Magna International (TSX: MG)(TSX: MGA) and Rivian (NASDAQ: RIVN) are two companies that don’t appear to have much in common on the surface. One is an auto parts manufacturer; the other is a car manufacturer. One mostly develops internal combustion engine (ICE) car parts, while the other develops electric vehicles (EVs). The differences are clear.
However, there is one similarity between Magna and Rivian: they’re both involved in the EV industry; directly in Rivian’s case, indirectly in Magna’s case. Rivian is an EV manufacturer that designs and builds its own cars. Magna, through a joint venture (JV) with LG Electronics, builds parts that are used in EVs. So, Magna and Rivian are worth comparing.
In this article, I will explore these two EV stocks side by side so you can determine which is best for your portfolio.
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The case for Magna International
One advantage that Magna International has over Rivian is the fact that it is a profitable company that is not at risk of simply dying out. In the last 12 months, the company achieved the following profitability metrics:
- A 13.5% gross profit margin.
- A 4.7% operating income margin.
- A 2.5% net income margin.
- A 2% free cash flow (FCF) margin.
- A 9% return on equity (ROE).
These aren’t exactly high margins, but they are at least positive. Now let’s look at the comparable metrics for Rivian:
- Gross margin: -43%.
- Operating income margin: -123%.
- Net margin: -121%.
- FCF margin: -84%.
- ROE: -67%.
It’s a night and day difference. Now, there is a pretty simple explanation for this difference in margins: Magna is an old company while Rivian is a new company, and it usually takes a while for startups to turn profits. However, while Rivian is older than Magna, it’s not exactly a startup. Founded in 2009, it is 15 years old. It’s not clear that this long a period of unprofitability is inevitable or to be expected for a typical company. So Rivian’s lack of profitability could be a concern.
The case for Rivian
The case for Rivian comes down to growth. Rivian’s revenue grew 20% in the trailing 12-month period, while MG’s revenue grew just 1.8%. Rivian is certainly a faster grower than Magna. However, there is a caveat here: while Rivian’s revenue is growing, its negative profit margins are growing too, so you could argue that there is “reverse growth” in profit that is much worse than Magna’s merely slow growth.
Final verdict
It seems pretty clear that Magna is a better business than Rivian. It’s profitable, its margins are stable if not high, and it has a clear market for its services. In addition to that, it has a much healthier balance sheet than Rivian, with more equity than debt (the reverse is true with Rivian). You could see Rivian going bankrupt in the next few years; that will not happen with Magna.
Nevertheless, Rivian is a growth stock in a highly publicized industry. You can’t rule out the possibility of a short-term “pump” in the stock price. As a long-term holding, though, it leaves much to be desired.
