Key Points
Rivian was upgraded by UBS analysts to a buy.
Though UBS upgraded Rivian, it left its price target the same.
UBS sees a disconnect between Rivian's stock price and the new R2's potential.
Rivian Automotive (NASDAQ:RIVN) shareholders probably wouldn't mind a little encouragement from Wall Street. But a buy rating alone doesn't pay the bills, fix a production bottleneck, or convince somebody to buy an electric vehicle (EV).
What makes this upgrade interesting is the reasoning behind it. UBS sees a disconnect between Rivian's beaten-down stock and the opportunity taking shape around its highly anticipated R2. For investors, the question is whether that disconnect represents an opportunity – or whether the market has good reasons to remain skeptical.
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Opportunity knocks?
On Nov. 2, UBS analyst Joseph Spak upgraded Rivian from neutral to buy while keeping his $17 price target unchanged. Analysts at UBS viewed the stock's roughly 19% decline over the preceding month as a buying opportunity ahead of an expected improvement in R2 production and automotive gross margins.
It's fair to say that Rivian has worked through two quarters of upfront launch costs, which have weighed on margins, and the EV maker added a second shift near the end of the third quarter while targeting a third production shift sometime next year.
Rewinding a moment, UBS' unchanged target is worth thinking about. UBS didn't need a bigger estimate of Rivian's value to become more enthusiastic. Essentially, a lower share price made the existing opportunity more appealing, suggesting Rivian is undervalued in the analysts' view.
Or to use a corny auto analogy: Think of a vehicle you've been eyeing finally getting a price cut. The discount matters – but you still need to look under the hood before celebrating a bargain.
There's something under the hood
Rivian delivered 19,248 vehicles in the third quarter, up 46% year over year. R2 became its best-selling vehicle by volume, outselling both R1 and its electric delivery van. Those are actual customer deliveries, giving investors something firmer than launch excitement to consider.
Rivian's highly anticipated R2 SUV. Image source: Rivian Automotive.
UBS also described initial R2 demand as solid, suggesting an encouraging foundation as more trim levels become available, as well as lower pricing. That's the analysts' assessment, rather than proof that every future version will find eager buyers. The investment opportunity rests on what comes next: whether Rivian can sustain that demand while turning a growing vehicle business into a more profitable one.
A turning point still needs proof
Rivian's automotive business posted an $80 million gross loss in the third quarter. Companywide gross profit was positive, but its software and services business provided the strength needed to offset that automotive loss.
That leaves two straightforward things to watch: whether R2 keeps attracting buyers as the launch progresses, sending deliveries to new heights, and whether automotive gross margins improve as production settles into a rhythm and efficiencies begin to add up. A falling share price doesn't automatically make a stock cheap, but it can create an interesting opportunity for investors willing to accept risk in such a young company.
That's the useful takeaway from this upgrade. Investors don't need to agree with a $17 target to understand the argument. Rivian's R2 is gaining traction, but now Rivian needs to show that its next chapter includes improving automotive segment profits alongside more vehicles.
Daniel Miller has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.