Opinion: These two EV companies are miles ahead of the pack. Yes, Tesla is one of them.

Today’s relevant facts are the electric-vehicle (EV) delivery statistics from Tesla
TSLA,
-1.10%,
Rivian Automotive
RIVN,
-2.09%,
XPeng
XPEV,
-3.19%,
and others. All three of these companies beat the most-recent earnings expectations and demonstrated impressive production and delivery numbers.

Tesla is one of our firm’s biggest long holdings and Rivian is also a good-sized portfolio position for us, so let’s look at the facts (the numbers) to get a sense of where things stand in the EV industry.

According to Morgan Stanley, total 2022 global light-vehicle sales were about 77.6 million units, 8 million of which were EVs. EV growth is expected to continue at 23.6% CAGR through 2025, while ICE (internal-combustion engine) growth is expected to remain flat over that period. While Tesla faces some serious competition for EVs in China, in the U.S., the company has a commanding lead over rivals.

Most importantly, Tesla is one of the only auto companies that is actually earning significant profits from EV sales. Tesla is continuing to accelerate growth despite purported “competition” from traditional automakers including General Motors
GM,
-1.81%,
Ford Motor
F,
-0.71%
and Volkswagen
VOW,
-0.37%.

While those companies have rolled out EV models of their own, they have so far been unable to produce those vehicles at scale, nor at price points that are attractive to most consumers.

Almost all of TSLA’s sales (~96%) come from the cheaper Models 3 and Y rather than the more expensive Models S and X (~4%). For reference, the Model 3 starts at about $40k and the Model S starts at about $88k. We think it will be difficult for Ford, for example, to sell a substantial number of F-150 Lightnings (which run from $60k to $95k), or for Lucid
LCID,
-0.72%
to sell tons of Airs (which start at around $90k) to a public that is spending more money than ever just to survive because of higher inflation and interest rates.

With a Tesla Model 3, you can get a brand new car for about $33k (when the federal tax credit is included), which comes out to $615/month (Tesla quotes financing at 5.89% for a 72-month loan).

Analysts expect Tesla to produce anywhere from 1.7 million-2 million vehicles this year, which would put it at about 2%-2.5% of the global light vehicle market share, or 17.5%-25% of the global EV market. If Tesla can grow to just 10% of the global vehicle market in the next few years, it would sell around 8.5 million units. Using an average selling price (ASP) of $46,000, Tesla would generate $382.5 billion in revenue, and about $72 billion in gross profits using a 19% gross margin. Operating expenses would probably be about $10 billion, which means the company would generate somewhere around $62 billion in operating profits.

That gives Tesla a 13.4 price/profits ratio in a few years, which is pretty cheap considering the company is growing revenues by around 25% per year, and has multiple trillion-dollar kickers (including Cybertruck, Dojo Supercomputer, Robotaxi and Optimus Robot Charging Network).

Read: Tesla is still playing the long game, but here’s why Wall Street’s spooked in the present

Rivian gains traction

When it comes to Rivian, obviously the company is not in the same position as Tesla. Rivian’s 2023 production target of 50,000 units is about 2% of Tesla’s stated goal of 2 million units. Rivian is targeting a more niche market (premium pickups and SUVs), and unlike its EV rivals in this area, Rivian is actually producing and delivering these vehicles at scale. Rivian delivered 12,640 vehicles in the second quarter, compared to estimates of 11,000 vehicles. And Rivian produced 13,992 vehicles, which was 4,597 more than in the first quarter.

As we have stated before, Rivian’s biggest challenge in the near-term is getting its production up in order to lower its cost of goods sold per unit. Our golden rule for startups like Rivian has been execution, and thus far management has done a good job of executing on its plan to produce at least 50,000 units in 2023. If Rivian hits that target, we expect the company would generate sales this year of about $4.5 billion, up from $1.6 billion in 2022.

The U.S. pickup market has ranged from 10-12 million units over the past four years. America is obsessed with trucks and SUVs. Rivian builds a great product and is poised to capture this trend if it can get its production ramped quickly. If Rivian could garner even 10% of the U.S. pickup market in the next five years, it would be shipping 1million-1.5 million units per year. At 1 million units, Rivian would be generating $87 billion in revenue at an average selling price of $87,000. Assume the company can generate 10%-12% gross margins, and we are looking at $9-$11 billion per year in gross profits. Plug in operating expenses of $4 billion and we have profits of $5-$7 billion, yielding a p/p range of about 3.6-2.5 five years out.

Looking at the facts before us, we remain convicted in our Tesla and Rivian longs. Both of these companies are growing rapidly and executing well. Although there is always risk involved, we think these are the best names to own in the EV Revolution.

 Cody Willard is founder of 10,000 Days Fund Capital Management and runs the 10,000 Days Fund, a hedge fund. At the time of publication, Willard and/or the hedge fund were long TSLA and RIVN. Positions can change at any time and without notice.

Also read: Tesla, Rivian are the most shorted stocks in autos, but the trade is far from profitable

More: These 3 EV makers, not Tesla, are about to eat everyone else’s lunch, Morgan Stanley predicts