General Motors Company (GM) as a business has never been better, and 2015 was yet another record year.
GM sold 9.8 million vehicles last year, a 0.2% increase over its previously set sales record in 2014. Yet despite this strong performance, GM stock is anything but thriving, trading at a very conservative multiple of 5 to this year’s expected earnings per share.
Clearly, GM stock needs a spark, and buying the ride-sharing service Lyft could be the big move General Motors needs.
If General Motors were to buy Lyft, it would not create a significant revenue increase. In fact, investors would not even notice the purchase on GM’s income statement.
Back in January, Lyft indicated that it had reached an annual gross revenue run rate of $1 billion, and was now completing seven million rides per month.
With Lyft earning 20% of gross revenue, the company is making about $200 million of that $1 billion in gross revenue, plus a $1 “Safety & Trust” fee per ride that would add another $84 million in annual revenue based on seven million rides per month. While impressive, it is still insignificant to GM’s $150 billion-plus annual revenue.
Nevertheless, it is the speculative value that matters in this case. When it comes to Lyft, there is a lot of upside speculative value to be had.
Just recently, Lyft completed a capital raise that valued the company at $5.5 billion. This offering was led by GM’s $500 million investment, which gives the company a 9% share.
That said, Lyft is growing very fast. In just one year it has increased its presence from 65 cities to nearly 200, and its valuation has skyrocketed.
Back in September 2011, Lyft completed its Round A funding at $6 million. In 2013, its Round B was $15 million and C jumped all the way to $60 million later that year. Here we are, less than three years and three rounds of funding later, and Lyft’s value has soared from a few hundred million to $5.5 billion!
If GM were to make an offer in the range of $8 to $10 billion, or wanted to spend another $3 billion to take a controlling stake, it would instantly own an asset of rapid value appreciation that is showing no signs of slowing down.
How Lyft Bodes for GM Stock
What investors must keep in mind is that companies like Lyft and Uber are completely changing the taxi industry, adding jobs to the economy and, in many instances, changing how consumers value the ownership of vehicles. Lyft is also partnering with large companies like GM and Alibaba, among others, with the potential to branch out into new businesses as well.
For example, GM’s investment in Lyft centers around the development of self-driving cars, and using that technology for ride sharing. If successful, a much larger percentage of gross revenue becomes realized revenue and this fast-growing company becomes even more attractive in terms of actual revenue and profits.
All things considered, disruptive companies like Lyft have the potential for significant value appreciation as investors place bets on the future, not necessarily the past or present. We have seen this in the auto industry with Tesla (TSLA), and if GM were to purchase Lyft, it could very well have a profound effect on GM stock and investor sentiment.
For one, GM stock could trade higher by 60% and it would still represent a multiple of just 8 times earnings. That is still very cheap. Yet, that 60% increase in value could create nearly $30 billion in new market capitalization, making the acquisition well worth the price if it leads to the expected multiple appreciation.
Personally, I think multiple appreciation would be an automatic reality. While some may criticize the high price that GM would have to pay, others will look at the discounted price to Uber’s $62.5 billion valuation and realize that whatever price paid by GM represents a good deal relative to Uber.
After all, GM would not only be getting Lyft’s current business, but it would be incorporating Lyft with GM’s fleet of vehicles and its resources in the industry. This would be an advantage that Uber could never replicate, and would make Lyft’s already bright future look even better.
As of this writing, Brian Nichols was long GM stock.
More From InvestorPlace
- Should I Buy Or Sell Tesla (TSLA) Stock? 3 Pros, 3 Cons
- Facebook Inc: Genius Ad Innovation Will Move Fast and Break Things (FB)
- 10 Best Stocks to Buy for a Quick Pop