Michael Vi
Investment Thesis
General Motors’ (NYSE:GM) recent quarterly performance highlighted how the semiconductor issue continues to be a concern. However, the re-affirmation of the FY22 guidance implies that the company’s management believes that they would be able to overcome this issue and that the company’s pricing power will still exist. In this article, I analyze the company’s prospects further down the road and argue why investors should be more excited about the company’s robotaxi division Cruise than the company’s EV strategy.
GM’s EV Strategy Looks Unconvincing In The Near-Term
After the first quarter, there were more questions than answers with respect to GM’s EV strategy. This was addressed, to some extent, by CEO Mary Barra during the analyst call held post the release of Q2 earnings. More specifically, she announced that GM would be able to undertake seven-day operations at the company’s first Ultium plant in just a matter of weeks. The company then plans to add 20% to the plant’s capacity every quarter and is expected to reach the full 35 GWpH capacity by the fourth quarter of FY23.
Ms. Barra also announced that the company is on track to open the second Ultium plant in Tennessee by next year, that the initial work is underway for its third plant in Michigan, and that the company is looking for potential destinations for its fourth Ultium plant. Once all four plants are fully functional, the company’s projected total battery capacity would be 160 GW.
In addition to updating investors on the status of the Ultium plants, Ms. Barra also announced three binding agreements with the suppliers of the raw materials that are required to manufacture the batteries. The first agreement was with LG Chem, who have signed to supply GM with approximately 1 million tons of cathode material between now and 2030. The second agreement was with POSCO Chemical who have agreed to supply GM with CAM, which are critical components of a battery consisting of lithium and nickel, from their Korean operations from 2023 to 2025. Finally, the company also signed with Livent to secure significant quantities of Lithium. If these agreements are executed, then according to Ms. Barra, GM has enough battery raw materials to support their goal of 1 million units in annual capacity in North America in 2025.
It is indeed heartening to see that GM’s CEO provided investors with some key information related to its EV strategy this time around, especially since, post the release of Q1 earnings, she dodged the question regarding the specific quantities that were secured, at the time, to achieve the company’s goal of 400,000 EVs over the course of 2022 and 2023. However, given the ongoing semiconductor issues, there are still question marks over whether this goal will be achieved. Moreover, GM has, till date, delivered 7,674 EVs, with 457 delivered in Q1 and 7,217 EVs delivered in Q2. Assuming that the company doubles EV production in Q3 and Q4, thanks to its first Ultium plant starting its operations, this would imply total EV deliveries of 50,000 for 2022. This means that the company will have to somehow manage the ongoing semiconductor issues and deliver another 350,000 in 2023 to meet this goal. Even if the company does manufacture 400,000 EV units by the end of 2023, the question is whether the company can deliver them or whether they are going to sit at the factory waiting for the chips? This is where my skepticism lies.
Furthermore, for the entirety of 2021, GM delivered 2.2 million vehicles in the United States. In 2022, as of the end of Q2, the company has delivered 1.1 million vehicles in the United States. EVs accounted for 0.7% of the total deliveries. Assuming the company maintains the same sequential growth rate this year, it’s on track to deliver 2.5 million vehicles. And given my earlier assumption, 50,000 EVs would be 2% of that figure.
Assuming that things do improve in 2023, in my best-case scenario, GM delivers 3.75 million vehicles, representing an increase of 50%. If it delivers the said 350,000 EVs, that would be nearly 10% of the total sales. Given that as things stand, the Silverado EV is coming in only by Q2 of next year and the Blazer and Equinox are coming on sale only by Q3/Q4 of next year, I am not sure how the company is going to achieve a 5x jump in the proportion of EV sales relative to total sales.
GM Cruise: The Catalyst That Deserves More Credit
In my opinion, there is one segment of the company that is not being fully appreciated by the market due to its obsession with the EV strategy: GM’s Robotaxi service Cruise. Cruise entered commercial operations in June of this year and is currently in talks with regulators to increase the hours of operation and service as well as testing the Cruise Origin, its autonomous vehicle designed for driver-less operations. Although the division continues to burn money, it has started charging for the rides albeit on a small scale.
I am actually more excited about Cruise than GM’s EV strategy even though we are still a while away from the robotaxi division becoming GM’s cash cow. The global robotaxi market, according to marketsandmarkets.com, is expected to reach 1.45 million units by 2030, growing at a CAGR of 136.8%. Based on current evidence, GM does seem to have a plan in place to scale the business quickly and as long as this plan is rightly executed, investors shouldn’t bother with the cash burn.
Cruise is the goldmine that GM has in its hands, especially if it capitalizes on the first-mover advantage and pulls ahead of the likes of Tesla (TSLA) and Ford (F). It is this aspect, the first-mover advantage, which I believe that the market is yet to digest when it comes to GM.
Valuation
|
Forward P/E Multiple Approach |
|
|
Price Target |
$47.00 |
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Projected Forward P/E multiple |
6.23x |
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Projected EPS in the next 12 months |
$7.51 |
GM expects diluted EPS of between $5.76 and $6.76 for FY22. The company has earned $3.23 till date, which represents a 35% decline YoY. In my most conservative scenario, I assume that the company earns only $5.76 for FY22 given the current macro headwinds. I then assume that the expected ramp-up in EV deliveries does become a reality to some extent and as a result, the company earns, in the first six months of FY23, what it earned in the first six months of FY21, which is $4.98 per share. That would give an NTM diluted EPS of $7.51. I assume GM’s forward P/E to be the same as the median forward P/E of the industry, 6.23x, which yields a price target of $47.00. This represents an upside of a little over 30% to Friday’s closing price.
Concluding Thoughts
As a long-term play, I continue to like GM. I think its EV strategy is well-laid out and the likes of Silverado EV and Equinox together with the Cadillac LYRIQ should help the company to establish itself as a top EV player. However, in the near-term, question marks still remain over the company’s ability to execute and achieve its EV goals. For me, GM’s robotaxi division Cruise is the actual goldmine and is a segment that remains underappreciated by the market. In an era where everyone is playing to win the EV race, the focus will be on differentiation. The first mover advantage gained when it comes to robotaxis is what I think will set GM apart from its rivals in the long-run. That is of course, if it is rightly executed.
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