Piper says sell this auto supplier after Rivian tie-up with VW

Shares of Aptiv (APTV) slid on Wednesday after Piper Sandler said Rivian’s (RIVN) joint venture with Volkswagen (VWAGY) is a “red flag” for the Aptiv thesis. The firm said the bull case seems unrealistic and that the blockbuster venture will impact more than just Rivian and Volkswagen.

RIVIAN, VOLKSWAGEN JV: Rivian announced a joint venture deal with Volkswagen under which Volkswagen intends to work with Rivian to create “next generation software-defined vehicle architectures” to be used in both companies’ future EVs. The joint venture will use Rivian’s “zonal hardware design” and platform as the foundation of future vehicles, as well as Rivian’s electrical architecture expertise for the vehicles. Rivian will license its existing IP rights to the joint venture.

Under the terms of the agreement, Volkswagen will grant Rivian Automotive a convertible note in the amount of $1B that will convert into Rivian’s common stock, with up to $4B in additional investment staged through 2026 for a total infusion of $5B.

“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 CEO RJ Scaringe said in a statement.

RED FLAG FOR APTIV: While Piper Sandler said that the Rivian’s funding pathway is now largely de-risked, with the company poised to obtain $5B in funding in the coming years, the analyst said that the venture has broader implications for the entire auto industry.

In a research note to investors, Piper downgraded auto supplier Aptiv to Underweight from Neutral with a price target of $63, down from $78, and said that while the Rivian-Volkswagen news may seem unrelated to Aptiv, the announcement that Rivian and Volkswagen will share EV architecture and software is a “red flag” for Aptiv’s strategy. The firm thinks Rivian, Tesla (TSLA), and other Chinese electric vehicle specialists concluded that to stay competitive, automakers must configure their own electrical architecture, design their own onboard computers, and write their own code, and that for systems this critical, it’s too slow and too costly to rely on companies like Aptiv.  While Aptiv is still relevant, the bull case “seems unrealistic,” the firm added.

PRICE ACTION: In morning trading, shares of Aptiv are down over 9% to 66.71.