General Motors (GM) is starting off the year with a big move on the tech front. Today the No. 1 U.S. automaker announced a $500 million investment in Lyft, which is a fast-growing ride hailing service.
While GM stock was off about 3% to $33 in early trading, the deal should still be considered a positive for shareholders — at least those focused on the long-term.
Now, it’s true that Lyft is a distant No. 2 in its category. The dominant player is Uber, which has raised over $10 billion in funding and sports a valuation of $62.5 billion.
Lyft, on the other hand, has raised a total of about $2 billion since its founding in 2012.
But the company has certainly been gaining traction. Lyft currently provides service in over 190 cities and logs about 7 million rides per month. As of October, the company hit an annual gross revenue run rate of $1 billion.
Besides GM, Lyft has also snagged many other top-tier investors. Some include notables like Alibaba (BABA), Andreessen Horowitz, Icahn Enterprises (IEP) and Rakuten.
Impact of Lyft Agreement on GM Stock
As for the GM-Lyft partnership, it is wide-ranging. During the next few months, the companies will roll out “rental hubs,” which will allow Lyft drivers to rent vehicles on a short-term basis. In other words, this could be a nice money-making opportunity for people who do not drive their own cars very much. A key to this will likely be the tremendous scale of GM, as well as the benefits from its massive leasing arm, GM Financial.
Yet the biggest part of the deal — which will likely be important for GM stock — is the creation of an autonomous on-demand network. The vision is that people will be able to use their mobile app to get a car, which will be driverless!
Keep in mind that GM has been investing substantial amounts in autonomous vehicles. But the company also has other valuable assets, such as with its OnStar platform. There have also been key partnerships like with Mobileye (MBLY).
Yet shouldn’t investors in GM stock still be worried? After all, in a world of ride-hailing, will there be less demand to purchase cars? Perhaps so. But then again, GM has a thriving business with trucks and SUVs, which are generally for suburban and rural areas — generally places where there is likely to be less impact from ride-hailing services.
Besides, GM really has no choice but to innovate. The fact is that the auto industry is undergoing tumultuous changes — as seen with operators like Tesla (TSLA), Alphabet (GOOG, GOOGL) and even perhaps Apple (AAPL) — and automakers cannot be in denial.
The good news is that the senior management seems to understand this — and this should be encouraging for holders of GM stock. According to CEO Mary Barra, “We’re going to disrupt ourselves, and we are disrupting ourselves, so we’re not trying to preserve a model of yesterday.”
Bottom Line for GM Stock
For the past year, GM stock has been a loser, off about 5%. And yes, there are certainly legitimate concerns about the overall auto market, which could come under pressure because of the sputtering global economy.
But for GM stock, it appears that much of the bad news has already been baked in, with the forward price-to-earnings ratio at a mere 6X. By comparison, Ford (F) trades at 7X and Toyota Motor Corporation (TM) has a multiple of 9X.
Oh, and yes, GM stock has an attractive dividend of yield 4.2%.
More importantly, as seen with the deal with Lyft, GM is pushing innovation.
In fact, it looks like the automaker is positioned nicely to lead the changes in the industry — not be a victim of them.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
