Here's Why Rivian Stock Is a Buy Before Feb. 20

Rivian's (NASDAQ: RIVN) stock price has been volatile over the last 12 months, gyrating in price between $8 and $20. But make no mistake: Long term, this electric vehicle (EV) maker has huge growth potential. And next month could bring one of the most important announcements in company history.

If you've been looking for growth stocks with high upside potential, Rivian could be the perfect fit for your portfolio. But there are a few things to know about before jumping in.

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Why Rivian stock is so cheap

Every three months, public companies like Rivian update investors about their financial situations. Some of these quarterly reports, however, are more important than others. Since Rivian went public in 2021, its sales have grown from a few hundred million dollars annually to more than $4.5 billion. But its gross profit -- that is, the amount of money it earns from selling its electric vehicles -- has remained negative. Despite selling billions of dollars worth of vehicles over the last 12 months, Rivian has generated a gross loss of nearly $2 billion.

Losing money over the short term isn't necessarily a huge problem for most companies. Unusual expenses in a specific quarter can unbalance the balance sheet. But Rivian has been generating gross losses over multiple years. Its margins have stabilized somewhat following a strong surge in revenue, so it's deeply concerning that the company still loses money on every car it sells.

Looking ahead, the company plans to launch three new vehicle models beginning in 2026. These mass-market vehicles will be priced under $50,000 -- a potential inflection point for the company's sales base. But it will require billions of dollars in investments to get these new models to market. And if the company wasn't profitable selling $100,000 cars, why should investors be confident in its ability to generate profits selling vehicles for half that amount?

This skepticism about the company's ability to reach long-term profitability has put a drag on its valuation. Rivian trades at just 3.2 times sales, while rivals Lucid Group and Tesla trade at around 10 and 14 times sales, respectively. To be sure, Lucid Group also remains unprofitable, unlike Tesla. But Lucid's revenue is about one-sixth of Rivian's, and a tiny fraction of Tesla's. The fact that Rivian is still generating losses while operating at its current scale will naturally lead investors to be concerned that it may never be able to sell EVs at a profit, even if its vehicles are in hot demand.

RIVN Revenue (TTM) data by YCharts.

Keep your eyes on Rivian's next earnings report

This is where Feb. 20 becomes significant. On that date, investors may receive news that could change Rivian's valuation in a hurry.

In early 2024, Rivian's management team surprised investors and analysts when it said it expected the company to achieve gross profitability by the end of the fiscal year. It has made some progress on that front since then. Last quarter, for instance, it generated a gross loss of $392 million versus a loss of $477 million a year prior. That gap was narrowed in part, however, by a decline in overall sales. Because Rivian loses money on every car it sells, lower revenue should result in smaller losses.

Despite posting a negative gross profit of nearly $400 million just two months ago, Rivian's management team is sticking with its outlook.

"Our core focus is on driving toward profitability," CEO RJ Scaringe said during last quarter's conference call, adding that he still expects "modest positive gross profit" by the fourth quarter. Achieving this would radically shift Rivian's prospects, as the company would go from being yet another money-losing electric vehicle maker to one that can not only scale revenue but do so at a profit.

It will be a difficult feat, but Rivian's executive team remains bullish. If you're looking for growth stocks with immediate upside potential, Rivian appears to be a candidate. Expect its valuation to spike if positive gross profits are announced next month.

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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.