When push comes to shove, General Motors Company (GM) and Ford Motor Company (F) might look like the same stock, but all that will be changing very soon, with Ford and GM taking very different paths for the future.
That change in direction creates very different investment outlooks for these companies for the first time in years, with GM having the least risk and most upside.
GM is investing in autonomous technology and Ford is betting on electric cars.
Ford Bets Big on Electric Cars
Late last year, Ford unveiled a plan to invest $4.5 billion in addition to a $9 billion fund that Ford created that’s in large part used to develop new battery technologies. Ford wants to make 40% of its lineup electric or hybrid by 2020, thereby adding 13 new electric vehicles.
That’s a huge bet for a company that has nearly $150 billion in annual revenue, all tied to the development and sales of vehicles.
Ford’s decision to embrace electric vehicles is nice, but will electric vehicles really create enough demand to meet Ford’s high expectations, and can Ford make electric vehicles profitable, something that no other company has managed to accomplish?
Once more, Ford is making a huge bet, and with Ford spending so much on this venture, it has to succeed. Not only would failure result in significant market share loss — and a likely reduction in gross margin — but it will set Ford back many years due to the billions it is spending on R&D.
GM’s Superior Plan
With that said, what makes GM’s venture different is not that autonomous technology is more promising than electric vehicles, or that GM has a better shot at success. Instead, it is the partnerships that GM is forming to increase its chances of success, the lack of capital it is investing to make its goal a reality and that it is protecting its existing $150 billion business by not going all-in on an electric vehicle model that is yet to be proven at scale.
In retrospect, GM’s initiatives in autonomous technology are a bonus, so if it works, then wonderful, but if not, then no big deal.
Albeit, GM has made four key moves. First, it acquired a failed business called Sidecar that once competed against Uber. Then, GM launched a home-grown program called Maven, which allows consumers to rent GM vehicles. Third, GM invested $500 million into Lyft to fund autonomous research in hopes of creating driverless taxis. And most recently, GM acquired a self-driving software company called Cruise Automation.
With these four moves, it is quite clear what GM hopes to accomplish: It wants to become a major player in the ride-hailing industry, but without drivers, and while using GM vehicles.
Beyond that, GM probably hopes to sell self-driving vehicles to consumers.
If GM can get this right, it would create a new business with super high margins, a business where it is using its own vehicles at production prices without the costs of wages.
While it will take GM many years to get this program off the ground, it would certainly be very lucrative for GM if successful.
GM Stock vs Ford Stock
Nonetheless, both GM and Ford stock are greatly undervalued as investment opportunities, trading at 6 and 7 times next year’s EPS, respectively. However, if Ford flunks in electric cars, then Ford stock could end up looking pricey right now due to the high costs it would require and the negative effect on margins.
In fact, even if successful, a strong electric car business might still have a negative effect on margins.
Meanwhile, we don’t know the exact size of GM’s investment thus far, besides Lyft, but one has to assume that GM has not paid too much on a failed Uber competitor and a startup-level software company. I doubt its investment to date exceed $1 billion to make its vision a reality.
But if successful, there is really no limit on how valuable it could be. It could become another Uber, which currently has a valuation of $62.5 billion, about 26% more valuable than GM stock. Even if GM completely fails with its new investments, the risk is minimal, whereas the upside is clearly high.
For this reason, coupled with a completely different outlook for Ford stock based on its own direction, one must conclude that GM stock has the greatest combination of upside and safety between the two companies … by a long shot.
As of this writing, Brian Nichols owned GM stock.
