Tesla, the iconic electric vehicle maker headed by its boisterous CEO Elon Musk, has sold millions of cars and trucks since its founding more than 20 years ago. Over the last decade alone, Tesla's share price has appreciated by more than 1,300%, giving the company a market capitalization of roughly $700 billion.
While Tesla remains a fine investment today, investors looking for the biggest growth opportunities should be working to identify the next Tesla. If that's your goal, look no further than Rivian Automotive (NASDAQ: RIVN). There are three crystal clear reasons to expect its stock price to take off in a big way over the next few years.
1. It could reach a critical financial milestone very soon
Tesla was able to achieve a positive gross margin very early in its history. Rivian, meanwhile, is still struggling to reach this financial milestone. Last quarter, it lost more than $30,000 for every vehicle it sold. This is a huge improvement from previous levels, but still an obvious challenge for a company in a capital-intensive industry rife with historical failure often stemming from a lack of capital resources.
If Rivian wants to take the next step in its evolution -- and, most importantly, be able to achieve the next milestone on this list -- it needs to prove to the market that it can sell its products at a profit. The good news is that management expects to achieve positive gross margin by the end of this fiscal year.
There are two quarters left in Rivian's fiscal year, with the next quarterly results expected in early November. To be sure, there's still a giant gulf for the company to cross before it can report a positive gross margin. But management hasn't reneged on its promise yet, even if the market isn't pricing in any success.
If the company reports a positive gross margin this fiscal year, expect the stock price to move strongly on the news, as the next milestone on this list becomes significantly more likely to be realized.
2. New mass market models should put Rivian on the map
A decade ago, Tesla's revenue base was roughly similar to Rivian's today. But over the last 10 years, Tesla has grown its revenue base by nearly 1,000%. Can Rivian achieve the same kind of growth? Absolutely, just as long as it's able to get its new mass market vehicles to customers on time and at their promised price points.
Earlier this year, Rivian surprised investors by announcing three new mass market models: the R2, R3, and R3X. All are expected to debut under $50,000. And given Rivian's strong brand loyalty and reputation, expect plenty of demand when these vehicles hit the road. That's exactly what Tesla achieved when it launched its mass market models, the Model Y and the Model 3. While previous luxury models created a brand for Tesla, it was these mass market models that truly sent its sales base soaring.
It should be noted, however, that Rivian's mass market models are still currently prototypes. It will likely take billions in additional capital to get these cars to market. Huge sums will be needed for design, testing, marketing, manufacturing, and aftermarket service. But if Rivian can reach gross profitability soon, the market may gain enough confidence to finance Rivian's negative cash flows until it can get these vehicles into the hands of millions of new consumers.
3. Now looks like the time to buy, but there's a catch
Despite trading at a premium early on in its trading history, Rivian stock now trades at a deep discount to Tesla shares. For example, Rivian stock now sits at under 2 times sales, while Tesla shares are valued above 8 times sales. This looks like a bargain entry point for Rivian stock right before its sales ramp up heavily from the launch of its mass market vehicles. But there's a big catch.
Rivian's management team expects to launch the first of its three mass market vehicles sometime in 2026 -- although these timelines very often get shifted back due to the complexities involved in ramping up new manufacturing facilities. The R3 and R3X, meanwhile, may not hit the roads until 2027. That's several years away, a big cause for Rivian's discounted valuation.
If you're looking to make a quick buck betting on a convergence between Rivian and Tesla's valuation, don't expect a high probability of success. Apart from news related to Rivian's gross margin, there won't be many major catalysts for another couple of years.
This is where patience can pay off. If Rivian is able to successfully launch its mass market vehicles beginning in 2026, expect sales growth to explode, with additional launches in 2027 only adding to this sales arc. But there will be plenty of volatility in the meantime, fueled by an outright lack of hard news.
It's not hard to chart out how Rivian stock is extremely undervalued right now. But it'll be years before investors figure out whether the investment thesis is correct or not. Patient investors willing to hold on for a chance to make huge profits should consider taking a position -- just don't expect a big payoff anytime soon.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
3 Reasons Rivian Is the Smartest Electric Vehicle (EV) Stock to Buy Right Now was originally published by The Motley Fool