Is Rivian Stock a buy after Volkswagen’s $5 billion investment?

The electric vehicle (EV) industry hasn’t been particularly kind to investors, especially betting ones Rivian Automotive (NASDAQ: RIVN). Its shares have lost about 90% of their value since going public three years ago amid growing competition and missed production targets.

But some recent good news has given the stock a lift. Let’s dig deeper into Rivian’s newly announced partnership with Volkswagen and what it could mean for the struggling automaker.

The Volkswagen deal

On June 25, Rivian and Volkswagen announced plans to create a joint venture to develop software and EV technology for their respective automotive businesses.

The new entity will be owned equally by both companies. But as part of the deal, Volkswagen will take a $1 billion stake in Rivian, invest an additional $2 billion in Rivian stock in 2025 and 2026, and put $2 billion into the joint venture through a combination of payments in money and loans.

In total, the deal is worth $5 billion, with almost all of the money coming out of Volkswagen’s pocket.

This agreement is another vote of confidence in Rivian’s technology and research capacity. And Volkswagen will join blue chip company like Amazon AND Ford Motor Company, which also has an equity stake in Rivian. The deal is also likely to reduce Rivian’s software cost per vehicle through economies of scale, and Volkswagen appears to be footing most of the bill.

Volkswagen’s new stake in Rivian will dilute the existing shareholders, technically reducing their claim to the company’s future earnings. But dilution is not necessarily negative when new capital USE to create value, and that certainly seems to be the case here. Rivian shares rose more than 20% in response to the announcement.

How does this fit into Rivian’s long-term vision?

Rivian is in a difficult position. Macro-level challenges such as high interest rates, increasing competition and consumer reluctance are hitting the EV industry. And even the big players like Ford’s The Model E segment (which lost $1.3 billion in the first quarter) is not immune to challenges.

A person looks nervously at a stock chart.A person looks nervously at a stock chart.

Image source: Getty Images.

But unlike the Ford Model E, Rivian is a stand-alone EV business that cannot rely on the support of its parent company to subsidize its operating losses, which totaled $1.48 billion in the first quarter. Those losses will quickly burn through Rivian’s roughly $7.9 billion in cash and short-term investments. The good news is that the $2 billion Volkswagen partnership will help address this challenge for now. But in the long term, Rivian will likely need additional outside funding to maintain its operations.

While management expects the company to achieve the former gross profit (revenues minus direct manufacturing costs) this year, it may take a few more quarters to cover overhead such as office salaries, advertising, and research and development and eventually put an end to the cash burn.

Is it a Rivian stock buyout?

Rivian’s new partnership with Volkswagen adds more strength to the company’s case by providing it with the cash it needs in the short term, while potentially reducing long-term production and research costs.

With that said, I’m still not comfortable upgrading the stock from a (optimistic) hold to a buy because the future of the EV industry remains uncertain, even for the big industry players. As an unprofitable company, Rivian will struggle to compete against its more well-capitalized rivals. And investors may want to wait for more quarters of positive data before taking a position in the stock.

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. Will Ebiefung 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.

Is Rivian Stock a buy after Volkswagen’s $5 billion investment? was originally published by The Motley Fool

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