This EV Stock Could Soar By 79%, According to a Wall Street Analyst (Hint: Not Tesla)

The electric vehicle (EV) market is experiencing a slowdown. According to some data, U.S. EV sales dropped by 27% year over year in the first quarter. Investors are selling off shares of some notable EV makers, perhaps partly as a result of this. For example, Rivian Automotive (NASDAQ: RIVN) has seen its stock decline by 30% year to date, trading a bit below $14 per share as of this writing. However, some analysts expect Rivian to bounce back and perform well over the next year.

Is there plenty of upside ahead?

Mickey Legg, an analyst at The Benchmark Company, has a $25 price target for Rivian. That implies an upside of about 78.6% from its current levels. Even though the EV market is facing some challenges, several developments at Rivian may justify Legg's enthusiasm. First, the EV maker's latest financial results looked solid on the surface. The company's revenue of $1.4 billion was 11% higher than the year-ago period. Rivian's deliveries also climbed 20% year over year to 10,365.

Image source: The Motley Fool.

Second, Rivian began deliveries of its much-anticipated mass-market model, the R2, to its employees and said it would start shipments to external customers in the coming weeks. The R2 is much cheaper than Rivian's previous models. It could help the company expand its reach. Third, Rivian recently announced it was expanding the capacity of its Georgia plant to 300,000 vehicles per year, up from its previous goal of 200,000. It won't be up and running until 2028, but this initiative has important implications for Rivian's medium-term outlook.

The move could help lower unit production costs, thereby improving its margins. Lastly, Rivian struck a deal with Uber Technologies to deliver up to 50,000 autonomous vehicles to the ride-hailing giant for its robotaxi service. The partnership will result in an equity investment of up to $1.25 billion from Uber into Rivian, with about $550 million to be made by year-end, subject to certain conditions. These developments paint a fairly bright picture for Rivian's future.

Some reasons for skepticism

Looking more closely at Rivian's first-quarter results reveals a slightly more mixed picture. The company's revenue grew at a good clip, but automotive revenue (including vehicle and regulatory credit sales) declined slightly, even as deliveries increased. Rivian sold a higher mix of commercial vans in the first quarter, which cost less per unit than its customer vehicles.

Even with Rivian's relatively strong performance in the period, commercial buyers who purchase vans in large quantities tend to negotiate aggressively for much lower prices. Unless sales to individual customers improve meaningfully, Rivian could face declining revenue per unit, potentially putting pressure on its margins. That would be a significant problem for a company that isn't profitable yet. That's why the launch of the R2 is so important for Rivian.

If it is successful, it could boost revenue per unit while providing the company with a healthy infusion of cash to help it pursue various goals. Mass adoption of the R2 will also serve another important purpose. Rivian's deal with Uber is contingent on the EV maker reaching level 4 autonomy, a stage at which cars can, essentially, drive themselves with no human supervision.

Rivian isn't there yet, and the more cars it has on the road, the more data it will have to train its self-driving system. But what happens if Rivian is unable to compete with the leading EV car in its category -- Tesla's Model Y -- that also happens to be the best-selling car (EV or not) in the world in recent years? Failure to make a dent in the market with the R2 might trigger a domino effect that could lead to Rivian's shares plunging significantly over the next few years.

With all that said, Rivian is a fairly risky stock. It may reach $25 per share over the next 12 months if the launch of the R2 is strong, but things could get ugly very fast otherwise. It's important to remember that before pulling the trigger. Interested investors should start by establishing a small position in the stock and progressively add to it as Rivian shows significant progress toward key goals.

Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla and Uber Technologies. The Motley Fool has a disclosure policy.