Rivian stock soars 37% after it strikes $5 billion deal with Volkswagen

• Rivian stock surged 37% after it secured a $5 billion deal with Volkswagen.
• The companies will form a joint-venture to develop next-gen vehicle software and electrical architecture.
• Volkswagen's investment secures Rivian's capital needs ahead of its new R2 and R3 vehicle launches.

Rivian stock soared 37% on Wednesday after it struck a $5 billion deal with Volkswagen.

The two companies will form a joint-venture to collaborate on next-generation vehicle software and electrical architecture, which will be utilized in cars from both brands.

As part of the deal, Volkswagen will invest an initial $1 billion in Rivian via a convertible note that will convert into Rivian stock later this year, assuming the companies receive regulatory approval for the deal.

Volkswagen will then invest an additional $4 billion into Rivian, represented by two $1 billion common stock investments in 2025 and 2026, and a $2 billion investment into the joint venture by 2026 via both a $1 billion payment to the JV and a $1 billion loan to it.

The investment is seen as a pivotal lifeline for Rivian, which has yet to reach profitability since its founding in 2009.

"Not only is this partnership expected to bring our software and associated zonal architecture to an even broader market through Volkswagen Group's global reach, but this partnership also is expected to help secure our capital needs for substantial growth," Rivian founder and CEO RJ Scaringe said.

Rivian's stock price has been trending lower since its November 2021 IPO. The stock is down 91% from its record high, and year-to-date is down 30% even after accounting for Wednesday's share price gains.

But Wedbush analyst Dan Ives believes the gains for Rivian can continue.

In a note on Wednesday, Ives reiterated the firm's "Outperform" rating and raised his Rivian price target to $20 a share, representing potential upside of 21% from current levels.

"This is a core game changer for Rivian and changes the capital structure of the company looking ahead for the story and the Street's view at a key time," Ives said.

The capital investment into Rivian comes ahead of its launch of a new suite of vehicles, the R2 and R3, which are successors to its original R1 vehicle platform.

"Importantly, this partnership will provide capital needed for the R2 ramp and GA plant R2/R3 midsize platform which we view as a large step in the right direction and a key move for Rivian going forward," Ives said.

Rivian's deal with Volkswagen comes just a few hours after the company said it simplified its manufacturing process to cut some costs by as much as 35%. The company said the cost savings should help it reach gross margin profitability by the end of the year.