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Tuesday, July 5, 2022

Rivian vs. Ford: what is the best action?

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Thinking man with question marks around his head when to buy stocks which stocks to buy extreme greed

in 3 sentences

  • Rivian is riskier but still a blank slate and has great growth potential.

  • Ford is separating its electric vehicle business from its legacy business.

  • Rivian has a bigger opportunity for growth, but Ford is a safer bet right now.

The decline in the general market is affecting both emerging and established companies. The price of the shares of the newcomer to the electric vehicle rivian automotive (WKN: A3C47B) is down more than 70% from its all-time high. The long-standing automaker. ford (NASDAQ:FTC), on the other hand, is down 33% from its all-time high less than two months ago.

The current stock market has gone from growth stocks to value stocks. But that doesn’t mean you should buy or sell a stock just because it’s doing well or poorly. Let’s see why both Rivian and Ford could be good long-term options.

Nothing for weak nerves.

Howard Smith (Rivian): When comparing Ford and Rivian as potential investments, you have to look at the EV side of Ford. In this sense, both companies are approximately at the same stage of development. Ford itself has invested in Rivian and at one point had planned to partner with the EV startup on vehicle development. After Rivian’s IPO in the fourth quarter of 2021, Ford even reported an $8.2 billion profit on its stake.

After the initial public offering, Rivian told investors that it aimed to produce 1,200 vehicles in 2021, but the year ended with 1,105 vehicles produced and 920 delivered. Supply chain issues, which Ford is also struggling with, were blamed for the shortfall, leading to production delays at several plants. Rivian ended 2021 with an even larger market capitalization than Ford, despite the company generating virtually no revenue. But Rivian shares have fallen sharply so far this year, falling 54% to a record low.

However, there are not only reasons for this drop, which can be traced back to overvaluation. Rivian recently announced price increases of up to 20% for its truck and SUV models, even for customers who had already booked at the original prices. This led to anger and cancellations, after which the company backed down and offered the old prices to the more than 71,000 pre-orders.

The company is also facing opposition from Georgia residents who oppose the new $5 billion manufacturing plant that Rivian plans to build. Rivian expects the plant to reach an annual production capacity of 400,000 vehicles. The state is now taking the initiative to avoid voting on local building codes. The ultimate success of this project will be of great importance for the company to reach a profitable level of production in the future.

So the company is left with many unknowns and a valuation that still exceeds 40,000 million dollars. But his RT1 truck was named Truck of the Year by MotorTrend. The company also has the support of Amazon, which is both an investor and a client. If the company can successfully scale its business, its products could be in demand. And also a major customer, because Amazon wants to buy up to 100,000 electric delivery vans from Rivian.

An investment here is only suitable for part of an aggressive portfolio. And investors who buy at current prices face much more volatility and potential downside. But with a long enough time horizon, the stock’s more than 50% drop this year could give interested investors a good starting point.

All-round great talent

Daniel Foelberg (Ford): What sets Ford apart from other auto stocks is its aggressive spending on electric vehicles combined with its more than 100-year track record. On March 2, Ford announced that it would spin off its legacy internal combustion engine (ICE) business from its EV business. The former business will be known as Ford Blue. A press release from Ford says:

“Ford Blue’s mission is to create a more profitable and dynamic ICE business, strengthen our successful and iconic families of vehicles and build greater loyalty. This is based on solid service and experience. It’s about using a century of hardware experience to shape the future. This team will strive to deliver leading quality, combat waste in all areas of the business, maximize cash flow and optimize our industrial footprint.”

For now, Ford Blue will finance Ford’s electric vehicle business until it’s profitable. The electric vehicle business will be known as the Ford Model e. “Ford Model e will be Ford’s hub of innovation and growth, a team of the world’s best software, electrical and automotive talent unleashed to create truly amazing electric vehicles and digital experiences for new generations of Ford customers,” said Ford. Ford CEO Jim Farley in a press release.

The decision to split the business reminds me of the difference between the advertising business of Metaplatforms and their Metaverse inversions. Or the oil and gas business of bp compared to their investments in renewable energy. The key idea is that one business unit provides most of the cash flow while the other provides long-term growth. This strategy makes a lot of sense and is much easier than starting a company from scratch and arming yourself with dry dust in the capital markets.

Ford has an incredibly profitable business that is expected to remain profitable and generate ample free cash flow to support its dividend. All while financing investments in electric vehicles. With a dividend yield of 2.3% and plenty of upside potential, Ford is a balanced opportunity to invest in the electric vehicle sector.

Spoiled for choosing

Rivian’s stock has been hit harder than Ford’s, but the company also has a lot to prove. Getting into Rivian now could be a better long-term investment than the slow and steady course Ford might be taking. For growth-oriented investors, Rivian might be a better option right now. But for those who prefer a mix of growth, value and revenue, Ford is arguably a smarter choice.

The article Rivian vs. Ford: what is the best stock? first appeared in The Motley Fool Germany.

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Daniel Foelberg does not own any of the listed shares. Howard Smith owns Amazon shares. The Motley Fool owns stock shares and recommends Amazon and Meta Platforms. This article was published on 8/3/2022 on Fool.com and it was for our german readers translated.

Motley Fool Germany 2022

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