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We previously covered General Motors (NYSE:GM) here. Tesla’s (TSLA) aggressive price cuts in early January had directly impacted the automaker industry as a whole, due to the perceived threat of reduced profitability during the uncertain macroeconomic environment through 2023. The pessimism helped trigger the correction in GM’s price target by -14.8% then.
For this article, we will be discussing GM’s Cruise/ BrightDrop segment, which demonstrates the company’s focus in getting Super Cruise, its driverless technology, up and running for a myriad of end markets. GM also appears highly expedient in fully procuring its battery raw materials and semiconductor chips. We shall discuss these further.
GM’s Innovative Segments Are Revving Up Quickly
GM’s Cruise has been progressively scaling up its operations since commercial launch in June 2022, with the robo-taxi fleet numbering 130 by January 2023. The company also intends to “significantly increase its commercial footprint and operating scale” moving forward, with “thousands of vehicles” entering a “large number of markets” in 2023.
Naturally, the cash burn might continue, with the Cruise segment only reporting $102M (-3.7% YoY) of revenues in FY2022, while recording $2.57B (+129.1% YoY) in cost of sales and -$1.89B (+58.8% YoY) in EBIT losses. At the same time, Cruise also declared an eye-watering sum of $1.6B in compensation expenses, with costs to further increase in 2023 due to the rapid scaling.
However, consumer demand has proven robust as well, with Cruise’s last 100K driverless miles clocking in eight times faster than its first hundred thousand miles. In addition, the company plans to increase the use of automation and cloud computing to drive cost efficiencies, potentially reducing the rate of its cash burn moving forward.
Once GM’s autonomous technology, Super Cruise, gains traction and obtains credible safety records, we reckon the same technology may eventually be applied to its passenger vehicles and BrightDrop, as a self-driving electric commercial delivery vehicle moving forward.
Some companies are already looking to adopt the technology, such as Walmart (NYSE:WMT) and FedEx Corporation (NYSE:FDX), attributed to the supposed annual cost savings of up $12K per vehicle. Travis Katz, CEO of BrightDrop, said:
We can say with certainty that autonomy is going to play a huge role in commercial delivery. There is no need to have humans driving vehicles in all of these routes. One of the benefits of being General Motors, is we have our sister company Cruise, which is one of the leaders, if not the leader, in autonomous systems. (Freep)
Therefore, it is apparent that GM needs to be highly strategic in its capital allocation, between the unprofitable yet promising Cruise/ BrightDrop and the core businesses, namely ICE/ EV/ battery productions. The company also expects to significantly ramp up its automotive production and product launches from H2’23 onwards through H1’24, with an ambitious output of up to 400K EVs annually.
As a result of the dual-pronged strategy, it is unsurprising that GM has guided for an aggressive capital expenditure of up to $13B in FY2023, suggesting a notable increase of +23.8% YoY from FY2022 levels of $10.5B. This also includes the $0.85B committed to the Ultium battery cells joint venture.
Assuming a similar execution moving forward, we may see GM consequently generate a lower Free Cash Flow of approximately $8.5B (-19.1% YoY) in FY2023. We must also highlight the potential impact on its retained earnings by up to -$1.91B through 2024, based on market analysts’ projection in dividends per share of $0.37 in 2023 and $0.52 in 2024.
Meanwhile, it appears that the rising inflationary pressures and price hikes had unfortunately impacted consumer demand for high-ticket items, with GM’s inventory of Chevy Silverado pickup trucks rising to over 100 days of supply by mid February 2023. The same had been observed with Ford’s (NYSE:F) F-150 inventory, which grew to 92 days. This issue might have led to GM’s decision of halting truck production in the Indiana factory for two weeks in March 2023.
Particularly, the January 2023 CPI showed that new truck sales had decelerated MoM to 0.2%, compared to December levels of 0.6%. This came as no surprise, due to the notable hikes in truck prices thus far, as discussed in our previous article.
On one hand, GM has opted to reduce its headcount by about 500 as a way to “address efficiency and performance” issues by early March 2023. However, the impact may be miniscule given its 167K global headcount as of FQ4’22.
On the other hand, we remain optimistic about GM’s execution in the long-term, especially due to the company’s expedient strategy in fully securing all of its battery raw materials through 2025. This is on top of the procurement of US-made semiconductor chips in partnership with GlobalFoundries (NASDAQ:GFS).
Furthermore, GM had indicated its disinterest in participating in the ongoing price wars waged by TSLA, F, and Lucid Group (NASDAQ:LCID). This suggests that the company has confidence in market demand regardless of the short-term macroeconomic outlook. Mary Barra, CEO of GM, said:
When we look at our strong product portfolio and the interest that we have at the prices that we’ve already announced, we feel that we’re well positioned. Even going into the first month of the year, we’ve seen a very strong customer interest in our products and so we think right now we’re priced where we need to be. (Seeking Alpha)
The combination of these efforts indicate GM’s determination in staying competitive, while sustaining its profit margins in the automotive/ EV market, in our view. We reckon things are likely to improve by 2024, once the macroeconomic headwinds potentially lift and consumer demand returns.
So, Is GM Stock A Buy, Sell, or Hold?
GM 1Y EV/Revenue and P/E Valuations
S&P Capital IQ
GM is currently trading at an EV/NTM Revenue ratio of 0.92x and NTM P/E of 10.77x, relatively in line with its 3Y pre-pandemic mean of 0.94x and 10.94x, respectively.
Based on its projected FY2024 EPS of $6.23 and 1Y P/E mean of 8.31x, we are looking at a moderate price target of $51.77. This nears the consensus estimates of $53.45 as well, suggesting an excellent 35.9% upside potential from the current level.
GM 1Y Stock Price
Trading View
While the GM stock has recently failed to break out of its September and November resistance levels in the mid $40s, it has also met sufficient intermediate support at current levels. Therefore, keen investors may want to nibble here if it consequently reduces their dollar cost averages.
Otherwise, bottom fishing investors may try waiting for another low $30s entry point at its previous October and December bottoms. Those levels would also provide an improved dividend yield of about 1.67%, against its pre-pandemic levels of 4.15% and sector median of 2.03%, based on the projected FY2024 dividends of $0.52.
