To The Moon

The electric vehicle (EV) industry was not kind to investors in 2022. Shares of Tesla, Nio, and Rivian Automotive all suffered their worst calendar year performances ever -- falling by 65%, 69%, and 82%, respectively.

Even after the sell-off, Tesla has remained an EV market leader for the last few years. And the stock has been rebounding nicely in 2022. But is now the time to stick with a proven winner like Tesla or to take a leap by adding less-proven growth stocks like Nio and Rivian to your portfolio?

Tesla is already diversified

Howard Smith (Tesla): It's important to own a generally diversified portfolio, but one should also pay attention to one's diversification within sectors. The EV sector is still in an early stage of its evolution, and it's far from clear which of today's players will wind up winners and which will be losers. One winner as far as profitability goes is Tesla. However, that doesn't make it risk-free as an investment by any means. That's why it makes sense to look at adding various other EV industry names to one's portfolio.

While Nio and Rivian could both turn out to be successful, owning Tesla stock already gives one exposure to what they offer investors. Nio does business in China and is expanding to Europe. China-based BYD and, to a lesser extent, Tesla, already dominate China's EV market. And Tesla's German plant is ramping up production quickly to help supply Europe. The Berlin factory alone reportedly now produces 4,000 vehicles each week. For perspective, Nio only expects to deliver between 31,000 and 33,000 EVs in the entire first quarter.

Rivian began its life as a public company in the consumer light truck market -- a different EV niche than Tesla. But Tesla is about to start encroaching on Rivian's turf -- it expects to begin deliveries of its Cybertruck this year. Industry followers have estimated that there are already about 1.5 million preorders for the Cybertruck, based on a crowdsourced reservation tracker.

Tesla's business is already diversified and successful. The risk for investors now is really with the stock's valuation. After the recent recovery in its share price, its price-to-earnings ratio is up to 50. Though that is historically lower than past valuation levels for Tesla, it is still considered high relative to the rest of the stock market.

TSLA PE Ratio data by YCharts.

The company continues to grow at an accelerated rate, though. Different stocks bring different risks for investors. But buying Tesla stock is arguably less of a risk than investing in early stage EV makers that have yet to prove themselves as businesses.

Nio and Rivian are worth a look for growth-orientated investors

Daniel Foelber (Nio/Rivian): 2022 was a disappointing year for Nio and Rivian as both companies suffered their largest-ever annual losses -- with Nio losing $2.2 billion and Rivian losing $6.8 billion.

Nio is forecasting a sales slowdown in March, and its fourth-quarter loss was higher than expected. Meanwhile, Rivian has $12 billion in cash, cash equivalents, and restricted cash on its balance sheet -- but management has said that given its high rate of cash burn, it's "confident" that will be enough to fund its operations through 2025. The company is already looking beyond that, however, and just announced it raised another $1.5 billion in convertible notes. It's also forecasting an adjusted EBITDA loss of $4.3 billion in 2023.

Yet Nio and Rivian are starting to emerge as two standout EV makers with serious growth potential. While Nio is tackling different price points, mainly with electric sedans and SUVs, Rivian is staking its claim on the electric pickup truck, SUV, and delivery van markets.

Both companies are banking on scaling up production to reduce losses and improve margins. And while Nio has far higher production than Rivian, Rivian is also growing faster and is forecasting its production will double in 2023 to 50,000 units.

Rivian and Nio will need to prove they can become and stay profitable. But until that happens, their price-to-sales (P/S) ratios provide a good reading on how much cheaper they have become.

NIO PS Ratio (Forward) data by YCharts.

Nio's forward P/S ratio of 1.3 and Rivian's ratio of 3.4 aren't as low as the metrics of legacy automakers like Ford or General Motors. But they are quite a bit lower than Tesla or their fellow EV start-up Lucid Group.

Moreover, their forward P/S ratios are much lower than they were a year ago, when Nio's was 4.6 and Rivian's was 23.

Tesla is by far the safer and more proven company. But Nio and Rivan have loads of growth potential and increasingly attractive risk-to-potential-reward profiles as their stock prices continue to tumble. It's a close call, but I'd rather split my money 50/50 between Nio and Rivian shares than invest it in Tesla right now.

Tesla, Nio, and Rivian are all worth a look

Tesla may be the front-runner in the EV race. But its performance and growth rate will have to keep pace with the stock's valuation in order for Tesla to be a compelling buy after it started the year off as the hottest stock in the S&P 500.

Meanwhile, Nio and Rivian's valuations have come way down, but even their current levels can only be justified by future earnings -- which neither company has proven it can produce. The EV industry remains a highly uncertain investment area, especially when there is heightened potential for the U.S. to enter a recession and/or a period of slowing demand. The decision of which is the better place to put your money -- into Tesla, or splitting it between Nio and Rivian -- will come down to your risk tolerance and time horizon.

An investor can always avoid early stage uncertainty simply by waiting for an investment thesis to play out further, but that increases one's risk of having to pay a higher price for a stock down the road. On the other hand, buying a stock when uncertainty is high presents a greater potential for stronger returns, but also more risk.