomy, a lot of things will change in that eight-year timeframe. So I just think, yeah, that’s, it’s neither here nor there for me.

Dan Kline  42:09  I still want a landspeeder or a hover car. Like it feels to me like I should have been driving at least the one Luke had in the first Star Wars by now, but we don’t have that.

Let me ask the last question here. So there is a chance for a big success here, I can see what the market is, but they’re coming up against Tesla and look. I don’t love the Cybertruck. It is not designed for work. And that is a concern to me with the truck, the sides are very low. It’s not particularly practical. So if that’s an artist’s rendering, it doesn’t look like that. But that being said, they’re coming up against Tesla, they’re coming up against Ford. There’s a lot of upside here as this is a huge market. But there’s also a chance for zero, right? Like this could be an absolute epic disaster. This is a very risky investment, right?

Anirban Mahanti  42:54  Absolutely. Like I mean, one way to think about this is if Ford, their pickup truck looks very similar to the Ford Lightning, it’s actually not a radical design in that sense, it looks like a traditional. The Rivian looks like a traditional design. So if Rivian is going to be successful, maybe Ford is going to be successful, Ford’s market cap is $50 billion or something like that. I haven’t even looked at it. But I’m guessing it’s somewhere in that ballpark. If you’re going to go to $80 billion, there is a lot of success baked into that valuation.

It means that you’re going to be doing more than trucks and you’re going to be doing a lot more other things, you’re going to have very high margins. I don’t know, and you’re losing, there is no guarantee that your production ramp up. The Elon Musk line, it’s very easy to make concept vehicles very easy to make prototypes. It is really, really hard to scale manufacturing. Right? And to do it at scale with a return on invested capital. All those good things, right. Yeah, I don’t know. Like, I mean, it’s, it seems it’s something I think it’s very interesting. But the upside here seems low to me. The upside, all here is at $80 billion all the people who have gotten in before they go public, are the ones who are actually going to make a lot of money here, right?

Dan Kline  44:15  Investors be very wary. To justify an $80 billion valuation, you need a lot of sales, and you need them quickly. Now, that doesn’t mean the ride won’t get there. But it might mean that there are points where this looks like not great. So be very, very careful. I always say with IPOs. If it’s going to be a great company, it’s not that important to get in on day one, especially when it’s a company at this time. This isn’t some really cool company that’s coming out at a $1.2 billion market cap or a $6 billion market cap. This is assuming the truck works. They’ve made and sold no trucks. They have sold exactly as many trucks in fact as Anirban and I have sold. Actually our valuation is hovering around $20 billion. No sadly not.

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