More Likely to 5x First: Tesla vs. Rivian

Earning five times your money — or 400% — from an investment may sound like a daunting task, but one first has to put it into the perspective of a time frame. To accomplish that return in five years would equate to an astounding 38% annual return. But over a 10-year period, it would result from a more reasonable 17.5% annual return. 

Growth stocks can certainly achieve that rate of growth, but come with plenty of added risk. Electric vehicles (EVs) only made up 10% of global new-car sales last year, so that market sector has the potential to give investors outsized returns.

Tesla (TSLA 0.38%) and Rivian Automotive (RIVN 3.55%) would have two different paths for those 400% returns. Let’s see which one looks more likely to achieve it first. 

Tesla: It would take more than just cars

Tesla CEO Elon Musk — who has been prone to exaggeration on predictions — says his company could eventually be selling 20 million EVs annually. Tesla currently has four factories with the capacity to produce over 2 million units annually. Getting to the 20 million capacity level would take major investments to build another six to eight manufacturing plants. The company has been generating enough cash flow to support that, but with growing competition, there’s the big question of whether demand could support it. 

If that production volume comes to fruition, it would probably support the more than $2 trillion valuation the company would have if the stock quintupled from here. That kind of growth thesis is what drove Tesla’s valuation to its prior unsustainable level. That seems unlikely though, considering the world’s largest automaker, Volkswagen, delivered about 11 million passenger and commercial vehicles in 2019 prior to pandemic-related declines in more recent years. 

Tesla produced about 1.4 million vehicles in 2022, so a path to 20 million seems unlikely anytime soon. The bottom line is that it’s more reasonable to assume Tesla’s production capacity will get to 10 million or 11 million and reach that of current global leader Volkswagen. 

With that said, let’s look at its valuation. Even after its stock has corrected, Tesla still has a high valuation, with a price-to-sales (P/S) ratio of about 6 and a price-to-earnings (P/E) ratio of about 40. It’s likely that for volume to grow substantially, vehicle prices will decrease as it seeks to compete for those new customers. Even if it quintuples its production and sales, it’s unlikely for the stock price to follow, as some of that growth is already built in.

It would take Tesla to expand its other products — including battery production and storage, as well as solar systems — for Tesla to get to a $2 trillion valuation. And that would take some time, as the company has yet to even discuss those businesses being profitable. 

Rivian R1T truck at sunset.

Image source: Rivian Automotive.

Rivian: A speculative play

Rivian has a more clear, though much more speculative, path to 5x returns for investors from recent prices. That would give the company a valuation of $80 billion. Its market cap was actually at that level just over one year ago, in early 2022. That was based on pure speculation after the company went public, and it would still be based on the bet that the company can successfully execute its planned growth. 

Since then, Rivian has completed its first full year of production, delivering more than 20,000 of its electric pickup trucks, SUVs, and delivery vans in 2022. But it will need to significantly increase that at its existing Illinois facility and successfully start up its planned $5 billion Georgia factory.

But Rivian currently says its cash on hand will only get it through 2025. So successful execution remains a risk, and while huge returns are possible, so is bankruptcy if it fails to grow production appreciably this year.

But that’s what investing is all about. With the potential for high returns comes added risk. If investors can afford to risk losing those funds, Rivian could have a path to 5x returns from here.

Howard Smith has positions in Tesla. The Motley Fool has positions in and recommends Tesla and Volkswagen Ag. The Motley Fool has a disclosure policy.