Many hypergrowth stocks lost their luster over the past two years as rising interest rates throttled their growth, cast a harsh light on their steep losses, and compressed their valuations. However, analysts still expect many of those out-of-favor companies to more than double their annual revenue by 2025.
Let’s check in on three of those stocks — the electric vehicle (EV) maker Rivian Automotive (RIVN 0.45%), the cybersecurity company SentinelOne (S 0.22%), and the quantum computing firm IonQ (IONQ 0.29%) — to see if they’re worth buying.
1. Rivian Automotive
Rivian’s stock price has dropped about 80% below its $78 price at its initial public offering (IPO). The EV maker manufactures three vehicles: the R1T pickup truck, the R1S SUV, and an electric delivery van for its top investor, Amazon. But it disappointed the bulls after its public debut when it struggled to meet its own production targets.
Rivian originally planned to produce 50,000 vehicles in 2022. But it eventually reduced that target to 25,000 as it faced tough supply chain constraints — and it still narrowly missed its goal by producing 24,337 vehicles.
But in 2023, it more than doubled its production to 57,232 vehicles — clearing its own target of 54,000 vehicles — as it ramped up the production of its own in-house Enduro drive units to resolve its supply chain issues and reduce its manufacturing costs.
Rivian won’t disclose the finer details until it posts its fourth-quarter and full-year earnings report on Feb. 21, but analysts expect its revenue to soar 165% to $4.4 billion in 2023 and continue rising at a compound annual growth rate (CAGR) of 53% to $10.3 billion by 2025. With an enterprise value of $10.4 billion, the stock trades at just over 2 times this year’s sales, which seems like a screaming bargain relative to its long-term growth potential.
Rivian remains deeply unprofitable, but it still has enough liquidity ($10.3 billion at the end of its latest quarter) to operate in the red for a few more years. If it can scale up its business and narrow its losses, its stock could soar back to its IPO price.
SentinelOne’s stock has dropped more than 20% below its IPO price of $35, but the company is still growing like a weed. The cybersecurity company’s revenue more than doubled to $422 million in fiscal 2023 (which ended last January), and analysts anticipate another 46% in growth to $617 million in fiscal 2024. From fiscal 2024 to fiscal 2026, these analysts predict its revenue will continue rising at a CAGR of 32% to $1.07 billion.
Based on those estimates and its enterprise value of $7.5 billion, SentinelOne might seem a bit pricey at 12 times this year’s sales. It’s also expected to remain deeply unprofitable for the foreseeable future. Those issues, along with stiff competition from larger and more profitable companies, kept a lot of investors away from its stock.
Yet SentinelOne management believes the company can still carve out a business niche with its algorithms, driven by artificial intelligence (AI), which accelerate threat detection by cutting human analysts out of the loop. That innovative approach could disrupt traditional cybersecurity companies and make the company a compelling takeover target for its larger competitors.
Some takeover buzz regarding the company fizzled out last year, but it wouldn’t be surprising to see a potential suitor swoop in and pay a premium for its AI-powered platform.
IonQ became the world’s first publicly traded quantum computing company when it went public by merging with a special purpose acquisition company (SPAC) in late 2021. The stock started trading at $10.60 on the first day, went through some wild swings during the buying frenzy in meme stocks, and currently trades at just under $11.
IonQ hasn’t gone anywhere since its public debut because it only recently started to commercialize its quantum computing services through cloud-based platforms, and it’s richly valued at 56 times next year’s sales. Nevertheless, it might still have a lot of potential as it attempts to miniaturize its technology with a “trapped ion” process that can shrink quantum processing units (QPUs) from several feet to a few inches.
IonQ generated just $11 million in revenue in 2022, but analysts expect that figure to rise to $22 million in 2023 and quadruple to $88 million by 2025. That would represent a CAGR of 100% from 2023 to 2025.
But it’s also expected to lose more than $100 million per year for the foreseeable future. That red ink and high valuation make IonQ a more-speculative bet than Rivian or SentinelOne. And the bears claim it’s exaggerating its ability to scale up its quantum computing services.
Which of these stocks is worth buying?
I don’t own any of these hypergrowth stocks. But if I had to pick one, I’d be willing to buy Rivian — since its fundamentals are improving — instead of SentinelOne or IonQ.
SentinelOne hasn’t proved its business model is sustainable, and it might not be cheap enough to attract serious takeover bids. IonQ’s stock is simply too expensive, and it still faces too many unanswered questions regarding its underlying technology.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.