Legendary investor Peter Lynch is famous for saying, "Buy what you know." This means buying stocks whose products you have personal experience with and hopefully think of highly. Anecdotal evidence can sometimes give individual investors an edge over big research firms on Wall Street. It is how a lot of people made fortunes in Apple.

One company whose product I bet you are seeing more of lately is Rivian Automotive (RIVN -1.53%). The premium electric vehicle (EV) start-up has rapidly ramped up production after its late 2021 initial public offering (IPO), with plans to make 52,000 vehicles this year. And yet, as we sit here today, shares of the stock are down a whopping 82% in the last few years.

Rapid growth and a declining share price should be a signal for investors to investigate. Time to buy the dip on Rivian stock? Let's take a deeper look and see. 

Rivian: The one true Tesla competitor?

It seemed like everyone and their grandma was taking an EV start-up public during 2020 and 2021. With the meteoric rise of Tesla and its loyal shareholder base, companies with no revenue raised billions of dollars as the excitement around EVs hit a fever pitch. It turns out most of these stocks were all hype. Some, such as Lordstown Motors, are already primed to file for bankruptcy.

Rivian went public during this bubble and has since been grouped with other EV start-ups. It's no surprise, then, to see its shares down over 80% since the IPO, significantly underperforming the market over the last few years.

However, unlike most other start-ups, Rivian has actually brought cars to market. Last quarter, deliveries to customers numbered 12,600, up from just 4,500 a year ago. The company is selling a premium EV truck called the R1T to individuals, but also has a fleet business selling commercial vans.

Its most important customer is Amazon, which has placed an order for 100,000 commercial vans to be used in its delivery network. Assuming a price point of $75,000, this single contract could be worth $7.5 billion in revenue.

Rivian may have rung the opening bell at the height of the market's pandemic bubble with its IPO, but that doesn't mean the business is a bunch of vaporware. In fact, I think investors should heap praise on Rivian for the timing of its public market entrance. It allowed the company to raise over $12 billion at a $100 billion valuation even though it was just starting production.

Scale and expanding gross margins will be key

With over $10 billion on its balance sheet, Rivian has loads of firepower to invest for growth. Raising so much money at its IPO was key to the company's success because starting up production for multiple automotive product lines is extremely expensive. Over the last 12 months, it has posted a net loss of $6 billion.  

But it looks like this burn rate should ease. Last quarter, Rivian's gross margin improved to negative 37% compared to negative 193% a year ago. Gross margin will be the most important metric for Rivian as it tries to reach a positive operating profit in the coming quarters. Its operating expenses are generally fixed (they were actually down year over year last quarter), so in order to reach a sustainable business, it needs to scale up manufacturing and hit a gross profit level that covers these fixed costs.

With its premium price point, Rivian has a path to a gross margin of 20% in the near term. If it can triple its revenue over the next 12 months as its manufacturing base continues to scale up, that would leave the company with $3.36 billion in quarterly revenue a year from now.

On a 20% gross margin, that equates to $673 million in gross profits, which would be close to last quarter's $873 million in operating expenses. So Rivian has a path to hitting breakeven sooner than investors might think as long as quarterly deliveries keep growing quickly. 

RIVN Revenue (TTM) Chart

RIVN revenue (TTM) data by YCharts. TTM = trailing 12 months.

Is the stock cheap?

Rivian is a tough nut to crack when it comes to valuation. Its gross margins are currently negative -- meaning it has no earnings whatsoever to value it on -- but these gross margins are rapidly improving and have a path to hitting positive territory in the next few quarters.

Today, Rivian trades at a market capitalization of $19.2 billion. Let's do some estimates to see how crazy (or not) this market value is for a hypergrowth stock like Rivian. If the company can multiply its revenue fivefold in the next two years, it will hit $15 billion in annual sales. On a 20% gross margin, that equates to $3 billion in annual gross profits, which would barely cover its current operating expenses and leave little cash to be reinvested or returned to shareholders. 

What this means is you need to believe Rivian will not just 5x its revenue in the near term, but 10x or possibly even 20x its sales within the next five years in order for the stock to make sense at these prices. This is not out of the realm of possibilities given how large the EV opportunity is, but it should sober up any investor who thinks the stock is a can't-miss opportunity.

Rivian has a path to work for investors over the long term, but it is not out of the woods yet.