Rivian: Buy, Sell, or Hold?

One of the more volatile stocks of 2024 has been Rivian Automotive (RIVN 5.90%). The electric vehicle (EV) maker has had a number of ups and downs this year, and while the stock has performed well the past couple of months, the stock is still down about 35% year to date, as of this writing.

The question now, though, is whether the stock is a buy, sell, or hold going into 2025. Let's look at each argument to help decide.

The sell case

The sell case for Rivian largely comes down to two main issues: slowing EV industry sales and its weak gross margin.

EV sales are still growing in North America, but growth has decelerated. Meanwhile, the sale growth of hybrids (HEVs) continues to outpace the growth of pure battery electric (BEV) vehicles. In November, U.S. HEV sales climbed 41% year over year, while BEV sales were up 15.2%. By comparison, total EV sales (which include HEVs, BEVs, and plug-in hybrids) grew by 52% in the U.S. in 2023.

The climb in November sales, meanwhile, comes at a time when President-elect Donald Trump has talked about eliminating federal EV tax incentives. This presumably could have led to a jump in BEV sales, as consumers on the fence make their purchases before the incentives may go away. However, this would be a pull-forward in demand and could then negatively impact 2025 sales. Meanwhile, the elimination of a $7,500 tax credit for EVs could also hurt sales moving forward.

Vehicle owners, meanwhile, currently appear to be more drawn to hybrids given the increased versatility they offer. The life expectancy of very expensive batteries, resale values, charging times, lack of charging infrastructure, and driving ranges are all issues that keep some drivers from switching to BEVs. Both Toyota and Honda, meanwhile, are currently leaning into hybrids over BEVs.

The other bear case against Rivian comes down to its gross margin, which has been negative. This means that it is selling its vehicles for less than the cost to make them, not taking into account marketing and corporate costs. That's obviously not a sustainable business model. The company is working to improve its gross margin, but it will not only need to find a path to a positive gross margin, but also eventually positive free cash flow and profitability as well.

The buy case

While Rivian is currently burning through cash as it looks to improve its gross margin and scale its business, the company has been able to form important partnerships. This includes one with Amazon, for whom it makes EV delivery vans. Amazon is one of the company's largest shareholders.

Meanwhile, it recently entered into a joint venture with Volkswagen, which will invest up to $5.8 billion in the company. The big attraction to Volkswagen is gaining access to Rivian's new zonal architecture, which is expected to help significantly lower the costs of making its vehicles by reducing the number of electronic control units (ECUs) and wiring in its vehicles. Rivian has also lowered other material costs going into the vehicles and improved the line-rates of its manufacturing facility. It expects these changes to help it obtain a modest positive gross margin in Q4.

The cash influx from Volkswagen, with some coming later after certain milestones are met, will help Rivian ramp up the production of its new, lower-cost R2 model, which it plans to introduce in 2026. While Rivian has done well selling its luxury SUVs, it is looking for the more affordable R2 to appeal to a wider audience given its expected starting price of $45,000. Selling more cars leads to more scale, which leads to leveraging fixed costs, which eventually leads to profitability.

Rivian is still an early-stage company and the biggest opportunity for the company will be transitioning to become a profitable EV maker in the years ahead. While that will not be an easy task, being backed by Amazon and Volkswagen give it a long runway and a good chance to eventually succeed.

The hold case

As an early-stage company with a negative gross margin that is burning cash, Rivian is a speculative investment. However, the backing of Amazon and Volkswagen, together with its zonal architecture, gives it a solid chance to succeed. This could make it worth holding a small position in the stock.

The verdict

For risk-tolerant investors who don't mind a little (OK, actually a lot of) volatility, I think Rivian is a stock investors can take a small position and hold onto for the next few years to see how its story plays out. Its technology has drawn in a large investment from Volkswagen, while it also has a pretty big opportunity with Amazon in the years ahead. However, the stock is not for the faint of heart.