Since reorganizing as a public company following its 2009 bankruptcy, General Motors Co. (GM) has delivered modest success to investors. For the past five years, GM shares have achieved a compound annual growth rate of 11.2% – respectable and not too far behind the 15% CAGR achieved by the Dow Jones Industrial Average.
Clearly, however, equity analysts and GM management have higher expectations. According to MarketWatch, 18 of 25 equity analysts recommend the stock as a “buy,” three recommend “overweight” and four “hold.” None think it’s time to unload all or some of an investor’s GM holdings. The average target price for the stock prior to the earnings release was $76.
In light of GM’s yesterday’s ultra-bullish projections with regard to EVs and driverless technology, on top of solid financial performance, several analysts were raising their target price.
The big news from GM’s earnings call with analysts on Tuesday was CEO Mary Barra’s projection of 400,000 BEV sales through the end of next year. That would include sales of GMC Hummer EV, Cadillac Lyriq, debuting later this year; Chevrolet Blazer and Equinox, debuting next year, and Chevrolet Silverado EV, debuting next spring, as well as BrightDrop commercial BEVs. Deliveries of Bolt EV and EUVs also are scheduled to resume, following battery fires that forced Bolt’s recall and a halt to production.
GM has announced a number of new battery plants to be constructed with the aim of creating capacity of 1 million batteries annually by 2025 on top of 1 million batteries of capacity in China.
“And I can tell you right now,” Barra said, “one million units in North America won’t be enough to meet the steep inflection in demand that we expect starting mid-decade for our EVs.”
Another piece of positive news was Barra’s first-hand, glowing report of her ride in a driverless Cruise robotaxi in downtown San Francisco.
“I can tell you,” she said. “It was the highlight of my career as an engineer and as the leader of General Motors. The ride is smooth and confident. It’s like having an experienced and attentive driver behind the wheel.”
GM, which owns more than 60% of Cruise, is on the verge of commercializing a robotaxi service. Eventually, GM expects to sell driverless cars to individuals. For the time being, the automaker says it expects driverless tech will produce $50 billion in annual revenue by the end of the decade. Softbank’s Vision Fund announced this week it is investing another $1.35 billion in Cruise.
Given its EV and driverless initiatives, GM has its eye on sky-high price-earnings multiples assigned to Tesla (TSLA) and to startups like Rivian (RIVN), Lucid (LCID) while GM’s own is at about a 7 P/E – which is the investing public’s way of saying: “You might have ambitions to be an EV and driverless company, you might even have all or most of the components and materials in place, but you’re going to have to execute (and maybe make some real money) before we treat you like your smaller, nimbler peers.”
As a matter of fact, GM already is making real money, though for the meantime internal combustion engines are responsible. While the fourth quarter profit was down 39%, GM reported a net profit of $10 billion for 2021. It said full-year pretax profit, which disregards nonrecurring items, rose 47% to a record $14.3 billion – a record.
GM also forecasts pretax earnings in 2022 of $13 billion to $15 billion and net income of $9.4 billion to $10.8 billion.
GM’s cash flow and its investment-grade balance sheet are funding the migration from fossil fuels to electricity. The automaker has done well to navigate the semiconductor shortage and supply-chain bottlenecks. Now, GM says, the semiconductor shortage is “stabilizing.” Accordingly, GM sees its global production increasing 20% to 25% in the current quarter over the fourth quarter of last year.
Beyond the latest quarter, GM sees a bright long-term future: “We see a path to doubling revenue by 2030,” CFO Paul Jacobson told analysts “While expanding margins with significant opportunities in software, services and new businesses in electric and autonomous vehicles.”
In light of GM’s positivity, some investors no doubt will feel thwarted that the automaker hasn’t restored a cash dividend, especially because crosstown rival Ford Motor Co. (F) has done so. Barra explained unapologetically that investment in advanced technology and products takes precedence.
A few GM partisans also may be dismayed that GM – after 90 years as the leader – relinquished its U.S. sales crown to Toyota Motor Corp. (NYSE:TM) in 2021. They shouldn’t be. GM proved – or, perhaps, was forced to prove – last year that it still could earn strong profit by not over-producing vehicles – as it had done so many times in the past – to win sales leadership only then be forced to cut prices and pay discounts, which hurts brand strength and undermines profit.
Mary Barra has painted a rosy picture for GM’s future – and GM well may be able to accomplish its goals. There are risks as well as opportunities. Battery chemistry is tricky, as GM found out with the Bolt. Its new line of Ultium batteries are in the newborn phase and will become much safer and more dependable as more customers use them in real-world situations that can’t entirely be foreseen by testing.
The biggest imponderable is consumer uptake of EVs. 400,000 or so customers may buy GM BEV models over the next two years, just as Barra says GM believes they will. If so, there will be much cause for optimism and much more reason to rely on upbeat long-term forecasts, such as the doubling of revenue through 2030.
The same caution applied to consumer uptake of EVs should be applied to robotaxis. For the moment, the business looks to be on track and very well could achieve the forecast $50 billion in revenue by the end of the decade. Again, many more miles of real-world experience will answer questions about the technology’s safety and reliability.
For this reason, I remain neutral on GM shares at their current price. I don’t see much downside risk, only major questions that must be answered about upside opportunities. A year from now, if GM has sold 200,000 EVs and Cruise’s robotaxis are ferrying paying customers in downtown San Francisco, I well might join today’s herd of GM bulls.