Things have suddenly got very exciting for Rivian (NASDAQ: RIVN). Its stock leapt 9% in yesterday’s (25 June) trading session in New York. That still leaves it over 90% down since its 2021 listing.
Once the markets closed though, the price soared. In pre-trading today it is up a phenomenal 38%. What on earth is going on – and should I get some of the action?
Major partnership announced
Electric vehicle (EV) maker Rivian has been bleeding cash. Last year, the firm delivered a little over 50,000 vehicles. Revenue was a not-insubstantial $4.4bn.
But the net loss, although reduced from the prior year, still came in at a still-painful $5.4bn. Free cash outflow was $5.9bn.
Yes, the company is selling thousands of vehicles and, yes, those sales are set to grow strongly in coming years. But it is massively lossmaking and is burning through cash like a drunken sailor.
Enter the polar opposite of a drunken sailor… a large, sober, proven German corporation. Specifically, Volkswagen. Yesterday, it was announced the giant carmaker and Rivian are entering a joint venture.
Why investors are excited
That announcement is why the stock soared in after hours trading. It is also why I expect we will see a sharp move upwards as soon as the main market opened this morning (US time). That said, we may see wild moves both up or down in today’s New York trading session.
Why are investors so excited?
For a company burning through cash like Rivian, the prospect of any investment that improves the balance sheet can be exciting, depending on what strings are attached.
On top of that, when it comes to making and selling vehicles, Volkswagen clearly knows what it is doing. Last year, it sold 9.2m.
So for such a seasoned operator to see significant value in Rivian bolsters the sense that the EV company may really have developed something that has high value.
Volkswagen is not spending $5bn on the stock
But here’s the rub. Volkswagen is not putting its money into this stock right now – and maybe not at all.
It is setting up a joint venture with the company, which both firms will own and control equally. The announcement talked of “a total expected deal size of $5 billion”. Of that, only $1bn is likely to come soon. ”Up to $4 billion in planned additional investment” is an aspiration subject to conditions being met — not a concrete commitment to inject the money.
That $1bn will be in a form of convertible loan notes, so should convert into Rivian stock.
The other $4bn, if it ends up coming at all, will be in the form of $2bn put into the stock and the same amount split across a cash injection and loan for the joint venture.
Strategic investment perspective
I am an investor not a trader. So I would not buy the shares hoping for a short-term bounce.
From a long-term perspective, Volkswagen appears to like Rivian’s technology. I see its move as a vote of confidence from a strategic investor on the tech. That is not the same as a vote of confidence from a financial investor on the valuation of the stock. I have no plans to invest.
