What Rivian’s venture with Volkswagen means for the EV maker

Rivian ‘s latest partnership with Volkswagen could prove a major boon for investors and the broader auto industry, according to some Wall Street analysts. The electric vehicle company and Tesla competitor surged as much as 30% Wednesday, a day after announcing up to $5 billion in funding from German automaker Volkswagen . As part of the plan, Volkswagen will inject $1 billion, followed by an additional $4 billion investment planned by 2026. The joint venture will work toward creating electrical architecture and software, the companies said. Rivian shares have hit a roadblock in recent months, shedding 34% year to date as the company grapples with rising market competition from China, slowing demand and struggles with attaining positive cash flows. RIVN 1D mountain Shares pop on Volkswagen venture But Wall Street views the deal as a potential turnaround opportunity that can help limit execution risks and uncertainties surrounding funding that have spooked investors in recent months. “We have assumed RIVN would need to raise more capital, and VW’s investments in RIVN will prove valuable in helping it achieve the scale necessary to get to positive free cash flow,” and build new facilities, said Bank of America analyst John Murphy. “RIVN could also see potential benefits from material cost savings and operating efficiencies that would help improve its cost position and ultimately higher gross margins.” JPMorgan analyst Ryan Brinkman lifted his price target on shares to $14 from $10 following the announcement, implying 17% upside from Tuesday’s close. Along with a reduction in execution risk and an endorsement of Rivian’s technology, the deal also suggests lower operating expenses and a reduction in the cost of goods sold in the future, he added. To be sure, not everyone seem convinced that the venture will kickstart the much-needed turnaround for the company. “Although RIVN is making clear progress on cost … and offers what we believe to be a leading product, losses are still significant and it’s facing demand issues in the midst of the EV Winter,” said Barclays analyst Dan Levy. “Therefore, while we expect a sharply positive stock reaction amid the removal of the capital needs overhang, RIVN still faces key challenges ahead.” Levy maintained his equal weight rating and $10 price target, noting that investor focus now shifts toward fundamentals and ongoing demand concerns. Both Wells Fargo analyst Colin Langan and Morgan Stanley’s Adam Jonas also noted that auto partnerships historically tend to have a troubled history. “We view the JV announcement as a relatively efficient form of capital raising given other alternatives,” Jonas said. “The longer term (and bigger) challenge, in our view, is that Rivian needs help making cars profitably at scale.” Big wins for the auto industry While the venture justifies Rivian’s strategy, some on Wall Street anticipate some potential big wins for broader auto industry. RIVN YTD mountain Shares this year “Rivian and Tesla have long advocated for in-house mastery of these technologies, and now Volkswagen is (apparently) attempting to replicate their approach,” said Piper Sandler analyst Alexander Potter. “New Chinese brands are moving at an unprecedented speed, and only through vertical integration can other automakers hope to keep pace.” He added that the venture also highlights the need for proprietary electronic control units and software. Bank of America’s Murphy expects the deal to pose some positive tailwinds for Lucid Group , by boosting confidence in the ability of electric vehicle company to attract capital even as the market stalls. Lucid shares have tanked nearly 38% this year.