2020 was the year of the electric vehicle stock! Encouraged by Tesla‘s strong performance, last year saw a deluge of EV automakers debut on the public markets via IPO or via a reverse merger with a special purpose acquisition company, or SPAC.

Still, there was one high-profile holdout: Rivian Automotive. Founder and CEO Robert “RJ” Scaringe downplayed Rivian’s IPO intentions, noting as late as November the company was focused on production in response to an IPO-related question. That’s why investors were pleasantly surprised earlier this month when Bloomberg reported the company was prepping to go public with a possible September 2021 listing.

However, buying Rivian stock might not be the best way to take advantage of Rivian Automotive’s pending IPO. Investors should consider buying shares of Rivian investor Ford (NYSE: F) instead.

Lady charting electric vehicle.

Image source: Getty Images

Ford’s ownership stake in Rivian should boost shares

Trading at a price-to-book ratio of 1.5 times, Ford is certainly considered a value stock and owners are paying close attention to its assets. Because of this, its investment in Rivian could lead to a one-time repricing of Ford’s stock.

Ford announced a $500 million investment round in Rivian in April 2019, along with an agreement to work together to develop jointly develop a Ford-branded EV using Rivian’s drivetrain technology. Ford’s ownership stake of Rivian remains undisclosed, but that hasn’t stopped investors from bidding up Ford shares on positive news from Rivian stock.

Last year, when Rivian raised money at a $27.6 billion valuation, Ford saw its shares surge nearly 25% in three days. With a rumored IPO valuation of $50 billion, it’s likely Ford will experience another rally when Rivian hits the public markets.

Valuation convergence should benefit Ford

News of Rivian’s IPO was positive for Ford for a few reasons. First was the fact Rivian is likely to go public at a $50 billion valuation, which is currently higher than Ford’s market capitalization, despite having negligible revenue while Ford sells millions of cars every year. 

The auto industry is currently bifurcated from a valuation standpoint: pure-play EV makers are getting valuation multiples more akin to technology companies while traditional automakers like Ford and General Motors are being valued extremely less favorably. 

The most likely interpretation of the valuation divergence is investors have little faith in Ford and GM’s ability to compete and win share in the EV market. That’s irrational and you can expect some convergence — whether that’s Ford being rewarded with higher multiples, EVs experiencing valuation compression, or a combination of both. 

I expect the latter will be the most-likely outcome and competitor General Motors has experienced this to a certain degree. CEO Mary Barra has seen shares nearly double in the last six months as the company has started to promote their EV future and investors are buying in. More awareness of Ford’s plans and future successes in EVs, particularly its partnership with Rivian, should lead to stock gains. 

Regardless, Rivian Automotive’s IPO will likely be a can’t miss event for the entire automotive industry. To learn more about Rivian Automotive stock before the IPO, check out Millennial Money’s deep dive.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

By ev3v4hn