Here's the brutal truth: Simply producing electric vehicles (EVs) won't make a company the next Tesla -- which traded at sky-high valuations for years. Investors found that out the hard way as many EV stocks plunged over the last year or two.
With many EV stocks trading relatively cheaply versus historical levels, investors have a great opportunity to scoop up shares for the long haul. Here's one EV stock to double down on, and one to avoid.
Double down
Rivian (RIVN 4.07%) executives have their hands full trying to simultaneously accelerate vehicle production while vastly improving the company's cost structure to slow down its cash burn. The good news for investors is that the company is making progress on both objectives, and it has a cash stockpile of roughly $12 billion, which should be sufficient to take it well down the road.
Rivian's EV production hit a pothole during the first quarter; the company's commercial van assembly line was down for a significant period to adjust for its Enduro motor and lithium iron phosphate (LFP) technology. Management is still guiding to a production of 50,000 units in 2023 -- a 100% increase from 2022.
What makes Rivian particularly intriguing is that its vehicles are of high enough quality that it can make its own name and carve out its piece of the booming EV sales pie.
In fact, its R1T pickup truck ranked the highest overall for consumer satisfaction among premium EVs in 2023, ahead of the Tesla Model 3, according to a consumer survey by J.D. Power. Further, in 2023, Rivian's R1T and R1S were the only electric truck and only large SUV to earn a Top Safety Pick+ rating from the Insurance Institute for Highway Safety -- the organization's highest safety rating.
So, Rivian is producing high-quality vehicles (with more models on the way) and accelerating its sales -- but it's also burning through a ton of cash. While Rivian's first-quarter net loss narrowed to $1.4 billion, its best mark in over a year, it burned through $1.5 billion.
Investors should keep an eye on the cash burn, but also must recognize the operational progress being made. Rivian's first-quarter revenue jumped more than six-fold year over year, but its cost of revenue only doubled, and its operating expenses actually declined roughly 17%.
In light of all that, investors can feel comfortable doubling down on Rivian with its shares trading 86% below the price at which it went public, but the company will have to prove it can carve out its spot in the EV industry as juggernauts like Ford and General Motors join the battle with their own EV trucks and SUVs.
A struggling EV maker
Sweden-based Polestar (PSNY -2.27%), too, has made progress on narrowing its losses and cutting its selling, general, and administrative (SGA) costs, but its momentum may be stalling: It missed its first-quarter forecasts for revenue and units shipped.
Management cautioned investors it would need more time for software development, and that it was delaying the start of Polestar 3 electric SUV production until the first quarter of 2024.
To make matters worse, it forecast that it would produce between 60,000 and 70,000 EVs in 2023, which would amount to growth of only 16% to 36%. Previously, it had been guiding for production of 80,000 EVs this year. Further, the company announced it would cut its global headcount by 10% and implement a hiring freeze.
Polestar's cash burn also revved up: It burned $283 million during the first quarter, compared to generating $40.5 million in the prior-year period. It ended Q1 with only $884 million in cash on its books. Investors need to watch how Polestar's cash burn reacts to its slowing production growth, but it certainly has less margin for error now.
Rivian is in a better position
Time will tell if the issues plaguing Polestar eventually hit Rivian as well, but for long-term investors, the latter company seems to have much more momentum and a bigger safety net thanks to its production acceleration, vehicle quality, sales growth, and the security blanket of a large pile of cash.
The market seems to agree as well. While Rivian's shares are down 50% over the last 12 months, Polestar lost nearly 75% of its market value in that timeframe. Similarly, on a price-to-sales basis, Rivian is trading at nearly six times sales while Polestar stock trades at just 2.7 times trailing 12-month sales, implying the market's low confidence in the Swedish automaker. That's why Rivian appears to be an EV stock worth doubling down on now, while Polestar might be one to avoid.
