Stock prices of Rivian (NASDAQ: RIVN) rose after the electric vehicle (EV) manufacturer received a significant investment from the German automaker Volkswagen (OTC: VWAGY)Despite recent price gains, the stock is still down nearly 43% through 2024.
Let’s take a look at the importance of this investment, how it could help Rivian, and whether it’s too late to buy the stock.
Volkswagen investment
Volkswagen has announced that it will invest up to $5 billion in Rivian over three years and form a 50/50 joint venture (JV) between the companies. Volkswagen will initially invest $1 billion in the company in the form of a convertible note, which will convert into Rivian shares once it receives regulatory approval, but not before December 1, 2024.
If the joint venture is approved, the German automaker would like to invest an additional $4 billion in Rivian or the joint venture by 2026, including another $1 billion this year as the joint venture is implemented. The aim of the joint venture will be to develop the next generation of electric/electronic (E/E) architecture for electric vehicles.
For the JV, Rivian will contribute its expertise in electronic architecture for software-defined vehicles and associated IP via a fully paid-up license. The formation of the JV will also allow Volkswagen to use Rivian’s current electronic architecture in its own vehicles, including its new zonal hardware design.
For Volkswagen, the deal brings immediate access to much-needed technology to develop its next generation of electric vehicles. Rivian is one of the few non-Chinese automakers outside Tesla to date to develop zonal architecture.
For Rivian, in the meantime, this is a huge cash injection that will allow the company to continue to scale up its activities. Together with the current $7.9 billion of cash on the balance sheet, this should give Rivian plenty of room to ramp up production of its lower-priced R2 SUV models at its Illinois factory, and to expand its planned $5 billion manufacturing campus in to develop Georgia. for which construction was temporarily halted earlier this year.
Volkswagen will also lend some of its manufacturing expertise to Rivian, which could help it continue to lower production costs. Rivian has done a great job of creating popular luxury electric SUVs, but it has failed to sell them at a profit, losing money on every vehicle it sells. At the investor day following Volkswagen’s announcement, the company spent a lot of time discussing how to lower the cost of its vehicles so it could achieve a positive gross margin.
The company reiterated its guidance to achieve a positive gross margin in the fourth quarter and set a long-term target of a gross margin of 25%. It also targets a free cash flow margin of 10% and an adjusted profit margin in the high teens over the long term.
Is it too late to buy the shares?
If the joint venture is approved, the Volkswagen investment should provide Rivian with the cash it needs to scale up its operations and make it viable. Negative gross margins and cash flow have been the biggest problems, but the company has taken aggressive steps to reduce the cost of its vehicles and improve its manufacturing process.
The development of the zonal architecture has not only led to a huge improvement in the cost structure of the vehicles, but has also proven to be an extremely valuable technology. Volkswagen was willing to pay a lot of money to use this technology in the company’s vehicles.
The deal now gives Rivian two very large, powerful investors and partners in Volkswagen and Amazonwith which it has struck a deal to build Amazon’s electric delivery fleet.
Rivian remains a high-risk/high-reward stock given the early-stage nature of the business and its still-negative gross margin. However, the Volkswagen deal has helped remove much of the liquidity risk associated with the business. As such, the stock appears more attractive on a risk-reward basis after its recent run-up than it did before the deal.
Should you invest $1,000 in Rivian Automotive now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Volkswagen Ag. The Motley Fool has a disclosure policy.
Rivian Surges After Volkswagen Investment. Is It Too Late to Buy the Stock? was originally published by The Motley Fool
