With shares of Rivian Automotive (RIVN -8.85%) down 80% from their 52-week high, there are likely plenty of investors out there looking at the stock and thinking that it's a bargain at these levels. However, just because Rivian shares have fallen this far doesn't mean they can't fall further, and I think they are likely to fall much further from here -- perhaps 50% or more.
Investors who are interested in getting exposure to the rise of electric vehicles would most likely be better-served focusing on some of the other options in the space. Here's why.
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Rivian is not a software comany
Bulls will say that electric vehicle companies like Rivian are tech companies, but they aren't -- they are auto manufacturers. They likely use this idea to justify Rivian's valuation, implying that it should receive the valuation of top tech and software stocks. But software companies are asset-light businesses that often boast gross margins of 80% or higher and strong streams of recurring revenue.
Auto manufacturers are capital-intensive businesses with lower margins and relatively cyclical revenue as opposed to recurring subscription revenue, and they thus typically trade at much lower multiples than top software companies. Therefore, Rivian doesn't deserve to trade at the multiple of a top software company like ServiceNow (NOW 5.40%) or Adobe (ADBE 1.98%) -- it should trade more in line with the multiple of a company like Ford (F -1.04%) or General Motors (GM 1.02%).
Rivian is not profitable
This brings us to the next problem with Rivian -- you can't give Rivian the same type of price-to-earnings multiple as Ford or GM, because it isn't profitable, and likely won't be any time soon. In fact, the company posted a net loss of $5 billion during the first three quarters of 2022.
For argument's sake, let's say that we still wanted to value Rivian like a high-margin software company with significant recurring revenue. During the bull market, I tended to operate under the premise that you can buy a fast-growing software company for between 10 and 15 times sales. But Rivian still looks expensive even from this perspective, trading at 19 times sales. For comparison, top software stocks like the aforementioned Adobe and ServiceNow trade at 9 and 11 times sales, respectively. Plus, they are profitable, boast superior margins, and feature stellar net dollar retention.
If we compare Rivian to the price-to-sales multiple of other automakers, Ford and GM both trade at about 0.3 times sales, implying that Rivian could theoretically fall 95% from its current level to be valued like these peers. I'm not saying that it will fall 95%, but instead illustrating the incredible gulf in valuations between Rivian and its peers. Even Tesla, another stock that proponents say should be valued like a tech company, trades at about 5.5 times sales, a nearly 75% discount to Rivian.
Even if we were to put all of this aside and say that you should ignore the financials because Rivian makes a superior product to every other vehicle out there, this argument unfortunately doesn't seem to hold water at the moment either.
Car and Driver magazine recently compared the Rivian R1S Launch Edition to the 2023 BMW iX M60, and while it did praise some aspects of the R1S, it said that "while the BMW has some hints of torque steer, the Rivian's wheel feels like it just snagged a wahoo, which is also a possible verbal response to the fight required to keep the R1S pointed straight." Car and Driver also points out that the Rivian tops out at 111 miles per hour, and called out a "a plethora of ride and handling sins," ultimately calling it "the one to be seen in, but not the one to drive."
In fairness, it should be acknowledged that Car and Driver gave the 2023 Rivian R1T a very positive review.
Look for a margin of safety when investing
For investors who want to get exposure to the rise of electric vehicles, why not buy another company with a compelling lineup of electric vehicles, such as Ford? The F-150 Lightning (the electric version of the best-selling vehicle in the United States) recently won Motortrend's 2023 Truck of the Year, while the Mustang Mach-E was Consumer Reports' top electric vehicle of 2022.
Meanwhile, Ford trades at just 5 times earnings and pays a dividend which yields over 5%. Even the more richly valued Tesla looks like a sounder investment at this point, trading at less than 25 times forward earnings.
In conclusion, investor excitement about electric vehicles is certainly understandable. My goal here isn't to be a naysayer or to throw cold water on the space. But I do think there are more appealing investments here that don't come with as much risk, and thus offer investors upside as well as a much larger margin of safety.
