General Motors Company (NYSE:GM) has slipped following earnings. GM stock has exploded from $35 to $46 since summer. However, shares are now clearly stuck in reverse following Q3 results.
What to make of the results? On the plus side, it’s clear that GM’s corporate changes over the past few years are working. The company is shedding its bad image from a decade ago. It’s now posting consistent market-share gains and holding the line on pricing. But, bears will argue that the positives are already priced into GM stock here. Let’s take a closer look.
GM Stock Cons
Quarterly Results Weren’t Good Enough: On the surface, GM put up good numbers last quarter. It beat on both the top and bottom lines. And for the first time in ages, all of its business segments were profitable on the quarter, and that even includes the perennial disappointment that is the South American division.
However, while GM stock traded up the day of results, after results, it has slumped. GM stock is now down 10% from its recent peak. This is due to several caveats with GM’s report. For one, hurricane damage is leading to new demand now, but that is transitory and will be gone by 2018. For another, since GM stock had run up so much prior to this quarter, expectations were too high. We appear to be near the peak of this auto cycle for demand, and nothing in GM’s report seems to indicate otherwise.
Uber/Lyft Threat: Ride-sharing services such as Uber and Lyft are greatly changing the economics and user patterns for automobiles. This is particularly the case in big cities. Fewer people, especially millenials, see the need to buy a vehicle (or especially a second one) as ride-sharing goes more mainstream.
That alone wouldn’t necessarily be a problem. The Uber drivers will have to replace their vehicles frequently. The crux of the issue is total vehicle miles traveled, or “VMT.” In theory, total VMT wouldn’t change if someone forgoes car ownership and switches to ride-sharing exclusively.
In practice, however, ride-sharing tends to increase vehicle utilization. UberPool rides, where several passengers travel in the same vehicle, are one such example. Trips to the airport are another. In the past, you might take a family member to the airport, then drive home with an empty vehicle. Now, the Uber driver catches another fare at the airport, and fewer total miles are driven. Additionally, ride-sharing services are more efficient thanks to software. Their drivers don’t have to travel aimlessly, like traditional cabs, until they find a curb pickup. All this reduces total driving, and thus the need for replacement vehicles.
SUV Focus: GM has said recently that it will be focusing more on SUV production, as opposed to compact cars. There is a clear business motive for such a move: SUVs deliver much higher profit margins.
It’s understandable to cut back on smaller car concentration at a time when sales in that category are lagging. Putting the emphasis back on SUVs and trucks risks making the same mistake that crippled the automakers prior to the financial crisis, however. SUV and truck sales tend to be highest both when the economy is relatively strong and oil prices are low. Oil prices soared and the economy soured in 2007-2008, leaving the automakers on death’s door. History doesn’t have to repeat, but it’s worth noting that oil prices are creeping up again now, while the economy has gone almost a decade without a recession.
GM Stock Pros
Improving Market Share: The auto industry is slowing in 2017 compared to the record-setting 2016. That’s not good news for GM stock. What is good, however, is that GM is managing to hold its vehicle sales nearly flat, and thus its market share is rising.
October represented the third straight month in which GM made up 17% or more of the American market. This is the first time that General Motors has managed that feat since 2011. It’s taken long enough, but it seems that the perception that GM makes poor cars and was merely a ward of the state post-financial crisis is finally fading.
Lyft Isn’t All Bad News: It’s true that GM stock is vulnerable to ride-sharing services from a demand standpoint. However, there are two mitigating factors also in play. For one, for $500 million, GM purchased a 9% stake in Lyft last year. That didn’t seem noteworthy at the time. However, given Uber’s horrible 2017, I’d guess that Lyft has become a lot more valuable. Uber isn’t the untouchable sector leader that it used to be. GM stock would benefit greatly if Lyft ends up going public at a large valuation.
The other good news is that ride-sharing services may be creating new driving demand. It’s basic economics that when price falls, demand goes up. With Uber and Lyft fares way below traditional taxis in many markets, it encourages people to take more voluntary trips. An evening bar trip that might seem risky if you had to drive yourself or pay $25 for a cab each way looks a lot different if you cut that fare in half. Additionally, particularly within UberPool-style carpooling services, the ride-sharers are now stealing passengers from public transportation.
Increasing EV Sales: The Chevy Bolt EV continues its impressive 2017 sales trajectory. The Bolt had already surpassed the previous generation Chevy Volt in 2017 sales, and it is now heading toward the #1 overall spot.
The Bolt is riding an 8-month consecutive growth streak. Perhaps more impressively, in October, the Bolt outsold the combined offerings from Tesla Inc (NASDAQ:TSLA). For the first time, the Bolt (2,781 vehicles) outsold the Tesla Model S (1,120) and X (850) put together. For the year, the S has sold 20,750 units, and the Bolt is up to 17,083. There’s a real chance the Bolt could top the S and hit #1 overall for 2017. And Toyota Motor Company (ADR) (NYSE:TM) is still lagging. The Prius Prime, a key Bolt rival, saw sales dip in October to 1,626 units and it has fallen to #4 in unit sales for the year.
Verdict
GM is doing a lot of things right. You have to give management credit for fixing a business that looked completely broken less than 10 years ago.
However, investors seem overly eager for GM stock here. The ride-share threat looms large, the auto cycle appears to be topping out, and yet GM stock remains sharply higher year-to-date. We already know that 2018 is likely to be a challenging year for American auto sales, and with that clear warning, any bullish case for GM stock relies on thinking it can take yet more market share going forward. It’s possible, but I wouldn’t count on it.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
