Rivian Automotive, Inc. (NASDAQ: RIVN) may have been hit by a perfect storm in the last week of June. The news that Volkswagen is pouring up to $5 billion into the electric vehicle (EV) maker is impossible to say is anything but good news. Rivian needed funding to get to breakeven and self-sustainability. Now it has that funding. Or most of it. Maybe.
Rivian shares rose from just under $12 to right at $16 on the news. There is no such thing as bad news for a stock to rise nearly 37% on a news announcement. The problem here for Rivian is that the shares slid from the early day highs to close at $14.74, followed by day-after closing prices of $14.47 and then $13.42 respectively. After ending the month of June (and the quarter) at $13.42, Rivian did manage to close up at $13.92 on Monday to start the month of July.
Oggonomics wants to offer a 360-degree review here of Rivian as to why this may still be more of a “practical” buy rather than a “strategic” buy calling for upsized returns over other speculative and volatile stocks. Rivian’s stock price has generated close to a $3 billion gain in market cap. We will not know much Rivian will get in the years ahead from VW until it’s actually seen. And then there is the notion that VW could always invest more if it makes sense.
NOT A “GAP & CRAP” TRADE, BUT…
Most investors would not call the instant profit-taking strong enough on the sell-side to be a “gap and crap” trade. Giving back more than half of a major gain from what is supposed to be a life-changing event for Rivian just isn’t that comforting. VW’s joint press release with Rivian showed that VW will invest an initial $1 billion in Rivian via an unsecured convertible note. Up to $4 billion in additional planned additional investments can take it to the $5 billion in steps and traunches in the next few years.
Price history, very recent and in the last year, are at least so far saying something much more muted. That gives something closer to regular upside instead of much higher upside. And that is why Rivian may not be a screaming buy for strategic investors looking for juiced up gains. It will be very important in the weeks and months ahead to see if Rivian can hold its gains or add marginally before revisiting the “strategic” rather than “practical” upside expectations.
VOLUME VERDICT ALREADY?
If investors begin piling into Rivian shares, then the “strategic” buy rather than just a “practical” buy may start to form. We have so far seen about 600 million shares trade hands since the VW investment was announced. That includes the after-hours session when the news broke, but that is still exponentially higher trading volume for 5 trading sessions since. That should give a fairly good indication of traders being in and out and have allowed for a rotation of new long-term investors who wanted in.
SHORT SELLERS
Rivian is also a heavily-shorted stock. It should also have been enough time for the short sellers’ open interest of about 132.6 million shares (around 18.5% of the float, as of June 15) ample time to decide whether they wanted to cover or pile on with more shares short.
VW and Rivian’s joint venture for EV and software means that Rivian can get up to $5 billion, in exchange for a stake in Rivian and the ability to use Rivian’s technology and platform. The move is supposed to get Rivian from its negative cash flow today to the R2 platform with material costs of about 45% lower than today — and a bridge to much more affordable EV cars.
REGULATORY DEVELOPMENTS
As this is not a back-door merger posing as an investment, regulators in the United States and in Europe are likely to rubberstamp any would-be regulatory approvals that will be needed. The joint press release did in fact mention that convertible note prices would be issued after the regulatory approvals were complete.
LESS AGGRESSIVE ANALYST CALLS
The morning ahead of the VW-Rivian news announcement, Guggenheim started Rivian Automotive with a Buy rating and assigned a $18 target. The analyst felt that Rivian’s profits will exceed losses as a credible path to breakeven gross margins in the coming quarters. Then came news of the VW financing that juiced Rivian so much. Its market cap is now about $14 billion. Other analysts have issued their updated ratings on the heels of the VW pact and price targets, and here are the cautious calls:
- Truist maintained its HOLD rating and raised its target to $13 from $10.
- Goldman Sachs maintained its NEUTRAL rating and raised its target to $14 from $11.
- RBC Capital Markets maintained its SECTOR PERFORM rating and raised its target to $14 from $11.
MORE AGGRESSIVE ANALYST CALLS
Here is a group of the positive calls with Buy and Outperform equivalent ratings:
- Piper Sandler reiterated its OVERWEIGHT rating with a $21 price target.
- Wedbush Securities reiterated its OUTPERFORM rating and raised its target to $20 from $15.
- Cantor Fitzgerald reiterated its OVERWEIGHT rating and raised its target to $19 from $15.
- Needham & Co. reiterated its BUY rating and raised its target to $20 from $13.
What should stand out to investors today from all the “positive” ratings seen since this call is that these price targets are still $20 and under.
THE MOST POSITIVE CALL
BofA Securities has a Buy rating on July 1 it kept its $21 price objective. That’s still one of the highest targets of more known Wall Street firms. BofA’s John Murphy believes that Rivian is one of the most viable among start-up electric vehicle makers, and he thinks it is a relative competitive threat to incumbent OEMs already making EVs. Here is an excerpt from that BofA call:
We note the JV with Volkswagen could help accelerate the progression in part given the capital RIVN is raising from the deal, but also potential associated improvements in vehicle economics. On that point, the JV should help reduce materials costs (particularly on ECUs) and help drive operating efficiency. These potential cost savings are not included in the figures disclosed at the event. Separately, on capital spending, RIVN expects to deploy $2.7 billion over 2024 and 2025, which will primarily be allocated to manufacturing and product development.
ALL IN ALL…
This is not exactly cautious by any measure with shares closing at $13.92 on the first day of July. It’s also not the world’s biggest ringing endorsement for such a risky equity when you consider where the stock went immediately on the news versus how it has performed in the last year. You already know about the $16 share price briefly being seen. Rivian’s 52-week range is $8.26 to $28.06. It is probably not even relevant any longer that Rivian was a $100 stock for a very brief period in 2021.
There are not really any negative stances about VW’s investment into Rivian. This is also meant to show that it should act as the major lanes for a bridge that can get Rivian to profitability. There is just a whole lot that has to happen. Now Rivian has to just be able to stand up to the likes of Elon Musk and the Big Three U.S. automakers who have all been leaning toward a less aggressive march to electrification of their entire auto fleets due to customer pushback, higher borrowing rates, less definite tax credits in some cars, weak resale pricing, falling EV car prices and some other issues.
The endgame for Rivian here seems to be a scenario where most of the upside has already been realized for some Rivian watchers; and the more bullish Rivian watchers seem to have a more muted bullish upside compared to days when these stocks might have seen much larger reactions. The EV market seems nowhere close to being fully matured yet. It is, however, more mature than it was even a few years ago.
Now we just have to wait and see if more bulls, or new bulls, step up to the plate.
