Rivian Just Made a Game-Changing Move. Here's What You Need to Know | The Motley Fool (2024)

Rivian Automotive (RIVN 4.73%) has been a tough stock to own since its initial public offering (IPO). The electric vehicle (EV) maker went public at $78 per share on Nov. 10, 2021, and set a record high of $172.01 less than a week later, but currently trades at about $15.

Rivian initially impressed investors because it was already producing thousands of vehicles and was backed by Amazonand Ford Motor Company. Unfortunately, its stock crumbled as it missed it own production targets, racked up steep losses, and lost Ford as a leading investor. Rising interest rates also popped its bubbly valuation.

But on June 25, Rivian announced a new joint venture (JV) with Volkswagen (VWAP.Y -0.17%) to co-develop new EV technologies. Many bullish investors praised the partnership as a game-changing move for Rivian, and its stock has soared more than 30% since its opening price that day. Let's see what this deal might mean for Rivian's future.

How Rivian and Volkswagen can help each other

Rivian and Volkswagen's joint venture will be equally owned and controlled by both companies. It will use Rivian's zonal hardware design and integrated technology platform as a foundation to develop new software-defined vehicles (SDVs) for both companies. Rivian will license its intellectual property to the JV.

For now, Volkswagen will start using Rivian's existing electric architecture and software platform to build new EVs. But by the "second half of the decade," both companies plan to launch new vehicles created from the JV's co-developed technologies. A recent rumor also suggested Rivian was in early talks with Volkswagen to expand their software partnership into a manufacturing one, but Rivian refuted those claims.

Volkswagen plans to invest up to $5 billion in Rivian and the JV. It already bought $1 billion of Rivian's notes, which will be converted to its common shares on Dec. 1, and it plans to make two additional tranches of $1 billion investments in 2025 and 2026. It will also invest $1 billion in the JV upon its inception and provide it with a $1 billion loan in 2026.

That big investment isn't too surprising given Volkswagen remains an underdog in the EV market. Its sales of battery-powered EVs rose nearly 35% to more than 771,000 units in 2023, but that was only equivalent to 8% of the global EV market and less than half of Tesla's 1.81 million deliveries. Therefore, it makes sense for Volkswagen to invest in smaller EV makers like Rivian to accelerate that higher-growth business.

It's all about the cash

As for Rivian, that investment should allay some concerns about its cash flows and future projects. It still needs to open its $5 billion plant in Georgia; ramp up its production of its own Enduro drive units to boost its gross margins; launch its R2, R3, and R3X SUVs in 2026 and 2027; and fulfill Amazon's long-term order for 100,000 electric delivery vans through 2030.

Rivian ended the first quarter of 2024 with $9.05 billion in total liquidity, but analysts expect it to post a net loss of $4.69 billion for the full year. Therefore, Volkswagen's big investment should buy it a lot more time to achieve its long-term goals. Rivian CEO RJ Scaringe said the partnership would secure its "capital needs for substantial growth."

Rivian still looks undervalued

Rivian expects its annual production to nearly flatline at 57,000 vehicles this year as it faces tougher macro headwinds, more competition, and a temporary shutdown of its main plant in Normal, Illinois, to upgrade its production capabilities. But it's still aiming to achieve a positive gross margin per vehicle by the fourth quarter of this year as economies of scale kick in.

Analysts believe Rivian can increase its revenue at a compound annual growth rate (CAGR) of 34% from 2023 to 2026 as it rolls out its new vehicles. With an enterprise value of $12.6 billion, it still looks fundamentally cheap at just 3 times this year's sales. Tesla, which is growing at a much slower rate, trades at 8 times this year's sales.

If Rivian can get its act together, ramp up its production, and avoid more delays and disappointments, it could fetch a much higher valuation in the future. Volkswagen's investment is a vote of confidence in its ability to achieve those goals -- and Rivian could generate big multibagger gains over the next few years if it overcomes its more pressing challenges.