Prediction: Rivian Could Lose This $325 Million Revenue Source That Is Nearly 100% Profit

Key Points

• Rivian is set to lose automotive regulatory credits that it has been able to sell to other automakers.

• Shares remain cheap enough for long-term investment.

• 10 stocks we like better than Rivian Automotive ›

Rivian Automotive (NASDAQ: RIVN) has an exciting future. This year, the electric vehicle (EV) company achieved several consecutive quarters of positive gross margins. And early next year, management expects to begin production of three new vehicles, all priced under $50,000. That could attract tens of millions of new potential buyers to Rivian's lineup.

Despite the positives, there are some challenges ahead, including one that could eliminate a crucial $325 million profit source.

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A new budget bill could be costly for Rivian

For years, EV manufacturers have relied on government subsidies to increase demand for their products and help offset the steep cost of scaling up a capital-intensive business. These subsidies have generated billions of dollars in extra cash flow for EV producers over the decades. Several subsidies, however, are likely on their way out.

Following the recent signing into law of President Donald Trump's budget bill -- the so-called "Big Beautiful Bill" -- EV tax credits will be phased out by the end of 2025. Several EV stocks experienced analyst downgrades on the news.

Car buyers are increasingly cost conscious. Recent surveys suggest that more than 80% of them would cancel their orders if prices rose by 25%.

The elimination of federal tax credits, which can total up to $7,500 per buyer, will effectively make EVs more expensive -- a strong headwind. But there's another program that could be even more destructive to the financial viability of EV makers like Rivian.

In 2024, Rivian generated $325 million in revenue from the sale of automotive regulatory credits. State and federal governments were offering these credits as a way to spur production of low-emission vehicles.

EV makers like Rivian earn them for producing low-emission vehicles. They can then sell these credits to other automakers that fail to produce enough low-emission vehicles. Apart from a little overhead, the sale of these credits results in essentially a 100% profit margin.

In the fourth quarter of 2024 alone, Rivian sold roughly $300 million worth of regulatory credits. The company's total gross profit, meanwhile, was around $170 million. Without the sale of these credits, therefore, the company would have produced a sizable negative gross profit.

The new budget bill calls for the elimination of fines for noncompliant automakers. This essentially eliminates any incentive for these automakers to buy excess regulatory credits from their fellow automakers.

Will this result in a huge reduction in revenue and profit for Rivian? To answer that question, a few details need to be resolved.

Image source: Getty Images.

Is Rivian stock still a buy?

It's important to note that only federal regulatory credits will be affected. Credits earned under other government programs -- such as those in California or China -- won't be eliminated.

How much of Rivian's credit sales stem from federal programs? It's tough to tell, given that the company doesn't break down credit sales by source.

But analysts for Tesla believe around 75% of its credits are earned in the U.S., with maybe half coming from federal programs. These are very rough estimates, but using these figures, it's possible that Rivian would have generated around $120 million less in credit sales last year without federal programs -- or around $120 million less in profit.

Given that it produced around $170 million in gross profit last year, the elimination of federal regulatory credits would still have left it with around $50 million in gross profit -- not bad for a business needing to prove to investors that it can sell its vehicles at a profit.

Trading at just 2.8 times sales, expectations for Rivian are already low. And the elimination of federal regulatory credits won't sink the company on its own. But the company's growth timeline is now likely longer than previously expected.

The company will have less cash to invest and may need to shelve some growth initiatives to keep the launch of its mass market vehicles on schedule. Still, for patient investors willing to look far beyond current subsidy changes, Rivian remains a promising long-term growth stock.

Should you invest $1,000 in Rivian Automotive right now?

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Ryan Vanzo 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.