GM stock, after going nowhere for nearly a decade, took a spin in the fast lane this fall. In late November, GM stock dashed to the cusp of an all-time high. Now GM stock is facing its first big test since Wall Street began to gain confidence in its EV progress. Yet that test also offers investors the first entry point since General Motors (GM) unveiled its Hummer EV in October. So is now a good time to buy GM stock?
GM Stock Priced Like An Underdog
GM says it’s headed for the front of the pack, yet it’s still priced like an underdog.
While GM earnings shifted into overdrive in Q3, those earnings come from sales of vehicles with internal combustion engines. That’s a business which Morgan Stanley analyst Adam Jonas describes as a “melting ice cube,” destined for a long-term decline.
Wall Street analysts argued in recent months that GM should spin off its Ultium electric vehicle operations to get a more proper valuation. Deutsche Bank’s Rosner had said that a spinoff of EV operations could fetch a value of $20 billion to $100 billion, while easing access to capital and top talent.
Yet GM CEO Mary Barra killed that idea at the Nov. 19 Barclays Global Automotive Conference. “Our integrated strategy is a competitive advantage for GM.”
As GM funds itself through profits, pure-play EV automakers, including Tesla and a host of Chinese rivals are building up huge EV war chests by issuing stock. Meanwhile, Toyota (TM) and EV battery startup QuantumScape (QS) have surged lately on evidence of their separate progress toward a solid-state EV battery that has potential to offer faster charging, longer distance and greater safety.
Reuters reported this week that Apple (AAPL), with far greater resources, is working toward its own EV battery breakthrough and could produce an electric, autonomous vehicle in 2024. “If Apple were to really throw its weight around and intensify competition,” that would strengthen the “old autos bear case” for GM stock and others, Jonas wrote.
It’s hard to know where GM stands in the EV hierarchy, because such big technology breakthroughs may not be ready for the production line until mid-decade or later. Meanwhile, GM also has made some head-turning claims about its next-generation EV battery.
On Nov. 19, GM mapped out its road to topping its prior goal of 1 million EV sales by 2025 and achieving big EV battery cost-reductions and efficiency gains.
Barra said GM will realize $2 billion in cost efficiencies from shared engineering, manufacturing, marketing and corporate cost. Cash flow from GM operations will fund an accelerated $7 billion in EV investment through 2025, while still allowing General Motors to reinstate its dividend in 2021.
Barra also said that GM’s flexible Ultium EV architecture has helped cut vehicle development time by nearly 50%. She said the launch of the Cadillac Lyriq had been moved up to the first half of 2022, about nine months earlier than initially announced. GM will speed up the launch timing of 12 EV models, some by as much as 40 months.
“We’re committed to fighting for EV market share until we are number one in North America, achieving margins similar to or higher than our ICE business and exceeding our previous target of selling 1 million vehicles globally by mid-decade,” Barra said.
GM Stock Chart Technical Analysis
GM stock soared in October and November on the Hummer EV launch and stepped-up EV factory and production plans. Shares rose rose as high as 46.71 on Tuesday, Nov. 24, just below its October 2017 all-time high of 46.76.
Since then, GM stock has taken a breather. Shares have since slipped as much as 13%, including a 2.7% drop in Nov. 30’s stock market action on a scaled-back deal with Nikola.
Yet that weakness now offers a potential opportunity. After leading stocks break out and go on a run, eventually they’ll take a breather and fall back to their 50-day or 10-week moving average. This is often a place where mutual funds and other big institutions will add shares. As long as the current stock market rally is intact and the 50-day/10-week line is above the prior buy point, investors can consider the first or second test of this key area a possible buying opportunity. Watch a stock closely to make sure it finds support. Leading stocks often do. Ideally, you’ll see a bit of a bounce before you pull the trigger.
Last week GM stock rebounded from just above its 50-day line and just below its 10-week line. Investors could buy General Motors stock now or if it retakes Thursday’s intraday high, which would also be above the 21-day line.
GM stock now sports an 81 Relative Strength Rating, meaning it has outperformed 81% of all stocks over the past 12 months.
Meanwhile, the relative strength line, which shows how GM stock performs vs. the S&P 500 index, has turned down after surging to a 12-month high last month. Yet the technical picture has improved dramatically since July, when GM’s RS line hit a historic low.
General Motors Earnings And Sales Trends
General Motors earnings haven’t seen steady growth in the past couple of years, as auto sales peaked in the U.S. and hit a pothole in China. A UAW strike hurt results in the second half of 2019. Then Covid-19 marred the first half of 2020.
But in Q3, everything seemed to fall into place. General Motors earnings per share surged 65% to $2.83, as GM “showcased the benefit from its deep structural cost reductions,” Rosner said. Revenue of $35.5 billion was flat from a year ago and in line with estimates.
In the third quarter, GM deliveries in the U.S. recovered to 665,192 vs. 492,489 amid the coronavirus lockdown in Q2. Deliveries still fell 10% from a year ago, but GM said each month saw improvement, and September sales exceeded the year-ago total.
GM restarted factories on May 18 after a two-month coronavirus suspension. Lean inventories have held back sales, but GM has said that large pickup and full-size SUV plants are now all operating on three shifts and at maximum overtime.
With cheap oil prices, General Motors appears well-positioned in the U.S. market, seeing demand for pickup trucks and crossover SUVs.
Now sales in China also are on the upswing. General Motors and its Chinese joint-venture partners saw deliveries rise 12% to 771,400. GM sales outpaced the Chinese market as a whole, a nice turnaround from Q2, when deliveries fell 5% as China’s market grew 10%.
GM-Nikola Deal Gets Small
On Sept. 8, General Motors and Nikola announced a partnership that would see the top U.S. automaker build several versions of Nikola’s Badger pickup truck using GM’s own fuel cell technology and Ultium EV battery. GM also agreed to supply fuel cells to Nikola’s heavy-duty trucks, expanding GM’s market opportunity. In exchange for the services it provides, GM was supposed to receive $2 billion worth of Nikola stock.
Yet the deal almost immediately came under fire, and Nikola’s stock dived as its founder left the company amid allegations of being a huckster and of personal misconduct. The revised terms revealed Nov. 30 suggest that GM had an earlier lapse in judgment.
Now, GM won’t put its own capital on the line in exchange for NKLA stock, and the Badger won’t be built.
The reshaped deal “somewhat lowers confidence in Nikola’s longer-term outlook, and therefore GM´s ability to eventually monetize its fuel-cell technology,” wrote Deutsche Bank analyst Emmanuel Rosner.
The lack of a big negative reaction for GM stock suggests that investors see General Motors fuel-cell ambitions as gravy, not the main dish. But the potential remains intriguing.
Hummer EV Buzz
GM unveiled the Hummer EV truck during the World Series, touting “maneuverability and traction unlike anything GM has ever offered.” The Hummer’s CrabWalk mode, allowing it to move diagonally to get through tight off-road spots, quickly went viral.
“I think investors are crab-walking back to the stock,” Morgan Stanley’s Adam Jonas said on an Oct. 21 analyst call with management.
The Hummer EV, which will take on the Tesla Cybertruck, is due out next fall. GM says the Hummer EV can travel 350 miles on a full charge and reach 60 miles per hour in three seconds. The Hummer also will take on upcoming electric trucks from Ford (F) and Amazon (AMZN)-backed Rivian.
The Rivian RT1 will likely be released before the GM Hummer, but the Tesla Cybertruck will not be out until 2022.
Prices for the initial Hummer EV version start at $112,595. General Motors said all available reservations for the Hummer EV sold out within 10 minutes. GM reportedly received 10,000 pre-orders and is considering boosting production plans.
GM plans cheaper Hummer EV versions in future years.
General Motors’ Ultium Battery Future
GM had a puzzle to solve: How could it compete broadly in the still relatively small EV market, en route to an all-electric future, without frittering away its financial strength? The answer came with the March 4 unveiling of its Ultium battery and flexible platform.
The Ultium stands apart for its ability to be stacked either vertically or horizontally in the battery pack, to optimize the layout of each vehicle. The biggest stack is said to have the power to reach 400 miles on a full charge. The platform can accommodate a wide range of trucks, SUVs and cars.
CEO Mary Barra has said that GM’s multisegment EV strategy has “economies of scale that rival our full-size truck business with much less complexity and even more flexibility.”
The first generation of GM’s coming EV lineup “will be profitable,” the company said. Since then, GM has detailed a much more complete vision of its EV future.
In September, GM unveiled its strategy to produce electric drive systems that are designed in-house to deliver cost and performance benefits. GM says the five drive units and three motors will offer the power and versatility to work with the full range of some 20 different EVs it plans to produce by 2023.
GM said these Ultium Drive systems “will be more responsive than its internal combustion equivalents with precision torque control of its motors for smooth performance.”
In April, GM reached a deal with Honda Motor (HMC) that will see it jointly develop two electric vehicles for the Japanese automaker using GM’s Ultium battery.
The Honda deal created a partnership model that GM hopes will entice other rivals. Barra said that supplying GM technology to rival automakers would build “scale to lower battery and fuel cell costs and increase profitability.”
Now GM is highlighting progress in testing its next-generation Ultium battery chemistry. “We believe we are on the battery-cost frontier today and we intend to set the pace for the future,” said GM product development chief Doug Parks.
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GM Cruise Vs. Tesla And Alphabet Waymo
In November, General Motors’ Cruise autonomous vehicle division began testing five driverless cars in parts of San Francisco, a big step forward after a period of reduced expectations.
“We’ll be the first doing it in a complex urban environment,” Barra said on the Q3 call. “And why that’s so important is, if you think about even today’s ride sharing, the opportunity for profitability is in dense urban environments.”
On Nov. 10, Walmart (WMT) said it will begin a pilot test with Cruise in Scottsdale, Ariz., allowing contactless customer deliveries.
In January, General Motors unveiled its six-passenger Cruise Origin, which has no steering wheel. But the company laid off 8% of its workforce in May as it paced itself for a future that is still just over the horizon.
Apple, Alphabet (GOOGL)-unit Waymo, Uber (UBER), Ford (F) and Tesla are among a large field of well-funded competitors in the autonomous-vehicle market. Yet so far there’s been one detour after another. Covid-19 is yet another obstacle to shared rides.
Cruise had hoped to launch a robotaxi service in San Francisco late in 2019. GM and others were too optimistic about how fast they could solve what Barra has called “the greatest engineering challenge of our lifetime.” She remains optimistic about unlocking “the multitrillion-dollar market potential” of self-driving cars, though some experts now think that market might not develop until late this decade.
GM bought Cruise Automation for $1.1 billion in 2016. Key investors include Honda, which in 2018 put $750 million into the venture and agreed to put up $2 billion more over 12 years.
Tesla, meanwhile, has released a new Full Self Driving beta version to select drivers. But despite the name, Tesla FSD is still a Level 2, hands-on system, while Cruise and Waymo are Level 4.
Is GM Stock A Buy?
GM stock just went on its best run in years. The technical picture has improved dramatically. GM’s 74 IBD Composite Rating is now solid, though that still puts it in the second tier behind Telsa, with a stellar 99 IBD Composite Rating. IBD research shows that all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
Still, fundamental metrics don’t tell the full story. The Covid hit to earnings, a restructuring and strike are all in the rearview mirror. Meanwhile, GM’s traditional business faces a long-term decline. Undoubtedly, there is lots of execution risk and uncertainty, but Wall Street sees plenty of promise developing. If analysts see GM as a “stable of unicorns” with high-growth potential, as Morgan Stanley’s Jonas has said, they could begin to use a more flattering lens for valuing future earnings.
However, there’s no indication that GM will spin off its EV operations. GM joint ventures in China could be hurt if U.S.-China tensions grow. GM Cruise could turn out to be a robotaxi leader, but don’t hold your breath. The biggest unknown is whether GM will be able to keep pace with Tesla, which aims to drive down the price of its EVs to $25,000 in three years, and others on the cutting edge of EV battery development — including Apple.
Despite all that, the bullish bounce off the 10-week average, after a pullback from a strong advance, shows GM stock is acting just like it should.
Bottom line: GM stock is a buy as it rebounds from the 10-week line. But investors should be aware that GM stock is a hybrid play, depending on profits from gas-burning SUVs today to pave the way to an EV future.
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