To The Moon

Rivian Automotive has hit a rough patch. Ramping up its electric-vehicle production has proven challenging, and its shares are down this year.

Wall Street isn't giving up on the stock, though, and vertical integration is one reason for that.

Vertical integration refers to a company owning or participating in all parts of its value chain. At the dawn of the modern car era, Ford made the steel that went into its cars, for instance.

Canaccord analyst George Gianarikas recently visited $Rivian Automotive(RIVN.US)$ in Palo Alto, California, meeting with several executives, and his takeaway is the start-up is on the right track.

Rivian executives "helped us dive deeper into understanding the layers of vertical integration and technology proficiency at the company," Gianarikas wrote Wednesday.

Erik Fields, vice president of manufacturing at Rivian, described his company's strategy as if "Google and Toyota had a baby," according to the analyst's report summing up the visit.

Google parent Alphabet (GOOGL) is good at machine learning, software, and all things digital. $Toyota Motor(TM.US)$ is legendary for its manufacturing excellence. These days, vertical integration is more about software and microchips than it is about steel and rubber.

For Rivian, vertical integration means building manufacturing expertise, ranging from cars to batteries and battery systems. Rivian is also driving down costs by integrating its own electric motors. It is writing its own software and designing its own chips. Down the road, there could be potential for Rivian's own charging network.

That's like auto makers owning gas stations. $Tesla(TSLA.US)$ owns the largest network of EV charger stations in the U.S.

Tesla pioneered EV vertical integration, writes Gianarikas, adding that "Rivian started its journey with a familiar ethos -- make stuff in-house." He sees the strategy working: "Rivian is on its way to capturing its fair share [of the EV market] and [we] see the R1S as the family electric SUV of choice."

He rates shares Buy and has a $40 price target for Rivian stock, up about 170% from recent levels just below $15 a share.

Rivian stock has slumped about 48% over the past 12 months, while the S&P 500 and Nasdaq Composite are up about 4% and 11%, respectively.

Overall, 58% of analysts covering the company rate shares Buy, compared with the 53% average Buy-rating ratio for stocks in the S&P 500. Rivian was more popular around the time of its initial public offering in 2021. Back then, about 67% of analysts rated shares Buy.

The average analyst price target was higher in the past too, starting out at about $130 a share in 2021. Today that average stands around $24.

A lot has led to declines in both Rivian's average price target and the stock itself. In addition to Rivian's struggles to ramp production as fast as investors initially hoped, rising interest rates and a slowing economy have sapped some interest in companies that don't produce positive free cash flow.