Rivian Sacrificed Its 2027 Profit Target. Here's Why Investors Should Applaud.

For years, Rivian (NASDAQ: RIVN) marched closer and closer to profitability. Its progress on that front was impressive, given how difficult it is to scale a capital-intensive electric vehicle (EV) manufacturing business from scratch.

In the fourth quarter of 2024, Rivian posted positive gross margins for the first time in its history. Positive gross margins were generated in several subsequent quarters, leading many investors to believe that management's long-term guidance -- which called for positive adjusted EBITDA margins by 2027 -- would soon be realized.

In March, however, Rivian's executive team quietly dropped the company's 2027 profit target. That might seem alarming, but the shift in priorities should ultimately set Rivian up for greater long-term success.

Image source: Rivian.

Here's why Rivian is better off after dropping its profit target

Tesla (NASDAQ: TSLA) proved it was possible to build an EV business from scratch while generating long-term, sustainable profits. Over the last three years, Tesla's stock price has risen by more than 50%. Yet Tesla's auto sales have actually declined for several years in a row.

Why is Tesla stock rising as its auto sales fall? Because investors realize that the future of EVs doesn't rely just on manufacturing. Success for EV makers also hinges on their ability to develop self-driving software. In the future, consumers will demand cars that are fully autonomous. Autonomous features will also be critical for selling into the quickly emerging robotaxi market. Tesla has invested aggressively in autonomous vehicles, and the market has rewarded it for its efforts.

Rivian has also invested aggressively in self-driving technologies. But it arguably remains far behind deep-pocketed competitors like Tesla. To sell EVs long term -- whether to consumers or robotaxi operators -- Rivian needed to accelerate its investments in autonomous driving tech. That's exactly what management decided to do earlier this year, when Rivian announced that it no longer expects to be profitable in 2027 "due to an expected increase in R&D spend associated with the acceleration of its autonomy roadmap."

Given how critical autonomous tech will be to Rivian's long-term future, investors should applaud the move.

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.