Rivian Automotive (RIVN -2.90%) investors have been very happy over the past month. The valuation of this electric car stock has surged by roughly 40%. Looking under the hood, however, it's easy to project significantly more growth to come. There are three major reasons investors should consider buying Rivian shares before the company's next earnings call, which is expected to occur sometime around Aug. 5.
1. Rivian's growth rates are about to explode
Rivian has been experiencing a period of sluggish sales growth in recent years. Its R1T model was released back in 2021, with the R1S variant launched the following year. Sales grew significantly after their launch, but with price tags that can approach $100,000 depending on options, the total addressable market for these vehicles was always rather small. Rivian's flatlining sales growth in recent years suggests the company has reached a level of market saturation with the only two vehicles in its lineup.
All of this should change next year when the company begins shipping the first of three new models: the R2, R3, and R3X. All three are expected to have price tags of under $50,000, unlocking millions of new potential buyers that can finally afford one of the company's products. Analysts expect only 5% sales growth in 2025, a figure that bumps up to 41% in 2026. Once production of these models starts to scale, however, revenue growth could explode in 2027 and beyond.
2. Profitability will continue to improve
Last year, Rivian's management team promised investors it would achieve a positive gross margin by the end of the year. It took until the final quarter, but the company delivered. Last quarter, its gross margin improved even further into positive territory, matching Tesla's profitability levels.
The biggest factor in achieving profitability as an electric vehicle manufacturer is achieving scale. The more cars a company sells, the more fixed costs can be spread over a larger volume of sales. If Rivian's mass market vehicles experience as much sales success as Tesla's Model Y and Model 3 vehicles, expect Rivian to experience significant operating leverage, pushing profitability even higher.
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3. Rivian's valuation is too cheap to ignore
The two factors above won't be realized before the company's next earnings call. In fact, it will take several more quarters for Rivian's new models to hit the market. From there, it may take another year or so for production to fully scale. The reason to buy Rivian now isn't that there are near-term milestones that will be reached over the next few months. Instead, the valuation simply looks way too cheap to pass up, even if investors have to wait a year or two for the biggest catalysts to arrive.
Right now, Rivian stock trades at just 3.3 times sales. Tesla, meanwhile, trades at 12.5 times sales, while Lucid Group trades at 8 times sales. Both of those companies have experienced higher sales growth than Rivian in recent years. But once Rivian's new models hit the market, expect its sales growth and profitability to improve dramatically, earning a significantly higher valuation from the market.
