Stifel analysts initiated coverage of electric vehicle maker Rivian (RIVN) with a "Buy" rating and a $23 price target this week. Stifel Managing Director Stephen Gengaro highlighted Rivian's increasing brand awareness and partnerships as key strengths.

Specifically, Rivian's R1S SUV and R1T pickup truck are driving awareness and demand. A partnership with Amazon (AMZN) to produce electric delivery vans leverages Rivian's EV capabilities. Additionally, the planned 2026 launch of Rivian's R2 vehicle — an affordable crossover — capitalizes on interest in a practical and desired electric option.

While the EV industry has grappled with cost challenges, Gengaro highlights that Rivian stands out with its promising production volume and potential for margin expansion, positioning the company for successful EV manufacturing.

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Video Transcript

JOSH LIPTON: Rivian, you initiate as a buy here, Stephen. How come? What's the thinking there?

STEPHEN GENGARO: There's really three big reasons behind that, right. One is their initial vehicle, which is on the roads now the R1, both pickup truck and SUV. It's clearly on the expensive side. It is a vehicle, which is building brand awareness for the company. And you're starting to see sales increase, so that helps.

But then there's two other big factors, right? One is they have a deal with Amazon. Amazon actually owns about 16% of the stock. But they collaborated with Amazon on the design of an electric delivery vehicle. There's 100,000 vehicle order there, which is helping. But now behind that they're starting pilot programs for that electric delivery van with other potential customers. And I think that could be a positive catalyst for the shares over the next year as we get results of that program.

And then finally, and I referenced this a little bit earlier, but as you start to filter down to vehicles that are more affordable for most consumers, they have the R2 vehicle, which is a mid-sized SUV, which is the most popular type of vehicle in America right now. That starts to hit the production in 2026. I think that's ultimately going to be the driver of high volumes and help boost profitability. So those three factors are really the big drivers behind our positive stance on Rivian.

JULIE HYMAN: At the same time whether you're talking about Rivian, which you just spoke about, or Lucid, which you have a hold on, the economics of building EVs has seemed to be really tricky, right? Tesla seems to finally have figured it out, but it took it a long time. So what gives you confidence that Rivian is going to get there? And are you concerned about Lucid not quite getting there?

STEPHEN GENGARO: So there-- you mentioned it on the Tesla front, it's a good point. This-- it's hard to build a vehicle than many people think. So that's number one. You need volume, right, because there's an immense amount of expense, which goes into the R&D, the construction of the facilities, getting the production lines up and running. So you need volume flow through.

And so when we think about Rivian, what we think about is, a, are the vehicle vehicles desirable? What's coming out to the market? So we check mark, yes, that's-- definitely, we believe that. Two is, how do you start to get margin expansion, right? and right now even on the gross profit line, they're negative. We think they can get gross profit margins to about break even by the end of 2024. There's a few factors behind that, one is higher volumes. Two are some new technologies that are introducing onto the production lines next year. They've renegotiated some supplier agreements which help with the cost side. So there's many factors here in addition to volume, which will start to help push them towards gross profit positive and then ultimately EBITDA positive probably by 2026. And they have $10 billion of liquidity in place, which I think helps them get there.

You mentioned Lucid. And on the Lucid front, the sports sedan that they have in the market right now is outstanding. They have a Gravity SUV. They just unveiled, and I got to see a couple of days ago. That will help drive sales as you get late into '24. They probably need capital a little bit sooner than Rivian does, which is one of the things that has kept us on the sidelines on Lucid right now. And then they're mid-sized probably more volume-driven vehicle is several years down the road.

JOSH LIPTON: All right. Steve--

STEPHEN GENGARO: The other--

JOSH LIPTON: I'm sorry, go ahead, Steve.

STEPHEN GENGARO: One other quick point there. Oh, sorry. The one other quick point there that's worth noting on Lucid, the Saudi PIF fund owns 60% of the stock. They have a large order and manufacturing facility going up in Saudi. So they have a very wealthy shareholder/partner that's behind Lucid, which I think will help the funding gap.