2 Reasons to Buy Rivian Stock (and 1 Big Reason to Sell)

This struggling electric vehicle maker has a lot of things going for it. But there is plenty of uncertainty ahead for the industry, too.

Some adventurous investors are more open to considering a fast-growing company in the early stages of reaching its full potential. And with a market capitalization of just $11.7 billion, Rivian Automotive (RIVN -0.61%) is just such a company. In fact, it is a bite-sized investment option compared to electric vehicle (EV) industry leader Tesla with its $565 billion in market value.

But does that make Rivian a buy today? Let’s discuss two reasons to consider buying the stock and one reason to sell.

Its shares are dirt cheap

Rivian stock was incredibly expensive when it hit public markets through an initial public offering (IPO) in November 2021. With a market cap of over $100 billion on its first day of trading, the automaker briefly became the second most valuable American automaker ahead of General Motors and Ford Motor Company, seemingly based on optimism about its brand power and ability to rapidly grow vehicle production and sales.

Over the subsequent years, Rivian has missed some of its production targets. But fundamentally, it is still the same fast-growing company — just now trading for a dramatically lower premium.

Rivian’s first-quarter revenue jumped 82% year over year to $1.2 billion based on the production of 13,980 vehicles and the sale of 13,588. This growth is much higher than industry leader Tesla, which saw its automotive revenue decline by 13% in its corresponding period. But despite Rivian’s higher growth rate, it trades for a price-to-sales (P/S) ratio of just 2.26, dramatically lower than Tesla’s multiple of 6.6.

Management has ambitious targets

The biggest difference between Rivian and Tesla is in profitability. While Tesla is a large and established company that generated an operating profit of $1.2 billion in the first quarter, Rivian burned through $1.5 billion. Further, the smaller company has a negative gross margin, which means it currently costs more to build and deliver its vehicles than it can recoup by actually selling them — a very alarming situation.

As of the first quarter, Rivian lost a whopping $38,784 per vehicle sold. But CEO Brain Scaringe believes plant retooling, technology improvements, and lower-cost materials could bring that number to zero in just three quarters. While this sounds like a tall order, it could lay the groundwork for Rivian to quickly scale into operating profitability and eventually net income, if successful. This potential transformation story doesn’t seem to be priced into Rivian’s current stock valuation.

The EV industry remains uncertain

Rivian is an affordable way to bet on growth in the electric vehicle (EV) industry. It is much cheaper than Tesla and doesn’t suffer the overhangs faced by legacy automakers, which may cannibalize their old business to make the switch to the new technology. That said, it is far from a safe investment.

Image source: Getty Images.

According to Harvard Business Review, EVs may have hit the most challenging part of the new technology adoption cycle. Most of the early adopters have already been reached. And automakers must now enter the much more challenging mass market, where they face different consumer interests and priorities. Most people are more familiar with gas-powered cars (and their well-established fueling and repair infrastructure), making them reluctant to switch to EVs.

So while Rivian is still growing quite fast, it is unclear how much longer its momentum will last. Further, as a small, unprofitable company, it will have a harder time sustaining losses and raising capital compared to its larger rivals, who can likely access debt at much better interest rates. This could mean equity dilution (selling more units of stock to raise cash), which would dilute current investors’ claim on future earnings.

While Rivian may be able to overcome these challenges over the long term, investors may want to wait on the sidelines until more information becomes available.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

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