T-Mobile US Inc (TMUS) disrupted the entire wireless industry by sparking an unprecedented price war, and it has been able to capture just about all of the industry’s growth by staying two steps ahead in knowing what the consumer wanted in advance. Thankfully for General Motors Company (GM) stock holders, GM seems to be a similar step ahead in the typically cut-and-dry auto industry.
Earlier this year, GM made a series of moves that position the company as a leader for autonomous technology and ride sharing. GM launched and acquired several companies as part of these moves and at the epicenter is a $500 million investment in Lyft that will likely tie together all that General Motors has planned.
With that said, there are two growing problems in the new car sales world that manufacturers like GM have not encountered before.
First, vehicle leasing as a percentage of new car sales is soaring. It rose to 28% last year from historic levels near 25%, and in February jumped to 32.3%. Second, the rise of Uber and Lyft is devaluing the need to own a car, with many consumers around the country electing to “ride share” versus own.
Nonetheless, if GM does not get ahead of this growing trend, then Uber and Lyft will end up being the T-Mobile to its industry. Thankfully, General Motors is getting ahead of this trend, not only with the $500 million Lyft investment, but also with the launch of Maven.
A Head Start for GM Stock
Maven is a car rental program that lets consumers rent GM vehicles. General Motor’s launch of Maven was seen as independent from its Lyft investment, with the latter intended to advance autonomous technology. However, we are starting to see these GM investments and projects intertwine.
Specifically, GM just announced a program with Lyft where it will rent vehicles to drivers, presumably through Maven. GM will supply 125 Chevrolet Equinox SUVs and Lyft drivers will then pay $99 per week plus 20 cents per mile if they complete fewer than 65 trips per week. If they complete over 65 trips, the mileage is free.
GM will roll this service out in Chicago, followed by Washington D.C., Boston and Baltimore, where 150,000 Lyft applicants were denied employment because their cars did not meet the required specifications. Hence, this could give Lyft a big boost towards catching the current ride sharing king Uber.
GM Becomes T-Mobile
General Motors now has a significant financial interest in ride sharing, renting cars, autonomous technology and all of the things that could eventually cause chaos to its industry. At the surface, it may look like a successful restaurant sharing its recipe with a new competitor, but in reality, there is much more substance and there are numerous potential benefits for GM stock.
What GM has done is set itself up to become a new car renting powerhouse. Yes, leasing is sort of like renting, but consumers still have a massive financial obligation that is playing a role in their decision to bypass car ownership altogether. By renting to businesses like Lyft and also to the general public with Maven, GM can offer vehicles at a bigger profit and cheaper rates than the likes of Hertz Global Holdings Inc (HTZ) could ever dream of.
At $99 per week, GM can create about $28,800 over the course of six years, or $4,800 in one year before selling the vehicles used. Also, if it charges 20 cents per mile, and the driver travels 10,000 miles a year, that adds another $12,000 over six years, or $2,000 per year. Given that the LS Equinox MSRP is at $25,410, GM is clearly collecting more revenue this way.
Furthermore, by going this route, consumers don’t feel the commitment associated with ownership, don’t have to pay interest rates and insurance and can rent new vehicles for possibly a cheaper price than it costs to own. In essence, it is cutting out the banks and dealerships.
Therefore, GM seems to be going in a direction that is very similar to T-Mobile. In my opinion, it will be a blessing for GM stock. A look at Hertz unveils operating margins that are twice that of GM, a business that General Motors could likely replicate given its ability to create inventory at manufacturer prices while offering consumers truly unbeatable rates.
When you consider the rate at which consumers are switching to ride sharing over car ownership, and their reasons for doing so, renting seems like a terrific, low-risk, high-margin opportunity for General Motors. Not only could it boost the value of its investment in Lyft, but also give it a significant advantage over the likes of Ford Motor Company (F), thereby becoming a major catalyst for GM stock.
As of this writing, Brian Nichols was long GM.
