June 25th ended up being a really remarkable day for shareholders of electric vehicle manufacturer Rivian Automotive (NASDAQ:RIVN). Shares of the company closed up 8.6%. But that was only the start of the move higher. After the market closed, the stock skyrocketed nearly 50%. This was in response to news that Volkswagen Group (OTCPK:VWAGY) (OTCPK:VLKAF) (OTCPK:VWAPY) is going to be making a massive investment in the company, both directly and by means of a joint venture. The investment comes out to $5 billion between now and the end of 2026.

I would imagine that pretty much everybody who saw this take place is shocked by the development. I know that I am. In early April of this year, I wrote a bearish article about the firm. Even though the stock had fallen significantly leading up to that point, I pointed out how industry conditions were changing in ways that would challenge the firm. In addition to this, I pointed out the company’s inefficient cost structure and detailed how its net cash position was shrinking rapidly. Ultimately, this led me to make the claim that the company was facing an existential crisis, which justified in my mind a ‘strong sell’ rating.

The problem with instances like this is that, every so often, a miracle can pop up. And that is exactly what we are seeing here. While some of the details have not yet been provided, management did state that this investment should allow the company to achieve breakeven in the next couple of years. Add on top of this some other recent developments, and I think that the woefully pessimistic view that I had on the company originally no longer applies. Because of how expensive the stock is, I cannot become even neutral on the business. But I do believe that upgrading it to a ‘sell’ is appropriate at this time.

A massive move

After the market closed on June 25th, the management team at Rivian Automotive announced that it has struck a deal with a subsidiary of Volkswagen Group whereby its new partner has agreed to make a $5 billion investment into the company. This sent shares up significantly. But of course, the devil is in the details. This investment will be made over time as opposed to being all at once. The first installment should be allocated to Rivian Automotive in the final quarter of this year, and who will be in the amount of $1 billion. This would be in the form of an unsecured convertible promissory note that will bear an annual interest rate of 4.75%.

There are a lot of miscellaneous details that aren’t terribly important for the purpose of understanding the value that this cash brings to the table. So instead of focusing on that minutia, I will only focus on the biggest aspects. In short, if the notes are not converted earlier, then by June 2026 they will be forcefully converted into common shares of Rivian Automotive. $500 million of this amount will be converted at $10.8359 per share, which represents a 9.4% discount to where shares of Rivian Automotive close that on June 25th. This alone will result in about 4.5% dilution for shareholders.

The remaining $500 million has the same maturity date. However, it will be converted based on the 45-trading day volume weighted average price of the stock leading up to the conversion date. It is worth noting that there is a capped conversion stipulation in the agreement that basically prevents the number of shares from conversion to exceed 19.99% of the shares of Rivian Automotive. This is because, as a stock on the NASDAQ, Rivian Automotive must bring any transaction larger than that to a shareholder vote. This is a way to avoid that kind of situation.

Another $1 billion will be allocated at the inception of the joint venture. That should also occur this year. $2 billion would be split evenly between 2025 and 2026 as equity investments into Rivian Automotive by Volkswagen Group, while the remaining $1 billion that will be paid out in 2026 would be in the form of debt to the joint venture.

The two equity investments will be priced based on the 30-trading day volume weighted average price of Rivian Automotive prior to the date that the investments in question are made. Terms regarding these amounts have not yet been provided to the public. It would be a dereliction of my duty as an analyst if I did not specify that these follow-on investments are based on certain milestones that have not yet been disclosed publicly. So long as Rivian Automotive can achieve its objectives, this cash will come through.

At the end of the day, the joint venture between the two companies will be controlled equally by each of them. The goal here is to create next generation electrical architecture and related software technologies. Software, electronic control units, and related offerings like architecture design and development investments, will be the primary areas of focus. As part of this, Volkswagen Group will be permitted to utilize Rivian Automotive’s zonal electronic control units and software after 2025. In addition to developing technologies, the goal here is also to capture cost savings and to appeal to customers.

This all comes at a very expensive time for Rivian Automotive. As I pointed out in my previous article on the company, net cash has been declining rapidly. At the end of 2021, the firm had net cash on its books of $16.91 billion. This dropped to $4.94 billion by the end of last year. And as of the end of the first quarter of this year, it was down further to $3.43 billion. The firm’s cash needs moving forward are also certain to be significant. Not only has the company been hemorrhaging cash because of significant net losses, it’s also doing this while trying to scale.

Even after announcing that the company will be making a major investment into a facility located in Normal, Illinois in order to start production of its R2 model of vehicles, management still forecasted capital expenditures this year of $1.20 billion. Admittedly, that was down by $550 million from prior guidance. But even so, that’s a large chunk of money. And with production at that facility not expected to start up until the first half of 2026, additional capital expenditures are absolutely going to be required.

If management can truly get the business up to scale, the end result could be interesting. As I mentioned in my previous article on the company, the firm is still focused on producing 100,000 Rivian Automotive electric delivery vans for customer Amazon (AMZN). However, it is intent on growing its production of other vehicles as well. As an example, the R1S is currently the fourth best-selling electric vehicle in the US market. It’s also the best-selling one at a price over $70,000. Simultaneous to that, it is also the best-selling large luxury SUV in California, even if we include combustion engine vehicles in the mix. At scale, its production facility in Illinois is expected to produce 215,000 vehicles annually. This will open the door for other consumer vehicles such as the R3 and R3X.

This is not the only help that the company has gotten as of late. In May of this year, Rivian Automotive announced that it received up to $827 million in the form of incentives from the State of Illinois Department of Commerce & Economic Opportunity that it will use to expand its operations in that state. Some of this funding will be in the form of tax credits and exemptions, as well as grants. The tax credits would be eligible for issuance for 15 years initially. But there is the opportunity for an additional 15-year extension.

This does not come without a cost, of course. Within 60 months of the REV Tax Credit Agreement being executed, Rivian Automotive must invest at least $1.5 billion into the state and, by the end of 2029, it is expected to create at least 559 additional full-time, good-paying jobs. This is not a bad deal for the business. Because according to management, shifting its production to Normal, Illinois is expected to save the company more than $2.25 billion compared to what it would have spent launching production of the R2 at the company’s site in Georgia.

This move, as well as the just announced joint venture investment by Volkswagen Group, definitely changes the math when it comes to Rivian Automotive. But this does not mean, however, that the company is out of the woods yet. The firm is still growing rapidly. For instance, in the first quarter of 2024, revenue came in at $1.20 billion. That was nearly double the $661 million generated the same time one year earlier. This increase came largely from a rise in the number of vehicles delivered from 7,946 to 13,588 as the number of vehicles produced jumped from 9,395 to 13,980 on a year-over-year basis.

As good as this is to see, the bottom line for the business remains under pressure. The company’s net loss widened from $1.35 billion to $1.45 billion. A big part of the problem is that the firm still loses money on just the cost of goods sold side of the equation. However, with the company’s cost of revenue improving from 180.9% to 143.8%, there is no denying that the business is moving in the right direction on that front. Other profitability metrics have shown some improvement for the most part. Operating cash flow went from negative $1.52 billion to negative $1.27 billion. If we adjust for changes in working capital, it worsened only slightly from negative $730 million to negative $747 million. However, EBITDA for the enterprise improved from negative $1.02 billion to negative $798 million.

When you have a company that is hemorrhaging cash like this, you can’t really value it. But what you can do is to see what kind of cash flows would be necessary for the firm to become at least fairly valued. In the chart below, you can see hypothetical scenarios where the firm is to trade at a price to operating cash flow multiple of either 10 or 20 and at an EV to EBITDA multiple of either 10 or 20. It is worth noting that this analysis factors in the conversion of the first $500 million investment from Volkswagen Group, since we know the terms of it. But it does not factor in any of the other proceeds coming to the business, since we don’t know what that picture will ultimately look like. It does also factor in the after-hours surge in price that shares saw.

In that chart, you can see the significant amounts of cash the business would need to generate in order to get to that point. This year, management is still forecasting EBITDA to be negative to the tune of $2.70 billion. Management has forecasted that free cash flow might ultimately become positive with the scaling opportunities the business currently has. But beyond that statement, we really don’t have any idea what the fundamental picture will look like in the next couple of years.

Takeaway

Right now, I understand that investors in Rivian Automotive are awfully excited about this development. I definitely think that this changes the math to a large extent. I no longer think that the company faces an existential crisis if we assume that this series of transactions goes through. However, the company is still significantly away from achieving a state of being even close to fair value. So while the firm is definitely out of the woods, I cannot upgrade it to anything better than a ‘sell’.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.