Stock prices of Rivian (NASDAQ: RIVN ) surged higher after the electric vehicle (EV) maker received a sizeable investment from the German automaker Volkswagen (OTC: VWAGY). Despite recent price increases, the stock is still down nearly 43% in 2024.
Let’s 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 announced it will invest up to $5 billion in Rivian over three years, as well as create 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 be converted into Rivian shares once it receives regulatory approvals, but not before December 1, 2024.
If the JV is approved, the German automaker will seek to invest another $4 billion in Rivian or the JV through 2026, including another $1 billion this year after the JV is implemented. The purpose of the JV will be to develop next-generation electrical/electronic (E/E) architecture for EVs.
To the JV, Rivian will contribute its expertise in electronic architecture for software-defined vehicles and related IP through a fully paid-up license. The formation of the JV will also allow Volkswagen to use Rivian’s current electronic architecture in its vehicles, which includes the 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 out there Tesla so far to develop regional architecture.
Meanwhile, for Rivian, this is a major infusion of cash that will allow the company to continue expanding its business. Along with the current $7.9 billion in cash on its balance sheet, this should give Rivian enough room to ramp up production of its lower-priced R2 SUV models at its Illinois plant, as well as to build its planned $5 billion manufacturing campus in Georgia. for which it temporarily halted construction earlier this year.
Volkswagen will also lend some of its manufacturing expertise, which could help Rivian continue to lower production costs. Rivian has done a great job creating popular electric luxury SUVs, but has been unable to sell them for a profit, losing money on every vehicle it sells. At its investor day following Volkswagen’s announcement, the company spent much of its time discussing cutting the costs of its vehicles so it could turn a positive gross margin.
The company reiterated its forecast to be close to a positive gross margin in the fourth quarter and set a long-term target of a gross margin of 25%. It is also seeking a free cash flow margin of 10% and an adjusted profit margin in the mid-teens over the long term.
Is it too late to buy stocks?
Volkswagen’s investment, if the JV is approved, should give Rivian the cash it needs to expand its business and make it viable. Negative gross margins and cash flow have been its biggest issues, but the company has taken aggressive steps to lower the cost of its vehicles and improve its manufacturing process.
The development of its zonal architecture, meanwhile, not only greatly improved the cost structure of its vehicles, but also proved to be a very valuable technology that Volkswagen was willing to pay a lot of money to gain access to. was used in his vehicles. .
The deal now gives Rivian two very large powerful investors and partners in Volkswagen and Amazonfor which there is a deal to make Amazon’s fleet of electric vans.
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 much of the liquidity risk associated with the company. As such, the stock looks more attractive on a risk-reward basis after its recent rally 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 one disclosure policy.
Rivian soars after Volkswagen investment. Is it too late to buy stocks? was originally published by The Motley Fool