I agree with the sentiment recently expressed by investment bank Cannacord which called Rivian’s (NASDAQ:RIVN) deal with Volkswagen (OTCMKTS:VWAGY) “monumental.”
There are four main reasons why I believe the transaction will indeed prove momentous for Rivian and RIVN stock.
- The deal proves Rivian is one of the leaders in the U.S. automotive in-vehicle software sector.
- The partnership greatly boosts the startup’s brand recognition and overall power of its brand, providing a boost to Rivian’s financials in the process.
- Volkswagen’s decision to invest up to $5 billion in Rivian enables the EV maker to delay additional cash raises.
- Volkswagen is incentivized to help Rivian succeed.
Along with the continued popularity of Rivian’s EVs and the relatively low valuation of Rivian stock, I believe the shares are drastically undervalued. I continue to urge all investors to buy them.
Volkswagen Has Great Respect for Rivian
Volkswagen made the deal with Rivian because it was looking to improve its EV software and architecture while boosting its presence in the U.S. market. Obviously, Volkswagen had many U.S.-based EV startups to choose from in order to accomplish those objectives.
After all, particularly in the current environment, not many would have turned down several billion dollars from the German automaker. Because Volkswagen chose to invest in Rivian in order to form a software and EV architecture-focused joint venture means Volkswagen views Rivian’s technology as superior to its peers. The fact one of the world’s largest automakers thinks they are superior bodes very well for Rivian and Rivian stock.
A Big Lift for Rivian’s Brand and Finances
That Volkswagen is developing EVs in tandem with Rivian and using its software and EV architecture is a de facto endorsement of Rivian’s EVs. It will go a long way into making Rivian better known and respected in the U.S. It will also boost its profile in Europe, where Volkswagen is based, and in Asia where its brand is generally strong.
Financially, Seeking Alpha columnist The Asian Investor estimates Rivian now has enough cash to last at least two years.
Also importantly, the additional cash enables Rivian to more quickly complete its factory expansion in Illinois and build its plant in Atlanta. Consequently, the company will be able to greatly increase its production sooner, enabling it to sell many more EVs. That will shorten its path to profitability. Finally, Rivian will be able to license its intellectual property to the joint venture, further boosting its cash flow.
Assistance from Volkswagen and the Bottom Line
Under the deal, Volkswagen will own billions of dollars of Rivian stock. Consequently, as Seeking Alpha columnist Hawkinvest pointed out, the European automaker will be greatly incentivized to help Rivian succeed. It suggests Volkswagen is likely to help the U.S. company with technical and distribution issues going forward.
And as I noted in an earlier column, 2,855 of Rivian’s large SUVs were registered in the U.S. in April. That is compared to just 1,259 during the same period a year earlier. Consequently, I believe that the company’s EVs are becoming much more popular in America.
Given that and the huge benefits Rivian will obtain from its deal with Volkswagen, I believe Rivian’s current $14 billion market capitalization greatly undervalues its long-term outlook.
On the date of publication, Larry Ramer held a long position in RIVN. 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.
