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Wednesday, February 8, 2023

How General Motors Can Compete With Tesla

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I’ve been writing plenty of stories about how the valuation of Tesla (NASDAQ:TSLA) stock has become completely detached from reality. But no matter how big the Tesla bubble gets, Tesla is still a minor player in the global auto market compared to legacy automaker investments like General Motors (NYSE:GM).Yet Tesla is getting all the attention, and the owners of TSLA stock are making all the profits in 2020, while GM stock has lagged far behind the electric-vehicle upstart.

Image of General Motors (GM) logo on corporate building with clear sky in the background

Source: Katherine Welles / Shutterstock.com

At the same time, GM sold nearly eight times more vehicles than Tesla in 2019. As an owner of GM stock myself, I must admit that is frustrating. But worrying about how the grass has been greener on the other side of the fence does no good. Instead, I would urge GM and its investors to focus on the company’s advantages and ignore the TSLA stock bubble. General Motors has a tremendous advantage over Tesla when it comes to production, size, infrastructure and resources. GM should play the long game.

The Valuation of GM Stock Is Great

Regardless of what’s going on with Tesla, GM stock is a compelling long-term value investment. In the past four quarters, GM has reported earnings per share of $3.51. In that same stretch, Tesla reported EPS of $3.94. For a moment, forget that TSLA stock is currently trading at 380 times its normalized EPS.

GM is trading at around seven times its normalized EPS, an extremely attractive valuation. GM generated 2019 revenue of $137.2 billion. Tesla’s top line came in at $24.6 billion. GM stock trades at 0.25 times GM’s sales. Tesla trades at 9.6 times Tesla’s sales.

GM sold 7.7 million vehicles in 2019. The company also reported that it had $32.1 billion of gross cash and marketable securities on its balance sheet as of the end of the first quarter.

Bank of America analyst John Murphy says the auto industry’s near-term outlook is shaky, but GM is making the right moves by focusing on the future.

“GM continues to execute well on its Core and Future businesses, and remains one of the best positioned companies in our coverage over the long run,” Murphy says.

Bring Back the Dividend

One of the things GM did to make sure it remains on sound financial footing for its investors is suspend its dividend back in April. At the time, its dividend yield was 6%.

I understand the decision. But as soon as management has a reasonable amount of confidence in the company’s financial stability, the dividend needs to be a top priority. GM should bring it back and keep it if at all possible.

It’s clear that for the time being, the market doesn’t care about profits. It doesn’t care about revenue. It doesn’t care about vehicle sales, company size or margins.

The only thing carrying any value in the auto market these days is whether or not each company can show that it represents the next generation. GM crushes Tesla, Nikola (NASDAQ:NKLA), Nio (NYSE:NIO) and all the other EV bubble stocks in just about any metric that has traditionally been used to value companies. But GM doesn’t have a story about how it is the exciting new market disruptor.

In other words, GM can’t compete with Tesla in one major way:branding. But instead of trying to compete with Tesla and Elon Musk in the excitement department, GM simply needs to focus on what it does best, which is reliability and stability.

Interest rates are essentially at 0%. There’s no way Tesla will pay a dividend for at least another 10 years. Not only will bringing back the dividend of GM stock give investors a reason to buy the shares, but sticking to the dividend no matter what will help support the stock price. The lower the stock price falls, the higher the dividend yield, theoretically limiting the declines of GM stock.

Companies Aren’t Static

Another thing GM needs to do to compete with Tesla is to actually innovate. GM has been heavily investing in electric and autonomous-vehicle technology. Earlier this year, it committed $20 billion to developing these next-gen technologies. In December, GM announced a $2.3 billion partnership with LG Chem to mass-produce electric vehicle battery cells. In January, GM announced a $2.2 billion investment in its first all-EV plant.

“Indeed, we expect GM will introduce over 10 new electric vehicles in the US market over the next four model years, making the company a leader in OEMs’ alternative powertrain effort,” Murphy says.

Bank of America has a “buy” rating and a $45 price target on GM stock. For the record, Murphy has an “underperform” rating and a $500 target on Tesla.

Most Tesla bulls  see GM as a dinosaur and a relic of the internal-combustion era. In reality, innovative companies adapt and change with the times. Anyone who doesn’t understand that phenomenon must still see Amazon (NASDAQ:AMZN) as an online bookstore.

GM has an excellent plan in place to leverage its resources, scale and experience and continue to lead the next generation of the auto industry. In the meantime, the company should mostly ignore the Tesla hype and stick to its plan. It should also prioritize its dividend and give investors a reason to commit to GM as it continues to serve today’s auto market and positions itself to serve the auto market into the future.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long GM.

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