Share prices of Rivian (NASDAQ: RIVN) surged higher after the maker of electric vehicles (EV) received a sizeable investment from German automaker Volkswagen (OTC: VWAGY). Despite the recent price gains, the stock is still down nearly 43% in 2024.
Let’s look at the importance of this investment, how it could help Rivian, and if it is too late to buy the stock.
Volkswagen investment
Volkswagen announced it will invest up to $5 billion in Rivian over three years as well as 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 to Rivian shares once it receives regulatory approvals, but not before Dec. 1, 2024.
If the JV is approved, the German automaker would look to invest another $4 billion into Rivian or the JV by 2026, including another $1 billion this year upon the implementation of the JV. The purpose of the JV will be to develop next-generation electrical/electronic (E/E) architecture for EVs.
For the JV, Rivian will contribute its expertise in the field of electronic architecture for software-defined vehicles and the 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, which includes its new zonal hardware design.
For Volkswagen, the deal brings with it immediate access to much-needed technology to develop its next generation of EVs. Rivian is one of the few non-Chinese automakers outside of Tesla so far to develop zonal architecture.
For Rivian, meanwhile, this is a huge cash infusion that will allow the company to continue to scale its business. Along with the current $7.9 billion in cash on its balance sheet, this should give Rivian ample room to ramp up production of its lower-priced R2 SUV models at its Illinois plant, as well as build out its planned $5 billion manufacturing campus in Georgia, which it temporarily paused construction on earlier this year.
Volkswagen will also lend some of its manufacturing expertise, which can help Rivian continue to cut manufacturing costs. Rivian has done a great job creating popular luxury electric SUVs, but it has not been able to sell them for a profit, losing money on each vehicle it sells. At its investor day following the Volkswagen announcement, the company spent much of its time discussing reducing the costs of its vehicles so it could obtain a positive gross margin.
The company reiterated its forecast to be near a positive gross margin in the fourth quarter, and it set a long-term target of a 25% gross margin. It is also looking for a 10% free cash flow margin and a high-teens adjusted profit margin over the long term.
Is it too late to buy the stock?
The Volkswagen investment, if the JV is approved, should give Rivian the cash it needs to scale its business and make it viable. Negative gross margins and cash flow have been its biggest issues, but the company has made aggressive steps to reduce the cost of its vehicles and improve its manufacturing process.
The development of its zonal architecture, meanwhile, has not only greatly improved the cost structure of its vehicles, but has also proven to be a highly valuable technology that Volkswagen was willing to pay a lot of money to get access to for use in its vehicles.
The deal now gives Rivian two very large powerful investors and partners in Volkswagen and Amazon, for whom it has a deal in place to make Amazon’s electric van fleet.
Rivian remains a high-risk/high-reward stock given its early-stage nature and still negative gross margin. However, the deal with Volkswagen helped remove a lot of the liquidity risk associated with the company. As such, the stock looks more attractive from a risk-reward basis after its recent run-up than before the deal.
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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 Soars After Volkswagen Investment. Is It Too Late to Buy the Stock? was originally published by The Motley Fool
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