Should you take a ride on Rivian after $5b Volkswagen joint venture news?
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It certainly hasn’t been a smooth ride for Rivian Automotive (NASDAQ:RIVN) shareholders. After going public at $78 in November 2021, the electric vehicle manufacturer’s stock closed at above $100 the day of its initial public offering. It even reached a high of about $179 that month, with investors drawn to the potential for environmentally friendly electric vehicles.
The stock has been declining since then, trading in the $20s and even below that this year. However, after closing at $11.96 on June 25, the stock has been gearing up, gaining more than 20% to close at $14.65 on July 3.
This uptick has been fueled by a recent announcement that the established German car manufacturer Volkswagen is investing $5 billion in Rivian. According to a Volkswagen post on social media platform X, the goal of the joint venture is “next gen. software architectures for electric cars,” with the aim of creating “best-in-class, software-defined, vehicle technology.” The investment also seems like another step to further Volkswagen’s greening and take it past its 2015 emissions scandal.
Does this investment mean you should also take a ride on Rivian, expecting the company will get on the road to profitability?
Rivian’s design capabilities and technology will drive the joint venture
The companies expect the venture to enable scale and bring down vehicle production costs for both Rivian and Volkswagen.
Rivian’s hardware design capabilities and technology platform will serve as the foundation for the equally owned joint venture’s development of software-defined vehicle technology that both companies will use in their vehicles. Rivian will contribute its electrical architecture expertise and license its intellectual property rights to the enterprise.
Rivian’s proprietary technology platform comprises its interconnected vehicle technology and Rivian Cloud. Rivian’s vehicle technology is “a secure, reliable, scalable combination of hardware and software, connecting our proprietary in-vehicle systems, including vehicle electronics, battery, electric drive, chassis, Driver+, and experience management.”
And the Rivian cloud is “Our architecture of interconnected software applications designed to deliver seamless, end-to-end digital commerce solutions and experiences across web, mobile, and app. Rivian Cloud enables FleetOS (fleet management), remote diagnostics, OTA (over the air) software updates, and remote vehicle controls, including vehicle access.”
Path to profitability?
Robert J. Scaringe, Rivian’s founder and CEO, noted, in the company’s media release announcing the joint venture, “Not only is this partnership expected to bring our software and associated zonal architecture to an even broader market through Volkswagen Group’s global reach, but this partnership also is expected to help secure our capital needs for substantial growth.”
Volkswagen will make an initial $1 billion investment in Rivian through a note that will convert into Rivian shares subject to some conditions and approval from regulators. Volkswagen will invest another $2 billion in Rivian stock, putting in $1 billion in 2025 and another $1 billion in 2026. And the German car manufacturer will invest an additional $2 billion in the form of a $1 billion payment to the joint venture and a $1 billion loan available in 2026.
Rivian, founded in 2015, hasn’t managed to deliver a profit so far. For 2021, the year of its initial public offering, the company ran at a net loss of $4.688 billion, rising to $6.752 for 2022 and moderating to $5.432 billion for 2023.
For the first quarter of 2024, it reported a net loss of $1.48 per share, on revenues of $1.204 billion. For the first quarter of 2023, the comparable figures were net loss per share of $1.45, on revenues of $661 million.
Its revenues have been growing though (from $55 million for its 2021 fiscal year to $1.658 billion for 2022 and $4.434 billion for 2023), rising with growing sales as well as higher vehicle prices.
Discussing the company’s results on its first quarter 2024 earnings call, Scaringe noted that Rivian saw a gross loss of $38,784 for each vehicle it delivered (its lowest-priced vehicle, a five-passenger truck, starts at about $70,000 and it also offers a seven-passenger SUV for about $76,000). A good part of this loss is related to advance costs incurred related to a retooling effort that began in April at its Normal, Ill. plant.
Management expects the company to turn in a “modest” gross profit towards the end of 2024 as it generates savings from the retooling effort that allows Rivian to cut costs with new technologies, material changes and faster car production capabilities with improved manufacturing processes.
The company expects to benefit from a new network architecture that reduces the number of electronic control units in its cars by about 60%, which it expects to help substantially cut down vehicle costs. Even then, Rivian expects an EBITDA (earnings before interest, tax, depreciation and amortization) loss of $2.7 billion for 2024.
Marketing to a bigger audience
For 2024, Rivian is expecting to produce 57,000 vehicles. Rivian is also looking to expand its offerings with the introduction of a midsized five-passenger SUV model in 2026, at a more budget-friendly starting price of $45,000 (thanks to lower costs). The Volkswagen investment would help finance this new model besides providing funding to complete construction of a Georgia factory.
Another midsized “crossover” vehicle, with an even lower price, is also planned for further down the road. These offerings will allow Rivian to pursue a larger market. On the commercial market side, Rivian also offers an electric delivery van for which Amazon is a big customer, having put in an order for 100,000 of them. (Amazon is also a significant Rivian shareholder, with Ford Motor Company a minor shareholder.) Rivian is also looking for other customers for its commercial vans.
Certainly, it seems there have been more takers for electric vehicles in recent years, with their share of the car market globally growing from 4% in 2020 to 18% in 2023, according to the International Energy Agency. In the United States alone, registrations of new electric cars rose 40% over 2022 levels to touch 1.4 million in 2023, with some help from the incentives provided by the Inflation Reduction Act. (Some states also provide tax incentives for electric vehicle buyers). The IEA expects that conventional and electric SUVs could sell for the same price by 2030, while it will likely take longer for smaller electric vehicles to achieve price parity with conventional cars.
Rivian doesn’t have a dealership network and deals directly with customers, relying on digital marketing efforts and on the ground demonstration drive events. State laws require licensing for car dealers, and Rivian is licensed to directly sell cars in 11 states as of the end of 2023. It is also looking to get licensed in more states. For states where it is not licensed, sales have to be conducted indirectly, either out of state or through the Internet or telephone.
Rivian also enables financing and leasing for its cars, as well as insurance, vehicle maintenance, repair, software and charging services. Such services enable brand loyalty besides bringing in additional revenue for the company.
Higher costs of repair a negative, government incentives a plus
One drawback for electric car buyers is their higher average cost of repair, at about $6,800, compared to about $4,400 for all cars. According to Mitchell, an insurance data provider, electric cars tend to have more expensive parts and also require specialist mechanics. However, considering all electric car models, and not just bigger luxury ones, costs to repair electric cars tend to be about $800 higher compared to gas-based cars.
Another risk for electric cars is the possibility that their systems could be hacked into and disrupted, creating privacy and safety issues for drivers. And there is big demand for raw materials that go into electric car batteries, especially lithium, which could impact the production of batteries.
Also, the car manufacturing industry is competitive, with multiple players, and Rivian has to fight for market share with other electric car manufacturers, such as Tesla, as well conventional car manufacturers. Electric vehicle startups Fisker and Lordstown Motors, for instance, had to shut down.
According to Rivian, it was the fifth best-selling electric vehicle maker in the United States for the first quarter, with a market share of 5.1%. Rivian asserts, “We believe our vertically integrated business model and technology platform, focus on customer experience, direct-to-customer relationships, and ability to efficiently launch multiple vehicle platforms position us to compete effectively.”
Rivian also benefits from government incentives (both state and federal) to encourage the adoption of green energy that help lower its manufacturing costs. For instance, the company has received an incentive package from Illinois State, valued at up to $827 million, for its Normal plant. Rivian could also generate additional revenue through sales of green credits.
Should you take a ride on Rivian?
As of the end of the first quarter, Rivian had a book value per share of $8.11, while its current ratio of 4.72 indicates its current assets more than cover its current liabilities. Also it had a debt-to-equity ratio of about 60%, which indicates it hasn’t taken on too much debt.
The company has more than $1 billion in convertible debt outstanding, but says that any conversion of the debt to equity will not dilute shareholders’ equity since Rivian has call options to cover a potential conversion. However, the Volkswagen investment would be dilutive.
Volkswagen’s vote of confidence, with a big cash infusion, is certainly a positive for Rivian. The company could be a turnaround play for investors who can tolerate significant risk, and offers the potential for a big payoff if Rivian proves it can withstand the rigors of the road.
P.S.Want me to look into a particular stock? Reach out to stocktakes1@gmail.com and I’ll consider your suggestion.
Note: I do not own any individual Rivian stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.