Many EV stocks have high upside potential. But this is your best bet right now.
It’s not easy being in the electric vehicle (EV) market right now. Sales so far in 2024 have lagged expectations, with some manufacturers pulling back plans to expand their electric vehicle lineup. But if you’re a long-term investor, now could be the best chance in years to put some money to work. Out of all the EV stocks, one in particular has my eye right now.
The EV hype train has crashed
A few years ago, the market couldn’t get enough of EV stocks. Tesla shares, for instance, were testing new highs, while both Lucid Motors and Rivian Automotive (RIVN 1.88%) were going public with great fanfare. Since those highs, however, valuations have come down sharply. The price-to-sales ratio for Tesla has compressed by nearly one-third. Lucid and Rivian, meanwhile, have seen their valuation ratios decline by 90% or more, although this collapse is partially due to a sizable jump in sales since both companies went public.
The issue is clearly industry-wide. But despite a short period of declining sales for Tesla earlier this year, most manufacturers have continued to see rapid sales growth throughout this entire period. What, then, is the problem?
It’s a classic issue of reality versus expectations. “Sales momentum for electric vehicles (EVs) is slowing globally, and hybrids (HEVs) and plug-in hybrids (PHEVs) are proving more competitive than first thought,” concludes a recent research report from Goldman Sachs. The report specifically blames limited charging networks, high interest rates and capital costs, and uncertainty around government subsidies for the slowdown in growth rates.
Rivian’s decline in sales growth paints this picture well. One year ago, quarterly sales growth year over year exceeded 100%. In its most recent quarter, however, sales growth was just 3.3%. The muted growth has crushed the entire industry, much of which traded at premium valuations.
But if you’re just looking to get into EV stocks, now might be your best opportunity in years.
TSLA data by YCharts
Now looks like the time to bet on Rivian
While market conditions aren’t as favorable right now, this could be a great opportunity for long-term investors. As Goldman Sachs’ research shows, massive growth is still expected following 2024’s growth slowdown. “Despite the current slowdown in EVs,” its research concludes, “our base-case scenario still calls for EV sales volume to rise 21% year-over-year in 2024.” And looking even further beyond, EV sales will eventually outpace conventional vehicle sales within the next decade.
Why, then, has Rivian’s sales growth slowed to just 3.3%? Because it doesn’t have the models necessary to tap the mass market category. Long-term, it is that category of mid-budget vehicles that will fuel most of the industry’s growth. And right now, Rivian has zero models that are considered mass market. But that’s about to change.
Earlier this year, the company announced three new models that will debut under $50,000: the R2, R3, and R3X. Data from Consumer Reports suggests that Rivian has one of the highest perceived quality and loyalty rates in the industry, even when including non-EV brands. So when Rivian’s new models hit the market in 2025 and 2026, it’s reasonable to expect rapid uptake, similar to what Tesla was able to do with the Model 3 when it instantly became the world’s top-selling plug-in electric car for three consecutive years.
Image source: Goldman Sachs
The path forward for Rivian won’t be without challenges. It will need to spend billions of dollars to ramp up production of its new models. And it will need to retain its reputation for quality and brand loyalty. But if it can execute according to its timeline, Rivian could become a household name within a few years.
From 2017 through 2021, Tesla’s sales skyrocketed from $7 billion to more than $50 billion, largely off the backs of its mass market models: the Model 3 and the Model Y. With a current sales base of around $5 billion, don’t be surprised to see an inflection point for Rivian in 2025 or 2026, with sales growth matching Tesla’s historic precedent. Patient shareholders willing to wait can lock in today’s depressed valuation.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Tesla. The Motley Fool has a disclosure policy.
