It hasn’t even been six months since General Motors Company‘s (GM) $500 million investment in Lyft, and already the company is pushing forward with huge initiatives.
In a previous article, I explained why GM’s 9% stake in Lyft, and potentially an acquisition later down the line, could eventually add tens of billions to the company’s market capitalization over the next five to 10 years.
While I still believe this to be true, GM might allow investors to realize those gains sooner than expected.
General Motors Wastes No Time With Lyft
GM’s partnership and investment in Lyft had very specific implications: GM wanted a partner to develop self-driving cars.
While self-driving cars is something we hear about often these days, it certainly seems to the average American that the technology is years from being deployed on actual streets and highways.
However, the implications of making this a success are huge. Already, the ride-sharing business is taking money from the automotive industry as many consumers decide it is no longer economical to own a car, pay insurance, and pay for gas and upkeep. And while Uber commands an enormous $80 billion valuation, the actual business model for these top ride-sharing services isn’t all that lucrative.
Back in January, Lyft was on pace to create $1 billion in gross revenue for the coming 12 months, a run rate that has surely risen since then. However, Lyft keeps just 20% of gross revenue — the rest is paid to drivers.
And while drivers will always be a part of the equation to make ride-sharing services effective, GM and Lyft can greatly increase the profits and reduce the costs, thereby increasing the volume of rides, by successfully deploying self-driving technology.
Thankfully, GM recently announced that it will begin testing self-driving Chevy Bolts within the next year on public roads using real Lyft customers.
That means that the days of collecting bigger profits may be near, and seeing as how Uber does not have a big partner for deploying this same technology, there is a good chance that Lyft can steal some of its larger peer’s market share if the technology is implemented effectively, and safely, due to lower ride costs.
News Doors Open for GM
With that said, the partnership with Lyft opens a slew of revenue-creating doors for General Motors that should have big implications for GM stock.
Not only will GM share profits, but General Motors will rent new vehicles to Lyft drivers to create a new revenue stream. GM recently announced that it would supply 125 Chevrolet Equinox SUVs in Chicago followed by other major cities, where it will give Lyft drivers the option to rent vs own or lease.
Eventually, GM will open its renting program up to the general public, but in essence, the Lyft partnership is giving GM the ability to test new ideas on a small scale before rolling them out across its massive network.
Will GM Stock Get a Boost?
All things considered, these sound nice, but it still does not address how such moves will provide a boost to GM stock. The answer lies in what GM is doing to help Lyft steal market share from Uber.
Currently, Lyft’s valuation sits at just $5.5 billion versus $80 billion for Uber. If GM’s Maven program can attract drivers who were denied employment at Lyft due to vehicle specifications (reportedly more than 150,000) and can attract new riders by having more drivers and cheaper rides via self-driving technology, then it can steal a significant chunk of Uber’s business.
Not to mention, the ride sharing business continues to grow organically. Therefore, if Lyft can eventually climb to a $40 billion valuation, about half of Uber, then GM’s stake becomes more valuable.
Furthermore, it is obvious that bigger multiples are being applied to the likes of Uber and Lyft vs GM stock, which trades at just 5x earnings.
By succeeding in this arena, GM stock could experience a great deal of multiple appreciation, thereby driving its price higher. What makes this so enticing is the fact that GM is being so aggressive in capitalizing on its partnership with Lyft.
In other words, GM stock should be getting a “Lyft” in the foreseeable future, something all longs like to hear.
As of this writing, Brian Nichols owns GM stock and invested in Lyft.