Over the past 12 months, Rivian (RIVN -4.95%) shares have been stuck under $20. That's a far cry from their all-time high of around $130. If you've been looking for a growth stock with significant upside potential, this could be your chance. However, there are two things in particular that you should know about before jumping in.
This EV stock clearly has large upside potential
It's not hard to see how Rivian shares could have immense upside. Shares of the EV maker trade at just 3.2 times sales, while other EV makers trade between 10 and 14 times sales. There could be 200% to 300% in upside alone if its valuation were to reflect those already achieved by competitors like Tesla and Lucid Group.
What's holding Rivian back? Two things in particular.
First, its sales growth rates are now in the negative, whereas its historical growth rates were consistently in the double digits, sometimes even the triple digits. Sales fell by one-third last quarter while the competition saw their sales bases grow. Lucid grew sales by 45%, partially buoyed by its low total sales, which still stands at just $730 million versus Rivian's $4.6 billion sales base.
Tesla, meanwhile, was able to continue its sales growth due to its diversified vehicle lineup. Not only does it sell luxury cars like the Model X and Model S, but it also offers more affordable models like the Model 3 and Model Y, both of which are available for under $50,000. When consumer trends shift, Tesla has enough vehicle variety to absorb this shifting demand. Rivian, meanwhile, only has two luxury models, both of which cost around $100,000. If consumers pull back on spending, it currently has no cheaper models to attract more spendthrift shoppers.
The second factor holding Rivian's valuation back is its inability to become profitable. It's still losing money on every car it makes, while Tesla has maintained positive gross profits for years. Lucid, while still losing money, at least has significantly higher sales growth to sustain its valuation premium.
The good news is that these two headwinds could soon turn into tailwinds for Rivian. In 2026, it plans on launching three new mass-market vehicles, all of which will debut for under $50,000. This will diversify its lineup in a way that is similar to what Tesla has achieved. When Tesla released its mass-market vehicles, its sales base doubled and then tripled. Rivian could experience the same sale ramp, which should significantly improve its valuation multiple.
As to the company's inability to achieve profitability, investors won't need to wait until 2026. We should receive some major news within weeks.
RIVN Operating Revenue (Quarterly YoY Growth) data by YCharts
Could this be the biggest quarter in Rivian's history?
Earlier this year, Rivian's CEO told CNBC that Rivian will achieve positive gross margins by the end of the fiscal year. That fiscal year ends on Feb. 20. If the company achieves this milestone, it should dramatically improve the company's ability to survive until it can release its mass-market vehicles. That should result in a hefty improvement to the company's valuation multiple. But will Rivian actually achieve positive gross margins over the next few weeks?
RIVN Gross Profit (TTM) data by YCharts
As you can see, Rivian has made strides in improving its gross margins since going public. However, it has still accumulated nearly a $2 billion gross loss over the last 12 months. Last quarter, its gross profit totaled negative $392 million, meaning Rivian is losing tens of thousands of dollars on every car it sells.
Can Rivian narrow the gap to zero in just 90 days -- the length of a single fiscal quarter? That remains to be seen. But during last quarter's earnings announcement, Rivian's management reiterated that it is "on track" to achieve positive gross profits in the fourth quarter. If that becomes a reality, shares are likely a buy under $20. However, given the company's depressed valuation, the market clearly remains skeptical.
