A war of attrition may be just over the horizon in the automotive landscape. If so, that could benefit legacy manufacturer General Motors (NYSE:GM). Sure, the headlines all center on Volkswagen (OTC:VWAGY) and its multi-billion-dollar investment in Rivian Automotive (NASDAQ:RIVN). However, one of the beneficiaries could be GM due to the shifting focus on the middle-income consumer. Such a framework favors GM stock, making me bullish on it.
GM Stock a Possible Winner in a Surprise Development
Last week, Volkswagen sparked a huge runup in Rivian shares after it announced a major deal with the EV maker. To start things off, the German auto giant will put $1 billion into Rivian. Plans call for $1 billion each in 2025 and 2026. Further, another $2 billion could be injected in 2026 to form a joint venture to develop new architecture and software.
On paper, the two beneficiaries are the obvious parties: Volkswagen and Rivian. For the former, the famous car company can cut ahead of the line in terms of important EV-related technologies. Theoretically, this effort should bolster its long-term strategy of eventually dominating the EV market. For the latter, Rivian gets a much-needed financial lifeline.
It’s important to not suffer from immediacy bias with RIVN stock. Yes, it’s true that last week, Rivian stock gained just over 30%. However, on a year-to-date basis, shares are still down by more than 36%. Further, since the company’s public market debut, the stock’s value has dropped by about 86%.
Basically, whatever Rivian was trying to do earlier wasn’t working. And what exactly was its prior goal? Selling electric-powered trucks and SUVs, the cheapest of which starts at $71,900. At the upper end of either the truck or SUV format, you’re talking about a price tag exceeding $90,000. If the price-value proposition truly resonated with customers, I doubt that RIVN stock would have lost 86% since its debut.
So, what’s Rivian’s answer? It’s the logical one: start moving the crosshairs away from affluent consumers and toward middle-income buyers. In 2026, the company aims to release its R2 model, which starts at $45,000. A year later, it could debut its R3, with some publications estimating that it may start at $37,000.
However, addressing an entirely new consumer demographic comes with challenges – challenges that General Motors may be better positioned to address. Therefore, GM stock appears compelling.
Consumer Groups Each Have Their Pros and Cons
Among the analyses that have sprouted regarding RIVN stock, I’m surprised that relatively few are discussing the central challenge: each consumer group has its own set of distinct pros and cons. And that makes shifting one’s focal point risky.
For example, one of the inherent challenges that plague the effort of targeting only high-net-worth individuals is that they’re so few in number. Rivian’s problem here is that it’s late to the party. Tesla (NASDAQ:TSLA) has already grabbed a significant chunk of the upper-income market share. Further, Lucid Group (NASDAQ:LCID) sold its EVs around the same time as Rivian, magnifying the congestion.
So, Rivian is naturally turning to the middle-income consumer. However, such a focus will almost certainly favor the legacy auto giants and their pivot to electric mobility. Let’s just be real about the matter. Rivian was founded in 2009. General Motors was founded in 1908.
Of course, the age of a company is only one factor when a consumer assesses a product. However, when you’re talking about a major cash outlay, brand reputation becomes extremely important, especially for – you guessed it – middle-income buyers.
Think of it this way. An affluent consumer might not mind the risks of buying a flashy $90,000 EV from a young enterprise. However, the customer who works for a living has no such luxury. Should something go wrong with the vehicle, such a buyer needs reassurance of readily available support. Notably, a growing body of evidence suggests that EVs are really not that reliable.
Therefore, Rivian might be making a smart move by going down the income spectrum. However, other companies can do the same, turning an innovative deal into a war of attrition. General Motors will likely win that war in a head-to-head matchup.
The numbers speak for themselves. In 2023, GM had free cash flow of nearly $23 billion. On the other hand, Rivian’s free cash flow was -$5.89 billion. It will likely take some time for this figure to pop into the positive. Sure, Rivian moving into the modest-income scene should yield a boost in the top and bottom lines. However, if Rivian is successful, it would necessarily mean that consumer demand for reasonably priced EVs has increased.
Well, that would then suit GM stock better in the long run. It has the facilities, the dealership and service network, and the economies of scale to dominate the middle-income sector. In the meantime, GM can sell its hybrid vehicles and other popular combustion-based products. When the demand profile allows it, the company could shift gears and re-focus on EVs.
And that’s ultimately the main point. Yes, Rivian may get an initial sales bump with its R2 and R3. However, such a dynamic would essentially prove that pricing trumps all. Once interest in modestly priced EVs rises, GM can clobber various upstart competitors thanks to its numerous advantages, including established brand trust, deep dealership network, and the proven ability to scale production to fit the budget of the everyday commuter.
Playing the Patient Game
At the moment, GM stock trades hands at 0.35x trailing-year sales. On paper, that’s extremely undervalued compared to the underlying Auto Manufacturing sector, which runs an average multiple of 1.34x. So, why isn’t everyone clamoring for General Motors shares?
Forward projections aren’t really all that special. In Fiscal 2024, experts anticipate revenue to land at $176.29 billion, up 2.6% from last year’s haul of $171.84 billion. Fiscal 2025 may only see 0.9% growth to $177.84 billion.
However, if the EV war moves over to the middle-income segment, General Motors has the advantage. If you’ll excuse the hyperbole, GM has been around forever, and its dealerships are everywhere. Regular car buyers would almost certainly trust GM over an enterprise that’s younger than they are.
Is GM Stock a Buy, According to Analysts?
Turning to Wall Street, GM stock has a Moderate Buy consensus rating based on 12 Buys, three Holds, and one Sell rating. The average GM stock price target is $56.60, implying 21.7% upside potential.
The Takeaway: GM Stock May Receive a Tailwind from an Unrelated Deal
While business headlines have zeroed in on Volkswagen’s multi-billion-dollar deal with Rivian Automotive, it’s really General Motors that investors should focus on. Because the underlying theme is that Rivian will start focusing on middle-income buyers. However, this framework suits GM stock since the underlying enterprise commands brand trust and an extensive footprint. These attributes make GM a discounted stock worth considering.
