Earlier this month, Tesla Inc (NASDAQ:TSLA) briefly surpassed General Motors Company (NYSE:GM) as the largest U.S. automaker based on market capitalization, causing many to question whether to add TSLA stock to their portfolios.
So far this year, TSLA stock has gained a whopping 40% and its market cap rose as high as $51 billion. By comparison, GM stock is down roughly 4% on the year with a market cap that’s neck and neck with Tesla stock.
The fact that investors are flocking to Elon Musk & Co. over a tried-and-true GM stock speaks volumes about the confidence Wall Street has in Tesla’s future.
Because Tesla has only been able to produce a profit twice since going public, TSLA stock’s current valuation reflects its future potential. Even TSLA CEO Elon Musk admitted the stock was “absurdly overvalued” based on past performance, but said the price instead reflects the future cash flow Tesla shareholders can expect.
So where does that leave GM? Has the car company been overtaken or is the Tesla rally irrational exuberance? My guess is that it’s a little bit of both.
TSLA Stock vs. GM Stock
Sure, Tesla stock overtook GM in terms of market cap earlier this month, but GM is still head and shoulders in front of TSLA in terms of financial performance. Tesla sells just a fraction of the number of vehicles sold by General Motors each year, and GM reported profits upward of $9 billion in 2016. Tesla? A $675 million loss.
Comparing the two companies in terms of investment potential is difficult. They are in two very different categories! While GM is an established value brand that plays by investors’ rules, Tesla is a cash-burning upstart that trades solely on future potential.
As an investor, the way a company makes and uses its money is an important metric to consider, and GM clearly wins in this category.
Despite worries that the U.S. auto market has reached its peak, GM’s management is projecting per-share earnings of more than $6 this year and the firm is undergoing several operational changes to further improve its profitability.
GM is dropping it’s less profitable European business, which is expected to save the firm around $1 billion. Not only that, but General Motors is shifting its production so that all of its vehicles can be produced using just four platforms. Such a move would cut down on costs dramatically and improve manufacturing time and efficiency.
Tesla has been touted as arguably the most innovative automaker in the U.S. because of the firm’s autonomous driving efforts and its success in making luxury electric vehicles.
However, just because TSLA was first in the electric car market doesn’t mean it will remain at the top of the pack. Competitors like GM and Ford Motor Company (NYSE:F) have their own fleet of electric cars that are continually being improved.
Not only that, but GM has been working on its own autonomous driving technology and the firm’s substantially larger budget and experience in the auto industry makes it one of the best contenders in the industry.
A study by Navigate Research named GM as having the most potential in the self-driving space of all 18 companies evaluated. Tesla, on the other hand, came in toward the bottom half of the pack.
Bottom Line on TSLA and GM
That’s not to say that buying TSLA shares is a bad idea. The company boasts something that no other U.S. automobile maker has — youth. Tesla is just starting to iron out the details of its operations and has been ramping up production.
TSLA is a growth stock, something that GM can’t ever claim because the company’s established business doesn’t have as much room for expansion as TSLA’s does.
Not only that, but even though TSLA’s core business is electric vehicles, the company is more than just an automaker — TSLA is also a tech firm and an energy company, two spaces that are likely to see a great deal of growth in the years to come.
GM stock offers investors security and consistency while TSLA is likely to bring volatility to your portfolio. For long-term investors with a stomach for risk, TSLA stock is a good bet. For investors looking for solid companies with sound financials, however, GM is the better pick.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
