Over the past 12 months, Rivian(NASDAQ: RIVN) shares have been stuck under $20. That is a far cry from their all-time high of around $130. When you’ve been searching for a growth stock with significant upside potential, this could possibly be your probability. Nonetheless, there are two things particularly that you must learn about before jumping in.
It isn’t hard to see how Rivian shares could have immense upside. Shares of the EV maker trade at just 3.2 times sales, while other EV makers trade between 10 and 14 times sales. There could possibly be 200% to 300% in upside alone if its valuation were to reflect those already achieved by competitors like Tesla and Lucid Group.
What’s holding Rivian back? Two things particularly.
First, its sales growth rates at the moment are within the negative, whereas its historical growth rates were consistently within the double digits, sometimes even the triple digits. Sales fell by one-third last quarter while the competition saw their sales bases grow. Lucid grew sales by 45%, partially buoyed by its low total sales, which still stands at just $730 million versus Rivian’s $4.6 billion sales base.
Tesla did post negative sales growth in 2024 as an entire, but was in a position to flip back into the positive last quarter on account of its diversified sales lineup. Not only does it sell luxury cars just like the Model X and Model S, but it surely also offers cheaper models just like the Model 3 and Model Y, each of which can be found for under $50,000. When consumer trends shift, Tesla has enough vehicle variety to soak up this shifting demand. Rivian, meanwhile, only has two luxury models, each of which cost around $100,000. If consumers pull back on spending, it currently has no cheaper models to draw more spendthrift shoppers.
The second factor holding Rivian’s valuation back is its inability to grow to be profitable. It’s still losing money on every automobile it makes, while Tesla has maintained positive gross profits for years. Lucid, while still losing money, at the very least has significantly higher sales growth to sustain its valuation premium.
The excellent news is that these two headwinds could soon turn into tailwinds for Rivian. In 2026, it plans on launching three latest mass-market vehicles, all of which can debut for under $50,000. It will diversify its lineup in a way that is analogous to what Tesla has achieved. When Tesla released its mass-market vehicles, its sales base doubled after which tripled. Rivian could experience the identical sale ramp, which should significantly improve its valuation multiple.
As to the corporate’s inability to realize profitability, investors won’t must wait until 2026. We must always receive some major news inside weeks.
Earlier this 12 months, Rivian’s CEO told CNBC that Rivian will achieve positive gross margins by the tip of the fiscal 12 months. That fiscal 12 months ends on Feb. 20. If the corporate achieves this milestone, it should dramatically improve the corporate’s ability to survive until it could possibly release its mass-market vehicles. That ought to lead to a hefty improvement to the corporate’s valuation multiple. But will Rivian actually achieve positive gross margins over the following few weeks?
As you’ll be able to see, Rivian has made strides in improving its gross margins since going public. Nonetheless, it has still amassed nearly a $2 billion gross loss over the past 12 months. Last quarter, its gross profit totaled negative $392 million, meaning Rivian is losing tens of hundreds of dollars on every automobile it sells.
Can Rivian narrow the gap to zero in only 90 days — the length of a single fiscal quarter? That continues to be to be seen. But during last quarter’s earnings announcement, Rivian’s management reiterated that it’s “on target” to realize positive gross profits within the fourth quarter. If that becomes a reality, shares are likely a buy under $20. Nonetheless, given the corporate’s depressed valuation, the market clearly stays skeptical.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Tesla. The Motley Idiot has a disclosure policy.