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Over the past 12 months, Rivien(NASDAQ:RIVN) shares remained stuck below $20. That’s a far cry from their all-time high of around $130. If you were looking for a growth stocks with significant upside potential, this could be your chance. However, there are two things in particular that you need to know before you get started.
It’s not hard to see how Rivian shares could have immense upside potential. The electric vehicle maker’s shares trade at just 3.2 times sales, while other electric vehicle makers trade between 10 and 14 times sales. There could be a 200 to 300% increase only if its valuation reflected those already achieved by competitors like Tesla And Lucide Group.
What’s holding Rivian back? Two things in particular.
First, its sales growth rates are now negative, whereas its historical growth rates were consistently double digits, sometimes even triple digits. Sales fell by a third last quarter while the competition saw its sales bases grow. Lucid grew sales 45%, partly supported by its low total sales, which still stand at just $730 million compared to Rivian’s $4.6 billion sales base.
Tesla reported negative sales growth throughout 2024, but was able to return to positive results in the final quarter thanks to its diversified sales lineup. Not only does it sell luxury cars like the Model When consumer trends change, Tesla has enough vehicle variety to absorb this changing demand. Rivian, meanwhile, only offers two luxury models, both of which cost around $100,000. If consumers forgo their spending, there is currently no cheaper model to attract higher-spending buyers.
The second factor holding back Rivian’s valuation is its inability to become profitable. It continues to lose money on every car it makes, while Tesla has maintained positive gross profits for years. Lucid, while still losing money, is at least seeing significantly higher sales growth to maintain its valuation premium.
The good news is that these two headwinds could soon turn into tailwinds for Rivian. In 2026, it plans to launch three new mainstream vehicles, all of which will cost less than $50,000. This will diversify its lineup in a way similar to what Tesla has achieved. When Tesla launched its consumer vehicles, its sales base doubled and then tripled. Rivian could experience the same sales ramp, which should significantly improve its valuation multiple.
As for the company’s inability to achieve profitability, investors won’t need to wait until 2026. We should receive important news within a few weeks.
Earlier this year, Rivian’s CEO told CNBC that Rivian would achieve positive gross margins by the end of the fiscal year. This exercise ends on February 20. If the company reaches this milestone, it should significantly improve its ability to survive until it can bring its mainstream vehicles to market. This should result in a strong improvement in the company’s valuation multiple. But will Rivian really manage to generate positive gross margins in the coming weeks?
As you can see, Rivian has made great strides in improving its gross margins since its IPO. However, it still racked up a gross loss of nearly $2 billion over the past 12 months. Last quarter, its gross profit totaled $392 million, meaning Rivian is losing tens of thousands of dollars on every car sold.
Can Rivian close the gap to zero in just 90 days, the length of a single fiscal quarter? That remains to be seen. But when announcing its latest quarter results, Rivian management reiterated that it was “on track” to achieve positive gross profits in the fourth quarter. If this becomes a reality, shares will likely be purchased at less than $20. However, given the company’s depressed valuation, the market clearly remains skeptical.
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool holds positions at Tesla and recommends it. The Mad Motley has a disclosure policy.
