No strangers to controversy, electric vehicles (EVs) are definitely here to stay. These cars offer a suite of advantages but are also bedeviled by problems.
On the downside, EVs are considerably more expensive than traditional gasoline-powered cars. Additionally, high inflation and interest rates make it harder for consumers to afford such high-priced items. On the upside, EVs offer a high level of performance under normal conditions, usually come equipped with the latest digital and connectivity tech, and have strong support from government policy initiatives.
On balance, the EV industry has a bright future ahead. Automotive industry experts estimate that, by 2030, as many as half of all new cars sold in the US will be EVs, a growth that translates to a CAGR of approximately 18%. Whatever you may think of the merits of EVs, this sort of growth will always attract investor attention to EV stocks.
Analyst Stephen Gengaro, covering the EV sector for investment bank Stifel, is giving EVs that attention. In particular, he’s focused on Tesla (NASDAQ:TSLA) and Rivian (NASDAQ:RIVN), two of the EV market’s most prominent names.
In his recent write-ups, Gengaro lays out why he sees these two companies as the best EV stocks to buy in the current environment. Let’s take a closer look.
Tesla
We’ll start with Tesla, probably the best-known EV company in the US. The company is led by Elon Musk, who is no stranger to controversy himself – but who has also built Tesla into the only profitable US electric vehicle firm. Tesla was founded in 2003, started regular vehicle production in 2008, and turned to profitability in 2020.
Tesla’s success rides on its cars, of course, and the company has several models in full production. Three of these, the Model Y, Model X, and Model S, are premium EVs, styled more toward well-heeled customers in the luxury car market. The company’s Model 3 is a lower-priced EV, targeting a larger customer base. Tesla’s most recent offering is the Cybertruck, the stainless steel pickup with an easily recognizable eclectic design – and the only vehicle that the company introduced without any branding.
Looking at the production numbers, we find that the company produced a total of 433,371 vehicles in Q1, and made 386,810 deliveries. The bulk of these cars built and delivered were Model 3 and Model Y, clearly Tesla’s most popular cars.
The quarter’s financial results showed top-line revenue of $21.3 billion, a figure that missed the forecast by $950 million and contracted 8.5% year-over-year. At the bottom line, Tesla reported a 45-cent non-GAAP EPS profit, 5 cents per share less than had been expected. The revenue and earnings misses reflected a difficult sales environment for EVs.
Despite the tough current environment for EV sales, Stifel analyst Gengaro is upbeat on Tesla for the long-term. He sees the company in a solid leading position within the larger EV sector.
“We believe TSLA is very well positioned to deliver robust multi-year growth in 2024-27+. In the near term, the revamped Model 3 and upcoming Model Y refresh should bolster sales, followed by the commencement of Model 2 production that likely garners very strong demand. We also believe TSLA’s AI-based Full Self-Driving (FSD) initiative has the potential to generate significant value through both sales of FSD, possible licensing agreements, and as critical pat of longer-term RoboTaxi initiatives,” Gengaro opined.
These comments back up Gengaro’s Buy rating on Tesla, and his $265 price target implies that the shares will gain ~34% in the next 12 months. (To watch Gengaro’s track record, click here.)
This view of TSLA is significantly more bullish than the Street’s consensus; Tesla stock has a Hold (i.e. Neutral) rating, based on 34 analyst reviews that include 12 Buy recommendations, 14 Holds, and 8 Sells. The stock is currently trading for $197.88 and its $182.10 average price target suggests that TSLA will decline by ~8% in the year ahead. (See TSLA stock forecast)
Rivian Automotive
The next stock we’ll look at is Rivian Automotive, a pure-play EV company with several vehicles in production based on a unique chassis concept.
That concept is sometimes called the ‘skateboard;’ it’s a flat, four-wheeled platform suitable for customization into a wide range of models. The chassis has fittings for a variety of hardware – electric motors, battery packs, control systems, and seating and body styles. Each wheel is equipped with an individual motor, a system that weighs less than a traditional powertrain and still provides enhanced vehicle performance. Rivian’s chassis design was conceived from the ground up to provide maximum flexibility.
Rivian’s main production factory is located in Normal, Illinois, and is now running at planned capacity. During the first quarter of this year, Rivian built 13,980 vehicles and made 13,588 deliveries. The company’s outlook finds support from a long-term agreement it has with Amazon, to provide as many as 100,000 electric delivery vans. Under that agreement, Rivian has already delivered some 13,000 of the vehicles, which are in operation with Amazon’s delivery fleet.
In May, Rivian released its results for 1Q24. The results reflected the ramp-up of the Normal factory to full production. Rivian realized $1.2 billion in total revenue, up an impressive 81.5% year-over-year – and $30 million better than had been expected. Rivian still runs a quarterly net loss, however; in Q1, that loss, in non-GAAP terms, came to $1.24 per share, missing the estimates by 8 cents per share. In a positive development for the company, management is predicting that Rivian will run a ‘modest gross profit’ by the fourth quarter of this year.
In cumulative terms, looking at Rivian’s total production, we find that the company counts some 96,500 vehicles built since regular output began. The company is predicting that it will build a total of 57,000 vehicles this year and has an installed annual production capacity of 150,000 vehicles.
A significant development occurred earlier this month when Rivian secured a major investment from the German automotive giant Volkswagen. Under this agreement, VW will invest up to $5 billion in Rivian, starting with a $1 billion cash infusion. This partnership addresses strategic needs for both companies: Volkswagen gains access to Rivian’s software expertise, while Rivian receives essential capital and benefits from Volkswagen’s extensive manufacturing knowledge.
That deal has caught the attention of analyst Gengaro, who writes: “We believe this is a significant positive for Rivian because: 1) VW will use RIVN’s zonal architecture and technology stack, validating RIVN’s technology; 2) cash from VW combined with RIvian’s cash balance should enable it to fund operations through the R2 launch as well as the ramp in Georgia, proving a path to positive FCF. Given RIVN’s high-quality product, strong brand recognition, and upcoming mid-priced vehicles (R2/R3 and variants), we view the removal of the funding concerns as a very significant positive for the shares.”
Gengaro goes on to rate RIVN shares as a Buy, with a price target of $18 indicating room for an upside of 34% by this time next year.
Overall, Rivian has earned a Moderate Buy rating from the analyst consensus, based on 23 reviews that break down to 12 Buy recommendations, 9 Holds, and 2 Sells. The stock’s $13.42 trading price and $15.81 average target price imply a nominal gain of ~18% going forward. (See RIVN stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
