The electric vehicle (EV) industry has not been particularly kind to investors, especially those who bet on Rivian Automotive (NASDAQ: RIVN). Its shares have lost around 90% of their value since going public three years ago amid rising competition and missed production targets.
But some recent good news have given the shares a lift. Let’s dig deeper into Rivian’s just-announced partnership with Volkswagen and what it could mean for the struggling automaker.
On June 25, Rivian and Volkswagen announced plans to create a joint venture to develop EV software and technologies for their respective automotive businesses.
The new entity will be equally owned by both companies. But as part of the deal, Volkswagen will take a $1 billion equity stake in Rivian, invest an additional $2 billion in Rivian shares in 2025 and 2026, and put $2 billion into the joint venture through a combination of cash payments and loans.
In total, the deal is worth $5 billion, with practically all the money coming out of Volkswagen’s pocketbook.
This agreement is another vote of confidence in Rivian’s technology and research capacity. And Volkswagen will join blue chip companies like Amazon and Ford Motor Company, which also have equity stakes in Rivian. The deal will also likely reduce Rivian’s software cost per vehicle through economies of scale, and Volkswagen seems to be footing most of the bill.
Volkswagen’s new equity stake in Rivian will dilute existing shareholders, technically reducing their claim on the company’s future earnings. But dilution isn’t necessarily negative when the new capital is used to create value, and that certainly seems to be the case here. Rivian’s shares have risen by over 20% in response to the announcement.
Rivian is in a difficult position. Macro-level challenges like high interest rates, rising competition, and consumer hesitation are battering the EV industry. And even big players like Ford’s Model E segment (which lost $1.3 billion in the first quarter) are not immune from the challenges.
But unlike Ford Model E, Rivian is a stand-alone EV business that can’t rely on support from its parent company to subsidize its operating losses, which totaled $1.48 billion in the first quarter. These losses will quickly burn through Rivian’s roughly $7.9 billion in cash and short-term investments. The good news is the $2 billion Volkswagen partnership will help address this challenge for now. But over the long term, Rivian will likely need additional outside funding to maintain its operations.
While management expects the company to achieve its first gross profit (revenue minus direct production costs) this year, it could take several more quarters to cover overhead expenses like office salaries, advertising, and research and development and finally end the cash burn.
Rivian’s new partnership with Volkswagen adds more strength to the company’s bull thesis by giving it much-needed cash in the near term while possibly reducing its long-term production and research costs.
With that said, I’m still not comfortable upgrading the stock from an (optimistic) hold to a buy because the future of the EV industry remains uncertain, even for large 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.
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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 the $5 Billion Volkswagen Investment? was originally published by The Motley Fool
