As the EV market enters a period of headwinds, the main question many investors are asking is whether or not the party is over.
Are valuations crashing because the market is finally deciding EVs aren't worth software-level P/E multiples or have enough individual cases simply depressed sentiment for the short term?
Looking at the various bear narratives across the industry, we're more in the camp that enough bad EV news has temporarily drained sentiment from the market. So let's go down the list quickly:
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Lower demand isn't hurting Tesla, aggression is. EVs 'win' because of scale and margins. So with the team at Tesla basically refusing to cut costs and instead ramping up R&D spend, their overall margins are shrinking. At the same time, factory upgrades have improved margin-per-vehicle but not enough to even come close to offsetting aggressive price cuts to several Tesla models. Basically, Tesla is choosing a high-risk, high-reward strategy that the market doesn't think they can afford. Tesla can get right back on top if they demonstrate they can cut production costs enough to justify lower prices or if they generate any tangible software revenue from their Dojo array.
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Ford and GM can get momentum back after the UAW strike. With several EV component factories canceled amidst slowdowns caused by the UAW strike, Ford and GM have had a lot of wind taken out of their sails. Ford especially was trying to slam down the accelerator to try and gain momentum against Tesla's upcoming Cybertruck release. Both companies though have come away from the strike bruised, but not out of the EV race. There simply needs to be a strategic realignment now that there are more complex labor costs to consider. Meanwhile, Chinese EV makers are hitting production records while demand keeps up.
Long story short, we see this as a moment where the EV industry is fundamentally strong but struggling with a lot of sequential bad news that's driving investment out of the market in the short term. Adding in a potential slowdown in broader consumer spending -- investor caution makes sense here.
Meanwhile, one EV maker stands out as they've been unfairly dragged down by industry-wide bear sentiment. And that's Rivian Automotive ($RIVN). Rivian had a brilliant Q3 earnings report earlier in the month that signaled the company had turned a critical corner in its development pathway.
At the same time, Rivian just opened the door to a widely expanded backlog ahead of them breaking ground on their R2 factory in Georgia. With Rivian consistently beating production and delivery estimates, while keeping their cash flow in check, they are poised to keep operations flowing until well into 2025 -- which gives them plenty of time to scale.
While Tesla will continue to spook the market until their very aggressive position starts to pay off, Rivian is demonstrating that they are a strong efficiency play by finally achieving the scale necessary for more optimized delivery growth and reduced production costs.
So, we're raising our Rivian price target and considering them one of our top picks in the EV space for the time being. Let's explore how they're set up to dominate 2024.👇