Rivian’s AI and range impress but not enough to offset EV concerns

Rivian Automobile impressed Wall Street on Thursday with its plans for artificial intelligence, automation and a self-developed silicon chip, but significant demand and capital challenges remain for the electric vehicle maker.

Although Wall Street analysts expressed some optimism following Rivian’s inaugural “Autonomy and AI Day,” the company’s stock fell 6.1% to close Thursday at $16.43 per share. But shares rallied Friday to close at $18.42, up 12.1%.

Although the event did not cause many analysts to change ratings or price targets, Needham increased his price target on Rivian by 64%, to $23 per share. The company did so due to technology announcements and the potential for future licensing deals, as well as higher-than-consensus expectations for next year’s deliveries of its new R2 midsize SUV.

“RIVN has reported a change in [automaker] embrace autonomy by leveraging AI to build end-to-end autonomy,” Needham analyst Chris Pierce said in a note to investors Friday.

The company’s shares had been rising in the run-up to AI Day, but many analysts believed announcements from the event were already “priced in.” Stocks also fell as OpenAI made its own AI announcement on Thursday, revealing its most advanced model yet.

“We attended Rivian’s Autonomy and AI Day in Palo Alto yesterday and came away impressed with the strategic direction set by management,” Edison Yu, an analyst at Deutsche Bank, said in a note to investors on Friday. “However, the stock’s weakness appears justified given the rise since earnings and the lack of announcement of a major AI partnership/deal.”

Rivian’s announcements included a proprietary chip, RAP1, designed for “physical AI,” namely autonomous driving; an advanced software architecture, or “brains” of the vehicle; a new AI assistant; and a roadmap to access “personal L4,” or fully autonomous personal vehicles.

The latter debuts later this month with an update involving its hands-free driving system, followed by plans to continue expanding capabilities until vehicles reach full autonomy in the coming years. Rivian has not disclosed a timeline for full autonomy or potential autonomous vehicles in the robotaxi fleet.

Before the event, Rivian shares were up more than 30% at $17.50. Despite these gains, shares remain well below the company’s 2021 IPO levels of $78 per share.

Barclays analyst Dan Levy and others said that while Rivian’s technology announcements, including the surprise proprietary chip, were impressive, the company remained a “show me” story in tougher market conditions.

“While RIVN faces a more difficult path to breakeven on core vehicle sales alone, we believe that with enhanced AV/AI capabilities, RIVN opens the door to additional software/services revenue, which would increase margin,” Levy said Friday in a note to investors. “To be clear, there is definitely a ‘show me’ element to RIVN about its abilities.”

Challenges include plummeting demand for electric vehicles after tax credits of up to $7,500 ended in September, a lack of other support under the Trump administration and internal struggles within the company over products and capital.

Several analysts have noted that adoption of advanced driver assistance systems remains low across the industry, even at the U.S. electric vehicle leader. Teslaand Rivian continues to catch up with other companies that have been offering such systems for years.

Rivian founder and CEO RJ Scaringe and other executives have argued that vertically integrating the company’s internal capabilities, including software, AI, vehicle platforms and other technologies, will allow the automaker to be more efficient, faster and better than others.

“AI allows us to create technologies and customer experiences at a completely different pace than what we have seen in the past,” Scaringe said at the event.

Such arguments, along with the automaker’s $5.8 billion software joint venture deal with Volkswagen, led Wall Street to price Rivian’s software business higher than its core electric vehicle production and sales, given market conditions.

A $12 price target for Rivian shares from Morgan Stanley, which recently downgraded the company to underweight, includes $7 for software and services and $5 for its core automotive business. Several analysts added that Rivian may be able to license or sell its latest technologies, including chips.

“RIVN is developing a suite of hardware and software offerings to remain competitive in an Auto 2.0 world. However, several risks remain around demand, potentially limiting the data capture needed to achieve higher levels of autonomy,” Morgan Stanley’s Andrew Percoco said in a Friday note.

Morgan Stanley cited concerns over autonomy adoption rates, lackluster demand for electric vehicles ahead of Rivian’s new ‘R2’ vehicle next year and a prolonged path to profitability to justify rating affirmation.

Tom Narayan, RBC Capital Markets analyst, agrees: “The advancements improve Rivian’s product offering but do not address lingering concerns about liquidity and R2/R3 profitability. »

Rivian continues to lose billions of dollars each year, despite significant cost reductions and software revenue gains from its deal with VW.

Rivian ended the third quarter with $7.7 billion in total liquidity, including nearly $7.1 billion in cash, cash equivalents and short-term investments that Scaringe said positions the company “very well” for the R2 launch.

The R2 mid-size SUV is crucial for Rivian, especially since it is a major market in the United States. With an expected starting price of $45,000, it is expected to expand Rivian’s customer base and serve as a testament to the company’s efforts toward profitability and cost savings.

Current mainstream R1 pickup and Rivian SUV models start at over $70,000. It also builds electric delivery vans, largely for its main shareholder, Amazonwhich start at around $80,000.

“Pressure on profitability will likely intensify as Rivian rolls out its ~$45,000 R2 platform in the highly competitive mid-size SUV segment,” Narayan said. “While targeting a lower price point can increase market reach, the R1 platform struggles to be profitable despite being almost double the price of the R2.”

Shares of Rivian, with a market cap of $22.5 billion, are rated with a price target of $15.43 per share, according to average ratings and estimates compiled by FactSet.

—CNBC Michael Bloom contributed to this report.