Stocks, Economics and Real Estate - June 24-28, 2024

Business/Stocks

Rivian gets a $5 billion lifeline from Volkswagen and hosts Investor Day

Volkswagen has announced that it intends to invest $5 billion into a joint venture with Rivian to develop the next generation of software-defined EV platforms for Rivian and Volkswagen. Interestingly, Rivian will license its existing IP rights to the joint venture. The investment will come in stages, with the first being a $1 billion unsecured convertible bond issued by Rivian. VW will then inject another $1 billion at the inception of the JV in 2024, followed by a $2 billion equity investment in Rivian split between 2025 and 2026, and concluding with $1 billion in debt issued to the JV in 2026.

Seems like Rivian’s clean-sheet, vertical integration approach is paying dividends on the EV tech front. The additional capital should serve it well to bridge its pathway to the R2-model production in 2026, which is expected to be Rivian’s relatively affordable, higher volume product. Following that, Rivian intends to launch the R3, a small sub-$40k mass-market hatchback in late 2026 or 2027. Achieving the R2 and R3 production ramp could be the Tesla Model 3 moment for Rivian.?

As of March 31, 2024, Rivian had $6 billion in cash and cash equivalents, however Rivian’s quarterly free cash flow has been around the -$1.5 billion mark over the past four quarters. As Rivian looks to increase production, it would be crucial to see how well Rivian; 1) contains its costs as it ramps up production; 2) the market’s willingness to absorb the additional production without price erosion; and 3) Rivian’s capability to ramp up deliveries ahead of the production - a key challenge in direct-to-consumer models. If Rivian executes successfully on all three, there’s little reason to believe it can’t slow down its current cash burn. I must add that Rivian has done a decent job in holding its operating expenditure (adjusted) flat while continuing to scale revenue since 2022.???

Rivian held it’s 2024 Investor Day a few days following the VW announcement and while the presentation was tech-heavy and demonstrated the great amount of work put in to add features and improve the ownership experience, Rivian did dedicate a healthy amount of time to its cost efficiency efforts. The Gen 2 of its R1 platform is expected to shave 20% of its materials cost, while the R2 is expected to save 45% on that front. Rivian’s management further went into their cost efficiency efforts such as savings on the battery pack, cross member, skid plates and wiring harnesses. On the electronics front the number of ECU’s went down from 17 to 7 in-house developed ECU’s. Vertical integration yet again proves its benefits despite the heavier upfront cost.?

Overall, the support of an automotive behemoth like VW gives Rivian shareholders confidence that the company will be able to weather the next 2-3 years before it really takes off. Finally, while EV demand has significantly deteriorated, I strongly believe EV demand will remain robust in the long-term as the tech, infrastructure and cost continue to rapidly evolve.

Apple’s EU worries continue

The EU’s had a history with Apple and it seems the two can’t find middle ground. The EU has so far forced Apple to ditch its proprietary Lightening cable and use the more universally accepted USB-C ports, made Apple dance around the €13 billion tax issue for which another decision is due in 2024, and most recently fined Apple $2 billion in relation to a music streaming antitrust probe.?

The latest quarrel between the two stems from the EU regulators accusing Apple of being in breach of the EU’s new Digital Markets Act (DMA). In short, the regulators believe Apple’s App Store policies do not “fully” allow developers to steer consumers towards other app marketplaces that may offer more favorable terms to the developers. If proven guilty, Apple could be facing a fine of upto 10% of its annual global revenue - which works around to $38 billion… I’m no expert in policy, but the EU is not toying around on ensuring a fair, competitive marketplace. Apple has stated that they believe to be in compliance with the new DMA and have also blamed regulatory uncertainties on the delayed rollout of the full iOS18 to European consumers.?

Whatever the outcome, I’m almost sure we’ll be seeing more Apple vs. EU in the future.?

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Economics

Canadian Inflation Woes Return

Just a few weeks after the Bank of Canada found comfort in reducing rates, inflation in Canada seems to be trickling back up again. Not quite the assurance BoC needed to make further cuts next month.?

The Canadian consumer price index increased +2.9% in May relative to the prior year, up +20 bps from April and +30 bps ahead of the median estimate according to Bloomberg’s economist survey. More importantly, the May data reversed a four month streak of easing inflation - I believe the downward trend formed a large part of the decision to cut rates.?

Rent and mortgage interest costs remained the key drivers of inflation during the month, increasing +8.9% and +23%, respectively. Excluding rent and mortgage interest costs, the CPI increased a slightly more manageable +1.5%. Let’s see how the BoC interprets the May CPI data, and while one bad month isn’t indicative of a negative trend it does cause policy makers to pause and rethink the cadence of rate cuts.

On the flipside, after a strong start in the second quarter, the Canadian economy’s growth seems to be slowing down. The Canadian GDP grew +0.3% in April, followed by a slowdown of +0.1% in May. However on a quarterly basis, the GDP remains on track for a +1.8% growth, which is ahead of the +1.5% expectations and a slight improvement over Q1 performance. All I know is that the BoC will be working overtime to determine which side of the rate cutting fence they land on.??

US Consumer Confidence slips slightly and more eyes on the labor market as pandemic savings deplete

US Consumer confidence slightly fell based on their perceived outlook for the economy. Many noted that they will likely put off large spend items for the next 6-months and believed there’s an increased likelihood of a recession over the next 12 months. However the US job market remains strong and is an expected driver of general household spending. Housing prices have also remained strong so it’s unlikely the update on consumer confidence will be raising alarms yet.?

Additionally, according to a Bloomberg report, the savings Americans had accumulated during the COVID-19 pandemic, about $2 trillion worth, have now largely been depleted, likely adding additional pressure on consumer spending and therefore the negative outlook. With savings diminishing, workers will be depending more heavily on their wages, which just adds more weight on the labor market’s shoulders.?

Real Estate

Toronto Real Estate: New home prices fall as inventory surges and sales fall

Data from the Altus Group and BILD Association points toward new house prices slipping lower in May, with the benchmark single-family home falling -7% and condos down -5% year-over-year. Notably, both segments are down around 30% compared to their peaks. Total new home inventory now sits at 20,427 units - an increase of 33% over the past year and overall single-family and condo sales are 65% and 75% lower, respectively, compared to May 2023. For June, we’ll have to see if the rate cuts had any impact on stimulating buyer activity, but for now, the May update is rather concerning - or perhaps now is the time to buy?