General Motors Remains Undervalued. Should It Be?
General Motors world headquarters in Detroit, Michigan.
GM's entry into businesses affiliated with its core bode well, yet the market remains unimpressed. This could be an investing opportunity.
THE MOTLEY FOOL | Oct 30, 2022
GM continues to cultivate new businesses that correlate to its core activity.
The company is using its vehicles to launch a number of related noncyclical businesses
Its undervalued stock price and reinstated dividend still represent a buying opportunity despite possible headwinds.
General Motors produced record adjusted earnings per share (EPS) of $7.07 for 2021, and management expects equally impressive results for 2022. Yet GM has lost 42% of its value year to date.
The markets are overacting to concerns over chip shortages and their impact on production. And despite the fact that production and sales of its most profitable vehicles have held up, GM remains the Rodney Dangerfield of automotive stocks, even as it expects to double revenue to $280 billion by the end of the decade.
So far, Wall Street isn't buying it. The concern is that inflation, rising interest rates, and a possible recession and its effects on increasingly cash-strapped consumers will torpedo demand. Such concerns plague all automakers, however, including Wall Street darlings Tesla and Rivian.
But even though General Motors appears well positioned in both autonomous vehicles and electric vehicles (EVs), it's not valued as highly by Wall Street.
Profits from software and deliveries
GM is first and foremost an automaker, and its growing line of EVs is becoming a launching point for other businesses. The new vehicles, such as the Cadillac Lyriq and GMC Hummer, depend heavily on software. And the company intends to exploit this to deliver cloud-based consumer services beyond driving, using its new Ultifi software platform, expected to launch on 2023 models.
The company is no stranger to this business; its revenue-generating OnStar embedded telematics system was the auto industry's first in 1997 and has been widely copied since.
GM foresees Ultifi as the basis for applications including autonomous vehicles, something it is launching through its Cruise subsidiary. Its driverless robo-taxis, which had been undergoing testing in San Francisco, began charging fares there in June. The subsidiary is looking to add Austin, Texas, and Phoenix to its service network.
Robo-taxis are expected to generate $1 billion in revenue by 2025, growing to $50 billion in revenue with margins as high as 40% by 2030. But in the first half of this year, Cruise recorded $51 million in sales and an operating loss of $868 million, so profitability is a wait-and-see.
Similarly, BrightDrop, GM's delivery and logistics company, has more than 25,000 orders from FedEx and Walmart for its Zevo 600 and Zevo 400 electric vans. The company is also developing the Trace, an electronic cart that transports goods from the vehicle to the consumer. BrightDrop's fleet management software uses OnStar in concert with artificial intelligence. The company predicts BrightDrop will generate as much as $5 billion by 2025, and double that by 2030.
The newest GM business unit, GM Energy, will offer stationary battery packs, solar panels, EV chargers, and other energy-management products for homes and businesses. GM Energy is expected to help control the experience for its EV buyers and establish a business with consistent revenue flow as it supports the charging of GM's EVs. Beyond that'll, however, this new business segment is sensitive to the renewable energy market business cycle for its profitability. It's also sensitive to weather, as extremes can cause a spike in demand. GMs first storage products are expected to launch next year with the 2024 Chevrolet Silverado EV.
Fears and opportunity
While every business GM is entering already has its share of competition, the automaker's expanding EV lineup will provide an entry point with related services that provide a backstop against the cyclical auto market.
It's a solid plan that seems to position the company for long-term success with expectations of reliable profitability. Factor in a reinstated dividend and a price not far off its 52-week low, and GM appears to be an excellent buying opportunity.