It seems past time we can finally admit Tesla (TSLA 8.04%) has officially made it. Not only did the young automaker prove it could design and manufacture quality vehicles, it made driving an electric vehicle exciting and, dare I say, almost fashionable. But if you missed the boat on Tesla's meteoric rise, fear not, here are two EV stocks that have upside considering their price-to-sales (P/S) valuations. Let's dig in.
Why the P/S ratio?
At its essence, the P/S ratio shows how much investors are willing to pay for each dollar of a company's sales. It's particularly useful for comparing companies that are losing money or still in an early growth phase.
When comparing some EV stocks, two stand out: Nio (NIO 0.49%) and Rivian (RIVN 4.50%).
TSLA PS Ratio (Annual) data by YCharts
This graph tells us a couple things. First, it tells us that Tesla has demonstrated its vision and business prowess enough for investors to push its ratio up to 14 times sales. That's to be expected as Tesla is further in its story and has generated profits already, making it easier for investors to push up its valuation -- especially true if you're a believer in the company's potential robotaxi or artificial intelligence developments.
Second, the graph also tells us that Nio and Rivian have immediate upside if they were to convince investors to come on board and push their valuation up to the competition. Heck, even VinFast Auto has expanded into a decent valuation and it's almost entirely unproven outside of its home Vietnamese market.
Catalysts incoming?
For Nio, the stock could be on the verge of blossoming into a better valuation as the company just launched two brands recently. First it launched Onvo, which only went into production in September, and then in late December it launched Firefly. Both of these brands are positioned underneath Nio's namesake premium brand, and should help boost sales significantly in 2025.
In fact, Nio management expects the company's deliveries to more than double in 2025 to around 440,000 units. Now, for a company that has yet to turn a profit, this sizable gain in deliveries will send its top-line soaring, and if the management can manage to calm down fears surrounding the ongoing price war in China, it's valuation should narrow the gap with competitors and push the stock price higher for investors.
Rivian's ability to rope in investors and convince them of the future, in hopes it'll improve the company's stock price and valuation, will face a tougher road. That's because 2025 brings the company and its investors zero new vehicle launches -- those won't come until 2026.
That said, there is one major number to focus on in the near term because it could convince investors there's a real long-term investment to be made in Rivian: gross profit. Despite production hiccups thanks to supplier issues, management remains bullish the company will turn positive gross profits during the fourth quarter.
As you can see in the graphic below, Rivian has made progress with gross profit, but its progress has not been in a straight line.
Data source: Rivian SEC filings. Image source: Author.
It would be one huge step in convincing investors the company will eventually produce profitable vehicles. It's fair for investors to be cautious with Rivian as the company has failed to produce profits on vehicles often priced around $100,000, and its lineup of R2, R3, and R3X are all positioned around $50,000. In fact, during the third quarter Rivian lost almost $40,000 for every vehicle it sold.
The company must prove to investors it can cut costs, increase scale, and improve production efficiency -- and achieving positive gross profit will be a big step forward. The good news is that Rivian has already overhauled its R1, bringing in simplified systems, options, and features, all at a reduced cost.
What it all means
Rivian likely trades at a cheap valuation because the company has a lack of 2025 catalysts and the narrative surrounding the EV industry is gloomy, especially with the incoming administration threatening to pull support for the industry. Nio also trades at a cheap valuation, likely because the company is trudging through a brutal price war in China that has clobbered some financial results and forced foreign automakers back to the drawing table.
But both companies and their stocks have immediate upside if they can convince investors there's a long-term business and vision. Both have the ability to sway investors in the near term with gross profits or a surge in deliveries, and if that takes place, look for the P/S ratio gap to narrow and Rivian and Nio to rise quickly.
