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Beyond Rivian: Buy These 2 Stocks Integral to Its Trucks' Design

By Keithen Drury – Dec 1, 2021 at 9:01AM

Key Points

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Service providers can be better investments than the company making the products.

Rivian Automotive (RIVN -0.66%) has created quite the story through its public offering. It has a market cap around $100 billion, yet is generating no revenue. Buying the stock isn't a big deal, but investors should expect irrational price movements or even a total loss should its operations cease.

Instead, investors should look toward two integral Rivian business partners, Amazon (AMZN -0.59%) and Dassault Systemes (DASTY -0.71%). Amazon Web Services provided the necessary cloud infrastructure for performing engineering simulations, and Dassault Systemes' software was used for product design. Both products are critical throughout multiple industries, allowing investors to spread their bets across many businesses instead of one electric vehicle producer that has yet to earn revenue.

Electric car being designed on a computer.

Image source: Getty Images.


Amazon has several businesses under its umbrella. The most recognizable is the consumer-facing website customers can buy practically anything from. However, its 3% third-quarter revenue online store segment growth is lackluster and isn't an exciting reason to own the stock.

Investors should focus on its Amazon Web Services (AWS) segment, which grew 39% to produce revenue of $16 billion during Q3. Furthermore, Amazon's cloud segment has been accelerating its growth.

Year-over-Year AWS Revenue Growth*
Q3 2021 Q2 2021 Q1 2021 Q4 2020
39% 37% 32% 28%

Data source: Amazon. *Excludes currency effects.

This segment is Amazon's cloud computing service, allowing users access to Amazon's data centers around the world. Customers can build websites, store data, or run software through the service. In Rivian's case, engineers used external computing power provided by AWS once their on-site simulations computer failed. It took three weeks to migrate to AWS, and it improved the software speed by up to 66%. After a successful transition and benefit realization, the chances Rivian will switch away from AWS are slim.

AWS made up 15% of total Q3 revenue, so it is not Amazon's largest factor. However, when a trillion-dollar company is growing its overall sales at 15%, investors should take notice. Amazon is also showing above-company-average growth in its Amazon Prime subscription (24%), third-party seller services (19%), and advertising service (50%). Just over half of Amazon's revenue results from combining all four segments. As Amazon's online store growth begins stagnating, look toward the other business segments to drive growth.

Dassault Systemes

Much more under the radar than Amazon, Dassault Systemes is a French company that makes engineering software like SolidWorks and Catia. It also has Enovia, a product life-cycle management software that allows collaboration by users in different departments to ensure everyone is on the same page, something critical when a product as complex as a vehicle is being designed.

Investors can learn a lot about companies by scouring their job postings. For Rivian, it was obvious its engineer applicants needed experience with Dassault Systemes' software, specifically Catia and Enovia. It's also a positive sign that Rivian is hiring, making it evident it is expanding operations.

Dassault Systemes is a mature growth company. It reported 13% Q3 revenue growth with a 20.5% operating margin. Instead of the U.S. generally accepted accounting principles (GAAP), Dassault Systemes abides by international financial reporting standards (IFRS). Non-IFRS operating margin was an impressive 34.8%. It also guided 26% non-IFRS earnings-per-share growth, up from the 20% previously given during the second quarter.

Market-crushing returns shouldn't be expected from Dassault Systemes, but it will likely provide dependable 10% to 15% revenue growth each year. Migrating from one engineering software is painful for customers, so turnover will be low. Dassault Systemes boasts a 99% customer retention rate, proving its product stickiness.  Additionally, engineering software is integrated into the modern design process; no engineer will return to pencil and paper.

Because clients are locked in, Dassault Systemes can raise its prices every year with minimal customer churn. Finding companies that can exert pricing power is Warren Buffett's "single most important decision in evaluating a business." Dassault Systemes has it, and investors should take note.

Time will tell if Amazon or Dassault Systemes will be a better stock pick than Rivian. Investors who want an exciting and volatile company in their portfolio could buy Rivian, but sometimes the companies providing services are better investments.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keithen Drury has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Dassault Systemes and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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