General Motors Co. (GM, Financial) is one of the world's largest automobile manufacturers and the name behind brands such as Chevrolet, GMC, Buick, Wuling and Cadillac. Since its incorporation in 1908, the company rose to dominate the U.S. auto industry and became a public company in 2010.
Unlike some of its peers, General Motors has been able to consistently earn profits since emerging from its most recent bankruptcy in 2009, although business conditions have changed dramatically in the last few years. Taking into account the changing industry conditions, General Motors has decided to expand into electric vehicles, and the company plans to spend $35 billion through 2025 to launch next-generation EVs and self-driving vehicles.
Ambitious plans
General Motors plans to double its revenue to about $300 billion by 2030, and almost a third of those sales are expected to come from EVs. To achieve this target, the company plans to introduce 30 new electric vehicles by 2025. Revenue from software and other services is projected to hit $80 billion in 2030 (this category was just a mere $2 billion last year).
General Motors revealed its 2024 Chevrolet Silverado EV pick-up at the January Consumer Electronics Show in Las Vegas, and this truck has already garnered the attention of vehicle lovers in America. The truck is scheduled to go into sales next year and boasts a range of more than 400 miles and 350 kW/800V fast-charging, outpacing the 300 miles of range and 150 kW of the F-150 Lightning, the electric truck from Ford Motor Company (F, Financial), which is scheduled to hit the market this year.
The company also announced in December that it is working with POSCO Chemical (XKRX:003670, Financial), a South Korea-based company that makes materials for EV batteries, to build a North American factory that will make materials for battery cathodes by 2024. If this becomes a success, the company will not have to rely on cathodes produced by other companies, and General Motors will be able to lower its costs and have better control over its supply chain.
General Motors is not only making new EVs but also plans to sell EV components that transform gas-powered cars into electric vehicles. The company projects the electrification market could be worth a staggering $20 billion by 2030 as traditional automakers will have no option but to embrace this new technology to remain relevant amid pressure from government authorities.
General Motors also has a controlling stake in Cruise, a self-driving car company, and it expects to earn $50 billion in revenue from the investment by 2030.
Most of these positive developments are not reflected in the stock price yet. The company is valued at roughly eight times projected 2022 earnings, while Tesla Inc. (TSLA, Financial) trades at 117 times expected earnings. With the ongoing penetration of the EV industry, it would be reasonable to expect General Motors to attract higher valuation multiples in the future, similar to that of pure-play electric vehicle manufacturers.
The semiconductor shortage is taking a toll
General Motors reported adjusted earnings per share of $1.52 for the third quarter of 2021, ahead of analyst projections for just 98 cents per share in earnings. The reported revenue of $26.78 billion, however, was a decline of 25% in comparison to the third quarter of 2020, and this lackluster performance came on the back of the global semiconductor shortage. Top executives at many automobile companies expect these supply chain headwinds to last through the end of this year, which might keep General Motors shares under pressure temporarily until things improve from this front.
Heading in the right direction
In the long run, General Motors will reduce the production of combustion engine automobiles while focusing more on electric vehicles. The Global EV market, which includes both battery electric vehicles and plug-in hybrid vehicles, is set to boom in the next decade. According to data from Deloitte, total EV sales will grow from 2.5 million units in 2020 to 11.2 million units in 2025 and eventually reach 31.1 million units by 2030. This suggests the global EV market is set to grow at a compound annual growth rate of 29% over the next 10 years, securing around 32% of the total market share for new car sales by 2030.
Amid this favorable outlook, it makes sense for legacy automakers such as General Motors to expand into this business segment to secure growth. Investors, however, should remain patient until General Motors succeeds in making a full transition into electric vehicles, as this transitory phase could result in volatility in the stock price.
Takeaway
General Motors has made notable progress in the last couple of years to venture into the electric vehicle industry, but the market has not rewarded the company for making these much-needed changes to secure the sustainability of future earnings. The company seems to be cheaply valued in the market, assuming General Motors will attract higher valuation multiples in the future once the business transformation is complete.
