General Motors (GM, Financial) shares had a strong run in 2021 but fell back to earth in 2022 due to the bursting of the market bubble, high inflation, rising interest rates and continued supply chain issues. Nevertheless, its earnings kept improving, and eventually the stock began to follow along despite the bear market. The year thus far has been great for GM, with shares up over 26% year-to-date.
Some investors might still be skeptical of GM despite the positive start to the year. The macroeconomic environment is uncertain, and there are execution risks involved as well. However, several recent moves from the company show that it is setting itself up for long-term success.
In light of these moves, I believe the fears of it being left in the dust as Tesla (TSLA, Financial) starts slashing its prices are unfounded. An EV price war could negatively affect all stocks in the automotive industry, partucularly EV producers, but I still thing GM is undervalued regardless given the long-term outlook.
Furthermore, there are some signs that the macroeconomic environment is improving, with the Federal Reserve saying it is seeing progress in its efforts to cool down inflation. Automakers are also set to see reduced production costs as steel prices keep decreasing. This is driving up the profits for each car.
Recent earnings
During full fiscal 2022, General Motors achieved a record of 2.27 million vehicles sold. Three of the four brands (GMC, Chevrolet, Cadillac and Buick) experienced year-on-year sales growth; Buick was the only one that saw a drop in sales figures. In the fourth fiscal quarter, GM's revenue increased 28.4% to $41.11 billion, and net income was up 15% to $2 billion compared to the year before.
General Motors expects a positive financial performance in the first quarter of 2023. It forecasts adjusted automotive free cash flow of $5.0 billion to $7.0 billion and earnings between $6.0 and $7.0 per share.
Multiple tailwinds
General Motors is committed to getting new electric models in various market segments, fulfilling its strategy of capturing the market with new products for a variety of price points. Despite the current obstacles, General Motors is looking to become a leader in the EV industry and already has a good start.
There is an acute demand for electric vehicles at the moment. Despite tough macroeconomic conditions, electric vehicles sold worldwide in 2022 totaled 7.8 million units, a 68% increase from 2021. GM does not have a huge chunk of this market in the grand scheme of things. In 2022, the automaker sold over 39,000 EVs. Still, this marks a huge leap compared to previous sales figures, and we also have to keep in mind that GM is an American company - the U.S. is lagging on EV adoption.
Several countries are encouraging the sector as part of the wider agenda of addressing climate change and pollution, which will keep demand for electric vehicles healthy for several decades to come.
China, for example, wants 40% of new cars sold by 2030 to be electric. In the U.S., business owners can benefit from a commercial tax credit for EVs. This grants up to $7,500 for lighter vehicles and $40,000 for heavier transport trucks. In addition, several European nations have completely established objectives to shift to electric vehicles in the upcoming decades. Similar initiatives are cropping up all over the world, underlining the strategic shift in thinking throughout the world.
General Motors has set an ambitious mission to increase its North American electric vehicle production to 1 million units by 2025. It expects this to translate into aggregate revenue of over $50 billion in EV sales by that same year, projecting a three-year Compound Annual Growth Rate (CAGR) of 12%.
General Motors has pledged an enormous $35 billion to its electric and self-driving initiatives between 2020-2025. This funding also covers the need for battery manufacturing plants to fulfill the increasing demand for electric vehicles.
It is constructing two lithium battery-making factories in Ohio and Tennessee. These factories are expected to be operational by the mid-2020s, supplying GM and other EV manufacturers with handy battery solutions.
General Motors is investing $650 million in a lithium mine in Nevada operated by Lithium Americas (LAC, Financial) to support its battery manufacturing. This investment will be made over two stages - the first stage of $320 million will be injected in 2023, and General Motors will get exclusive rights for lithium production from this site. This investment will give General Motors a 10% share in the company. The mine is anticipated to provide enough lithium for one million vehicles annually when it starts production in 2026. General Motors has ramped up its prior financial commitment by 75%, largely due to its strong financial performance recently.
The implications of Tesla's price war
Tesla sent a chill down the spine of the auto industry when it announced aggressive price cuts in January. Tesla's recent price cuts are making its vehicles accessible and financially viable for a larger consumer group while simultaneously producing more competition throughout the auto sphere.
Some Tesla models are now cheaper by as much as 20%, along with incentives such as federal tax credits being instituted to make them even more affordable - though these reductions come at an unexpected cost in terms of resale value for those looking to trade-up or sell current models.
Aside from making Tesla better able to better compete with lower-price competitors, this could indicate a potential weakening of market demand. This might lead to reduced profitability across the entire industry, which could hit stock prices.
Furthermore, Tesla has a lot of room to cut prices. Its well-received EVs have brought higher profit margins than traditional cars. Its software, subscription services, driver assistance systems and Wi-Fi offerings provide further support to counterbalance any losses from price reductions. A similar ecosystem is not there for other automakers in the EV sphere as of yet, which means GM and other competitors are at a disadvantage.
Plus, with the lowering of Tesla's prices, other EV manufacturers are being pushed to reduce their own costs. The bottom line is that Tesla has the advantage hre. Even with investing heavily in battery technology and expanding their EV production capabilities early, competitors are now playing catch up with Tesla as the market leader.
An EV for every price point
While Tesla still wants to keep its luxury brand image, General Motors aims to have a car for every price point. That should make it easier for the automaker to defend against Tesla's price war in the long run.
Gerald Johnson, GM's global manufacturing head, asserted that Tesla's cuts would not affect their planned production of electric vehicles. General Motors offers a range of electric vehicles, from the affordable Bolt EV models that cost less than $30,000 to its more expensive models with a newer battery system. According to Johnson, General Motors has cars catering to different market segments. He also noted that Tesla's lowered prices suggest its original pricing may have been too high.
Last year, General Motors reduced the prices of Bolt models but recently raised them again due to market pressures. In June, Chevrolet decreased the prices of both Bolt EV and EUV models by $5,900 and $6,300, respectively, making them the most affordable electric vehicles available in the U.S. for 2023.
However, the Bolt EV went up by $900 to $27,495, and the EUV's price jumped $600 to $28,795 last month. Despite the significant price reduction in June, both vehicles are eligible for the full $7,500 tax credit for electric vehicles. This makes them still America's most economical EVs.
Takeaway
General Motors is still seeing an upward trend in sales and profitability. In addition, the outlook for future growth is quite positive. I believe investing in EVs while the industry is still young is a wise decision seeing as the world is turning its attention to them. Although renowned for its gas-guzzling vehicles, GM is also devoting energy and resources to developing electric vehicles. Thus, it should avoid an eventual decline and may even build market share. Staying ahead of the curve, the company has also been investing in self-driving cars. GM's stock has seen a positive trend in the last six months. It could suffer if a full-blown price war develops, but in the long term, this is just the beginning.
