General Motors (NYSE:GM) stock entered December trading near a five-year high. Excitement over electric vehicles finally hit the stock after third-quarter earnings.
At its opening price of about $44 per share, GM is now worth $62.7 billion and has a reasonable price-earnings ratio of 19.6. The shares have more than doubled their pandemic lows of about $21.
The catalyst was its Nov. 8 earnings announcement. This showed non-GAAP net income of $5.3 billion, $2.83 per share when diluted and adjusted, on revenue of $35.5 billion. Under GAAP rules income was just $4 billion, but operating cash flow was $9.9 billion, more than double 2019’s figure.
That means there’s plenty of cash to manage GM’s long-term debts of $83 billion and maintain its pivot toward electric vehicles.
No More Nikola
CEO Mary Barra always intended to use profits from GM’s big trucks to fund a new line of electrics, and electric vehicle business models. But until recently Wall Street was treating the older operations as dead money, preferring electric start-ups like Nikola (NASDAQ:NKLA).
Instead, GM plans to spend $5.4 billion per year releasing 30 electrics by 2025, representing 40% of its production. The efficiency of electrics means it no longer has to fight over emissions standards.
GM is also seizing new business opportunities created by data. GM will sell auto insurance through its OnStar system, which collects data on a car’s use. OnStar was originally pitched as a safety feature, a way to connect with operators during a breakdown. The use-based policies will debut in Arizona, basing prices not just on miles driven but on data about how the miles are driven.
An IBM Model
Analysts now see two companies at GM. One is an electric vehicle start-up hiring thousands of software programmers, big enough to sell batteries to other, smaller players. The other is the company still selling gas-powered trucks and SUVs.
The model reminds me of International Business Machines (NYSE:IBM), which milked its mainframe monopoly for years as it sought a pivot into the cloud. Look at a stock chart and you can see that hasn’t worked. IBM is down 8% over the last 10 years. What analysts want is a complete split, but GM President Mark Reuss says that’s not in the cards. Not now, anyway.
The old company does well in what political writers call Trumpistan. Barra says the new company will also appeal in Techlandia, with electrics that hit all price points and are better than gas-powered alternatives. She even holds out hope of bringing back the dividend that was suspended during the pandemic.
The risk is mostly in the older company. GM recently agreed to recall 7 million trucks and SUVs to replace their airbags, at a price of $1.2 billion.
The Bottom Line for GM Stock
You can see GM stock as a glass half full or a glass half empty.
The pivot toward electrics is boosting the stock price. But its market cap remains below that of Nio (NYSE:NIO), the Chinese electric vehicle start-up.
The bet is that Trump-era cars continue to spin off cash that funds a Biden-era makeover. But that bet also holds out little hope for top-line growth. As was the case with IBM, the old company’s shrinkage may easily match the new company’s growth, leaving a stock to be bought only by income investors.
Barra insists other lines of business, like selling GM’s technology to rivals, can make GM a growth stock again. I don’t think so. You can speculate on the dividend, and you can speculate on the split-up, but at current prices you’re speculating. I prefer investing.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.