Avoid General Motors as It Tries to Take on Tesla With Luxury EVs

Stocks to sell
  • Having failed with mid-market electric vehicles, General Motors (GM) is going after the luxury niche
  • Electric Hummers and Cadillacs are meant to compete with Tesla models
  • The mid-market electric vehicle remains missing in action, and GM stock is entering a crowded luxury EV market
Source: Katherine Welles / Shutterstock.com

Having failed with mid-market electric vehicles (EVs), General Motors (NYSE:GM) is now going directly after Tesla (NASDAQ:TSLA). But GM’s plan could backfire for both companies.

The former American auto giant has begun production of an electric Hummer and an electric Cadillac called the Lyriq. The hope is that by putting its most opulent, high-end brands on the road in electric form, GM can avoid the disasters that befell it with the Chevrolet Volt and Bolt.

But without something for the middle market, electric cars can’t expand beyond their luxury niche. At stake is the future of America’s auto industry. GM stock entered trade on April 1 at $44 per share, a market cap of $63.5 billion. Tesla opened at $1,083 per share, a market cap of $1.13 trillion.

GM General Motors $42.86

The Missing Middle

The real electric challenge to Tesla doesn’t come from GM or Ford Motor (NYSE:F). It comes from Volkswagen (OTCMKTS:VWAGY), which is now entering the U.S. EV market after finding success in Europe and China.

VW plans to spin off its Porsche sportscar brand and relaunch its iconic VW bus as an electric vehicle called the ID.Buzz. The brand was practically run out of the U.S. in the 2010s over a scandal where its diesel engines routinely violated clean air rules.

The most-developed electric vehicle market is still China. There, most of the best sellers cost under $20,000. In the U.S., electric cars are often luxury vehicles that cost more than $50,000. The average new car in America now costs $47,000.

Japan and Korea are filling the low-end of the U.S. market with cars like the Nissan (OTCMKTS:NSANY) Leaf, the Hyundai (OTCMKTS:HYMTF) Kona and the Kia EV6. The Mini Cooper, another popular small electric, is made by BMW (OTCMKTS:BMWYY).

GM Stock Is Challenging Tesla

Both GM and Ford have been left in the dust by Tesla, which scaled production of expensive electric sedans and is now going into their lucrative pick-up truck niche.

The original plan was to get prices down to $35,000. But high demand and rising battery costs have the low-end Tesla Model 3 starting at $46,900. Start-ups that have followed it into the market, like Rivian (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID), carry even higher prices. All have waiting lists.

GM also has a waiting list for its electrics. Deposits are now seen as an indicator of demand. Most electric car production through 2024 is now spoken for.

But making cars is just part of the Tesla story. The company has created an entire ecosystem of charging, services and insurance. It has eliminated the dealer network GM depends on for its survival. Dealers also remain a powerful lobbying force. Rivian, which recently announced a huge factory in Georgia, can’t sell its cars there because of the state’s law against direct sales.

The Bottom Line on GM Stock

GM insists it has a cunning plan to take down Tesla later this decade. It’s built around Ultium, a shared body-and-battery platform for all its electrics.

By mass producing the platform, customizing just the suspension and the frame, GM hopes to drive down costs and drive up profits. Meanwhile, it hopes to extract maximum profit from its gas-powered cars and start at the high end of the market.

Investors have soured on GM’s plans. The company’s market cap is still just half its sales of $127 billion. Tesla stock sells for more than 21 times its $53 billion in revenue. Even those who proclaim themselves GM bulls on TipRanks don’t see its market cap hitting $100 billion.

I wouldn’t buy either GM or Tesla. The former is a speculation, the latter overvalued. If pressed to buy any electric car outfit, I’d go with VW. It’s committed to electric cars and its valuation is close to GM’s at half its sales.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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