Comparing Tesla (TSLA +2.40%) to any other auto company can be difficult given the fervent following and wide-ranging ambitions of CEO Elon Musk. But Rivian (RIVN 0.82%) may be the next great EV company to follow in Tesla's footsteps.
For investors, the difference between these two comes down to strategy, value, and the risks you're willing to take.
NASDAQ: TSLA
Key Data Points
Different strategies in the EV space
I think it's important to understand the difference between Tesla's strategy and Rivian's. Elon Musk and Tesla have clearly built a strategy based on volume growth above all else. Recent price reductions that could lead to a price war are one sign of how Tesla is holding the line on volume over price.
The vehicles they make also tell us a lot about how they see the market. Rivian's trucks and SUVs are entering a truck and SUV market that's typically much higher margin than sedans and crossovers, which is what Tesla makes. Rivian's business may be more niche as a result, but it's likely to be a high-margin niche. Tesla is making the Cybertruck, but it's so unconventional that I think it's too early to judge whether it will be successful in growing volume or revenue.
Rivian is also making a commercial vehicle, which has a 100,000-unit backlog from Amazon. Like the Cybertruck, it's hard to tell how financially successful that vehicle will be, but it'll help fill the manufacturing queue for years.
NASDAQ: RIVN
Key Data Points
What you're paying for
It's hard to value Rivian because it's so early in ramping production, but at the current stock price, the market cap is $18.3 billion and the company had $14 billion of cash on the balance sheet at the end of Q3 2022. Cash will dwindle as it ramps production and builds a second manufacturing plant, but getting a company this promising for slightly more than cash can be seen as a good value.
Data by YCharts.
Tesla is much more mature and has a $601 billion market cap. It earned $12.6 billion in 2022, but we are starting to see signs that margins and earnings will be significantly lower in 2023. Margins dropped throughout 2022, and in January 2023 the company implemented price cuts of as much as 20%. The price-to-earnings ratio of 48 may seem enticing given the current growth rate, but what happens when earnings drop this year?
Data by YCharts.
The problem with buying Tesla today is that investors are paying for the best-case scenario in existing operations and growth in unproven products like a robot and autonomous driving fleet (both products that don't exist).
Different risks
Both Tesla and Rivian are certainly risky stocks. With Rivian there's operational risk in the company ramping production, and it could potentially over-expand with a 400,000-unit Georgia plant under construction. The cash pile is great now, but if that money isn't put to use effectively, the company could crash and burn.
Tesla is more of a valuation risk. The company is being priced as if it will grow forever with extremely high margins. We're already seeing the margin story start to fall flat, and I think there's a good possibility management over-expands by growing production by 50% per year. There just may not be demand at that level of growth, leading to more discounting.
The better buy today
Right now, I think the risk/reward balance favors Rivian. It has a lot to prove, but the upside is tremendous from here if it succeeds in building a truck and SUV electric vehicle company with production of 500,000 vehicles or more. But it has a big pile of cash to fall back on, and I think the worst-case scenario is a legacy automaker swooping in to buy the company if the stock falls too far.
Tesla's price is so high that I find it impossible to have much upside at the current valuation. We are already seeing pandemic-related price increases being unwound, and emissions credits that have lined the company's pockets for years are going to dry up eventually. As competition gets better, there's more downside risk than upside potential for Tesla.
Tesla may be a bigger and better company today, but that doesn't mean it's a better stock to own. That's why Rivian is the winner between the two right now.
