In April 2024, Rivian (NASDAQ:RIVN) stock touched 52-week lows of $8.30. With macroeconomic headwinds, intense competition and significant cash burn, the pessimism seemed to be justified.
However, Rivian stock has doubled from these lows and currently trades at ~$16.30. It seems that the EV company is back from the dead and there are fundamental reasons to be positive.
The reason for Rivian stock surging higher is the deal with Volkswagen (OTCMKTS:VWAGY). This column focuses on the likely positive outcomes from the deal. Further, I have discussed other factors that are likely to ensure that Rivian survives the industry downturn and emerges stronger.
Before discussing the company and industry factors, it’s important to note that the world is moving towards lower interest rates through expansionary policies. The worst of macroeconomic challenges for EV companies might be over. That’s one catalyst for the company and will ensure that Rivian stock remains in an uptrend.
The Volkswagen-Rivian Deal Is a Win-Win For Both
Last month, Rivian announced a joint venture with Volkswagen to create the “next generation software-defined vehicle (SDV) platforms.” This platform will be used by both companies for future EVs.
I see two benefits for Rivian from this deal. First, Volkswagen will be investing $5 billion in Rivian over the next few years. This includes an immediate investment of $1 billion. Infusion of liquidity is important for the company as it struggles with cash burn.
Further, the focus of the EV industry is on lowering the cost per vehicle. The partnership will help in accelerating the development of the software and support lowering cost through scale and innovation.
Of course, Volkswagen stands to benefit as well with the company trying to match the technology offering from pure-play EV companies. Cyrus Mewawalla, head of thematic intelligence at GlobalData believes that Volkswagen is behind in areas of “autonomous driving and other software within the car.” The joint venture will help in closing the technology and innovation gap.
European Entry Can Boost Growth
As of Q1 2024, Rivian continues to expand its physical footprint in the United States and Canada. However, the company currently has only service centers in Germany for European EDV deliveries. In my view, Rivian is likely to establish a strong presence in Europe in the next 24 to 36 months.
The first point to note is that the European Union has set has set provisional duties of up to 37.6% on EVs imported from China. If this is finalized, Rivian will have a cost advantage as compared to Chinese peers.
It’s also worth noting that the Volkswagen deal has another potential benefit. There is a case for Rivian getting “better deals from suppliers while procuring components in bigger volumes with the backing of Volkswagen.”
Rivian had plans for setting up a factory in Europe. This plan was halted in 2022 as the EV company focused on conserving cash. It’s also possible that in the next 12 to 24 months, the European plant plan will be revived.
Growth From R2, R3, and R3X
In the first quarter of 2024, Rivian unveiled its new midsize platform with R2, R3, and R3X. The R2 is a mid-sized SUV with the starting price likely at $45,000.
Further, R3 will be a midsize crossover that will be priced lower than R2. Rivian is targeting to commence delivery of R2 in the first half of 2026. The delivery of R3 and R3X after the ramp-up of R2.
There are two benefits for Rivian here on launch.
First, the EV maker believes that there will be a cost saving of $2.25 billion compared to their initial cost projections for launching the R2. Further, R2 and R3 will also be competitive on the pricing front and can support deliveries growth acceleration. With operating leverage, I expect continued improvement in adjusted EBITDA.
The Bottom Line: Accumulate Rivian Below $20
It’s worth noting that Rivian ended Q1 2024 with a cash buffer of $7.8 billion. If we include the revolving credit facility and $1 billion initial infusion from Volkswagen, the company has a total liquidity buffer of $10 billion. While cash burn is significant, the company is well financed.
I must add that the benefit of the Volkswagen joint venture will not be visible immediately. However, over the next 24 to 36 months, this deal will benefit Rivian beyond the capital infusion and joint technology development.
While Rivian stock has surged by 100% from 52-week lows, it’s still a good time to gradually accumulate. I expect Rivian to navigate challenging times and emerge stronger in the next few years.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.