Morgan Stanley: Rivian’s third-quarter gross profit beats expectations. Why is Morgan Stanley still cutting its price target?

Where did the third-quarter beat come from?

In the third quarter of 2026, Rivian reported an adjusted EBITDA loss of $435 million, better than Morgan Stanley’s expected loss of $611 million and the consensus loss estimate of $576 million.
The automotive gross margin excluding regulatory credits was -10.9%, better than the bank’s estimate of -19% and the consensus of -21%; this occurred even as the R2 ramp-up added approximately $120 million in costs. Results also benefited from partial tariff refunds.
The company raised the midpoint of its 2026 adjusted EBITDA guidance from a loss of $1.9 billion to a loss of $1.8 billion. Morgan Stanley noted that the increase came mainly from credits, tariff benefits and higher deliveries, while sustained improvement still depends on scaling the R2.

The R2 became Rivian’s best-selling model in the third quarter, test drives nearly doubled quarter over quarter, and the Launch Edition conversion rate continued to exceed the company’s expectations. Management expects the R2 to account for most fourth-quarter deliveries and raised its total 2026 delivery guidance to 67 thousand–70 thousand vehicles.
The Normal plant has started a second production shift, but the production ramp-up is constrained by the slowest supplier. Morgan Stanley believes scaling production and spreading fixed costs over more vehicles are particularly important for automotive gross margin as lower-priced R2 versions are introduced.
Management maintained its expectation that automotive gross profit will turn positive by the end of 2026; however, Morgan Stanley noted that higher commodity prices and additional ramp-up costs in 2027 could make gross margin improvement uneven.

Morgan Stanley lowered its 2027 revenue forecast by approximately 5% to $9.8 billion, partly because it expects commercial vehicle sales to fall to 21,286 units, below its previous forecast of 27,418 and down 10% from the prior year.
The bank widened its forecast for the 2027 adjusted EBITDA loss from $1.36 billion to $1.42 billion, citing increased autonomous driving investment; its forecast for free cash flow burn also widened from approximately $2.8 billion to approximately $3.8 billion.
The company lowered the midpoint of its 2026 capital expenditure guidance by $300 million to $1.45 billion, mainly because spending on construction in Georgia was pushed back. Management expects capital expenditure to rise significantly in 2027, while autonomous driving software, hardware and computing capacity will also accelerate growth in research and development spending.

Morgan Stanley said the take rate for Tesla’s paid FSD among vehicles delivered in North America has exceeded 75%, up 20 percentage points from the previous quarter, showing the growing importance of autonomous driving to vehicle purchase decisions and ongoing software revenue.
Rivian said Autonomy+ adoption has exceeded management’s expectations but did not disclose the penetration rate; the company expects a limited launch of supervised point-to-point capability at year-end and broader coverage in 2027. The AI and Autonomy Day on 9 December will provide an opportunity to assess its point-to-point capabilities, next-generation hardware and long-term roadmap.
Morgan Stanley maintained its Underweight rating and lowered its price target from $14 to $13. Its valuation of the automotive business fell from $8 to $7 per share, while software and services remained at $6 per share; the cut reflects the bank’s assessment of increased investment and profitability in 2027.