The electric vehicle (EV) industry is in an intriguing spot for potential investors. Broadly speaking, optimism has turned to pessimism on Wall Street as many start-up EV makers are facing cash crunches and slowing demand. That said, EVs still appear almost certain to go mainstream, and the tantalizing possibility of high long-term returns for those who pick one of the eventual winners in the space is a prospect that still has many investors' attention.
If you're looking for clues about which young EV company to choose, consider this: One massive hedge fund recently upped its stake in Rivian Automotive (RIVN 2.54%) by 4,221%.
Why track hedge funds?
Watching hedge funds and the stocks they buy and sell can give investors insights into what the fund managers consider their best ideas. Typically, a manager will have a handful of great ideas that occupy the largest positions in their hedge fund, and a much larger number of diversified smaller ideas that each hold less weight. Essentially, a fund's top holdings represent higher conviction ideas than its smaller positions.
That's why it's noteworthy that hedge fund Two Sigma Advisors backed up the truck for Rivian stock in the fourth quarter. The hedge fund increased its position in the EV maker from roughly 275,000 shares to almost 11.9 million. That transformed Rivian's position in the fund from obscurity to a top 30 holding, out of well over 1,000 positions.
Be Greedy?
Warren Buffett famously advised investors to "be fearful when others are greedy, and be greedy when others are fearful." In this case, Two Sigma Advisors appears to be striking right when other investors have grown fearful about the prospects for the EV industry.
To be fair, it's natural to be cautious about the EV industry right now. Once-promising automaker Fisker has all but collapsed after failing to find the financial lifeline or investment it needed to help continue funding its operations, and is in the process of being de-listed from the New York Stock Exchange.
And the rest of this year looks likely to be bumpy for the industry, with slowing demand growth, a lack of affordable EVs, and higher interest rates making all auto purchases harder. But this could prove a great time to open or expand positions in those EV makers that can survive.
Is Rivian a buy?
Rivian does have a number of things going for it. It posted a 167% increase in revenue in 2023, and between Q4 2022 and Q4 2023, it reduced its gross loss per vehicle by roughly $81,000. Rivian also exceeded all aspects of its 2023 guidance and began offering leasing options on its R1 vehicles, which should help spur some additional demand for them, given that they start at just under $70,000.
Management also made the decision to start the production of its R2 SUV at its original Illinois factory, rather than wait for its Georgia factory to be completed. That will allow it to move up the R2's launch date while also taking advantage of currently underused production capacity in its original factory, and will save the company roughly $2.25 billion in capital expenses.
The drawback to Rivian, as with many young EV start-ups, is that it is in a race against time. The company boasts about $10.5 billion in total liquidity, but also spends roughly $4 billion to $5 billion annually to fund and grow its business. While the company is aiming to reach positive gross profitability late in 2024, it still needs to fine-tune its operations and build scale quickly in the next couple of years.
It's no fluke that Two Sigma Advisors opted to pour a hefty investment into Rivian out of the many options in the industry, but the stock is a highly speculative investment with risk aplenty. That said, Rivian does appear to be one of the top EV start-ups to consider a position in (if not the top pick) at a time when the rest of the market is feeling overly cautious about those companies due to slowing demand growth and the cash-crunch challenges they face.
