GM's Tesla Pitch Flags, but Old Tech Is Doing Nicely

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The froth has come out of General Motors GM -4.47% ’ stock as cost inflation has picked up and the gap between its tech-star aspirations and today’s reality has become clearer. Value-focused investors might consider it a good moment to buy.

First-quarter earnings from the largest Detroit auto maker, published late Tuesday, were better than analysts forecast thanks to vehicle prices that remain sky-high. While GM’s sales rose slightly year-over-year as the semiconductor shortage eased, the main driver of revenue growth was the average transaction price, which at the U.S. retail level was a full $10,200 more than in the same period last year.

However, the financial benefit to GM was entirely eaten up by cost inflation, leaving underlying earnings at a healthy but stable level. The company didn’t meaningfully adjust its full-year guidance, which implies little or no profit growth this year.

This loss of momentum is one reason why investors have cooled on shares in auto makers generally this year. The other is that the huge challenge traditional manufacturers face in catching up with Tesla on scaling electric-vehicle production have become clearer as the cost of battery metals such as lithium, nickel and cobalt has rocketed. GM has been noisier than most about taking on the EV pioneer, perhaps making it more vulnerable to this dawning realization. Its shares are down almost 40% this year, more than peers.

GM has tried to address fears that it won’t be able to make all the EVs it wants to with a strategy of vertical integration: investing “upstream” not just in battery manufacturing but also in supply-constrained components or resources that go into batteries or other parts of the EV powertrain. The most recent deal it announced was with Swiss mining giant Glencore, which produces cobalt, and GM Chief Executive Officer Mary Barra suggested on Tuesday’s call with analysts that it was working on something similar for nickel.

Such agreements show that the company is asking the right questions, but they won’t provide satisfactory answers. The EV production targets of auto makers require resources in excess of those that will likely be practically available, says Caspar Rawles, chief data officer at Benchmark Mineral Intelligence, a data provider covering the lithium-ion battery supply chain. Given the crunch ahead, investors are right to give companies little credit for good intentions.

GM’s other big tech bet—driverless vehicles—has also lost its shine lately. The company last month increased its stake in its majority-owned robotaxi venture Cruise at a valuation of roughly $19 billion, according to Deutsche Bank, much lower than the $30 billion of its previous capital raise, after co-investor SoftBank pulled out. GM’s latest results contained a charge of roughly $1.1 billion to compensate Cruise employees for not taking the business public. Such are the costs of trying to keep up with Silicon Valley’s stock-options game from Detroit.

Yet the run of bad news makes it a sensible moment to consider a longer-term investment in GM. At $38, the stock now trades at 5.5 times forward earnings, at the low end of its historic valuation range. A market value of roughly $55 billion attributes next to no value to the company’s now roughly 80% stake in Cruise. And if supply-chain problems delay the mass arrival of EVs, that is no bad thing for the conventional car business, which remains strong.

However its hopes of being a 21st century tech company pan out, GM could continue to churn out fat profits from pickup trucks and sport-utility vehicles for years to come.

Write to Stephen Wilmot at [email protected]

Source: WSJ