As an immediate impulse, the concept of investing in legacy automotive giant General Motors (GM) seems questionable at best. Clearly, both societal and political momentum favor the development and broader integration of electric vehicles, which also facilitates energy independence. However, the automaker still has a few tricks up its sleeves. I am bullish on GM stock.
In the “analog” era of personal transportation, General Motors dominated U.S. streets with several iconic models, including the 1964 Pontiac GTO, the 1969 Chevrolet Camaro and the 1963 Chevrolet Corvette, among many others. Churning out speed demons featuring throaty V-8 engines, GM helped shape Americans’ love for the open road.
However, Detroit struggled to adapt to the winds of change, first with the influx of small, fuel-efficient vehicles from Japan to more recently the broader pivot to electric vehicles. Here, pioneer Tesla (TSLA) has proven to be quite the thorn on the side of legacy automakers, applying significant pressure on GM stock.
Factor in the supply chain disruptions that have disproportionately affected the auto manufacturing industry and investors have plenty of reasons to abandon GM stock, and instead consider moving directly into the pure-play EV market. Still, this icon may still command some relevance.
On TipRanks, GM scores an 8 out of 10 on the Smart Score spectrum. This indicates a moderate potential for the stock to outperform the broader market.
GM Stock and the Quality of Earnings
For those interested in acquiring EV-related investments, one of the most obvious choices is Tesla. Not only does the brand feature incredible social cachet, the company has recently become consistently profitable. After years of consecutive net losses, in 2020, Tesla posted net income of $721 million and in the next year, $5.52 billion.
In the first quarter of 2022, Tesla generated a staggering $3.32 billion in net income, up almost 658% on a year-over-year basis. Everything seems to scream buying TSLA over GM stock. However, it’s quite possible that the latter fundamentally enjoys the better quality of earnings.
To be fair, GM posted net income of $2.94 billion in Q1 2022, which is actually down 2.75% against the year-ago quarter. That would seemingly contradict the idea of GM featuring superior earnings quality.
However, the crux of the target word comes down to the predictability factor of a company’s earnings trajectory. In other words, do the earnings that a particular organization posted bear any meaningful significance in future quarters? Under this framework, GM stock embodies greater confidence.
Investors should consider two fundamental factors. Number one, 2022 Kelley Blue Book data indicates that the average price of a new EV is $62,876. In parallel, the pre-pandemic U.S. household income was $69,560. Number two, the real earnings of full time wage and salary workers declined by nearly 8% between Q2 2020 and Q4 2021.
Stated differently, EV prices are soaring while real wages are declining. At some point, this dynamic won’t be sustainable for TSLA and other pure-play EV stocks. On the other side of the equation, the lower price of combustion-powered vehicles provides greater predictability value for GM’s earnings.
General Motors isn’t Perfect, but it is Flexible
At this point, it must be said that GM stock is not a perfect investment. Indeed, it’s quite speculative considering that the underlying business is also tied to consumer sentiment. What hurts Tesla will invariably impact GM.
However, the latter arguably has more flexibility. The average price of a new car in total (including EVs) currently amounts to $46,404. And the popular GM brand Chevrolet is quite close to this average at $47,882. In comparison, Tesla is at $63,381. Amid a growing number of tech jobs that are suffering the axe, that $15,499 difference is contextually large.
Further, GM is a diverse brand. From its GMC Hummer EV to the eighth-generation Corvette, the American automaker is meaningfully addressing multiple opportunity zones, thereby bolstering its flexible image. It’s an EV company for those that want to make the transition while also providing pure Detroit muscle for automotive enthusiasts.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, GM is a Moderate Buy, based on 12 Buys, two holds and one sell rating. The average General Motors price target is $54.53, implying 71.91% upside potential.
A Balanced Approach to EVs
Ultimately, the idea behind GM stock may come down to balance. Clearly, the underlying company is pushing toward EVs. At the same time, it’s not abandoning its loyal fanbase of gearheads. If anything, GM embraces its combustion-powered heritage with the introduction of the new Corvette.
Finally, because its cars are much more affordable to the common household, its earnings are much more predictable. In a world gone mad, such reliability may carry a premium.
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