Stock price of Rivian (NASDAQ:RIVN) surged after electric vehicle (EV) maker received significant investment from German automaker Volkswagen (OTC: VWAGY)Despite recent price increases, the stock is still down nearly 43% in 2024.
Let’s take a look at how important this investment is, how it could help Rivian, and whether it’s too late to buy the stock.
Volkswagen investment
Volkswagen said it would 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 security, which will be converted into Rivian shares once it receives regulatory approvals, but not before December 1, 2024.
If the joint venture is approved, the German automaker would consider investing an additional $4 billion in Rivian or the joint venture by 2026, including an additional $1 billion this year when the joint venture is implemented. The aim of the joint venture will be to develop a next generation electrical/electronic (E/E) architecture for electric vehicles.
Rivian will bring to the joint venture its expertise in electronic architecture for software-defined vehicles and associated intellectual property through a fully paid-up license. The formation of the joint venture will also allow Volkswagen to use Rivian’s current electronic architecture in its own vehicles, including its new zonal hardware design.
For Volkswagen, the agreement provides immediate access to essential technology to develop its next generation of electric vehicles. Rivian is one of the few non-Chinese automakers outside of You’re here so far to develop a zonal architecture.
For Rivian, this is a huge cash injection that will allow the company to continue growing its business. With the $7.9 billion in cash currently sitting on its balance sheet, this should give Rivian ample room to ramp up production of its low-cost R2 SUV models at its Illinois factory, as well as to build its planned $5 billion manufacturing campus in Georgia, construction of which was temporarily suspended earlier this year.
Volkswagen will also bring some of its manufacturing expertise, which could help Rivian continue to reduce its manufacturing costs. Rivian has done a great job creating popular luxury electric SUVs, but it hasn’t been able to sell them at a profit, losing money on every vehicle sold. At the investor day that followed Volkswagen’s announcement, the company spent much of its time discussing how to reduce the costs of its vehicles in order to achieve a positive outcome. Gross margin.
The company reiterated its guidance for a gross margin near 10% in the fourth quarter and set a long-term goal of a gross margin of 25%. It also targets a free cash flow margin of 10% and an adjusted profit margin of 15% in the long term.
Is it too late to buy stocks?
Volkswagen’s investment, if the joint venture is approved, should give Rivian the cash it needs to grow its business and make it viable. Gross margins and negative cash flow have been its biggest problems, but the company has taken aggressive steps to reduce the cost of its vehicles and improve its manufacturing process.
The development of its zonal architecture, meanwhile, not only significantly improved the cost structure of its vehicles, but also proved to be a very valuable technology for which Volkswagen was willing to pay a lot of money to have access and use it in its vehicles. .
The deal now gives Rivian two very large investors and powerful partners in Volkswagen and Amazonfor which a deal has been struck to manufacture Amazon’s fleet of electric vans.
Rivian remains a high-risk, high-reward stock due to its startup nature and still-negative gross margin. However, the deal with Volkswagen helped eliminate much of the liquidity risk associated with the business. As such, the stock looks more attractive on a risk/reward basis after its recent rise than before the deal.
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Rivian takes off after Volkswagen’s investment. Is it too late to buy stocks? was originally published by The Motley Fool
