The auto industry has been on fire for years, but there's been a lot of debate among investors in the space about the better way to play strength in automobiles. General Motors (GM 1.35%) is the titan of the industry, with its Chevrolet, Cadillac, Buick, and GMC units all producing some of the most popular vehicles in the world. Tesla (TSLA 1.24%) is the up-and-coming star of the electric vehicle niche, with CEO Elon Musk having attracted a devoted set of followers who are eagerly waiting for mass-market cars to be readily available.
The two companies have similar market caps right now, but investors need to decide which one is the smarter play. Let's take a closer look at General Motors and Tesla to see how they compare on key measures of performance.
Stock performance and valuation
Both General Motors and Toyota have done well over the past year, but Tesla has a huge edge. Its stock is up 43% since December 2016, compared to just a 16% rise for GM.
When it comes to valuations, it's hard to use a standard approach to compare the two companies. After emerging from bankruptcy in the early 2010s, General Motors has been consistently profitable, and it currently trades at just seven times forward earnings estimates. Tesla remains soundly unprofitable, trading at nearly five times sales over the past 12 months. Many traditional value investors would say that only GM is worth considering, although growth rates at Tesla arguably make its richer valuation more justified.
For dividend investors, choosing between General Motors and Tesla is easy. Tesla doesn't pay a dividend. GM has a yield of 3.6% and has done a good job of growing its dividend payments in recent years.
Tesla's growth plans are so ambitious that income investors shouldn't expect a dividend from the upstart auto manufacturer for years to come. Even in more cash-flow friendly businesses, Musk has shown a preference toward reinvesting money back into his businesses.
General Motors investors shouldn't assume that the automaker's dividend is guaranteed going forward. During past downturns, major automakers have routinely had to adjust their dividends downward or temporarily suspend them in order to redirect available capital to more immediate needs. Still, with GM paying out between a quarter and a third of its earnings currently, the automaker can afford to endure a slight slowdown in future years without endangering its ability to keep paying its current dividend.
Growth prospects and risks
General Motors has had an extremely good 2017, and it's in position to keep doing well in the future, even amid concerns about having hit a cyclical peak. The company has made moves on multiple fronts, both with its traditional business and its forward-looking innovation efforts. Strategically, GM's decision to exit the European market promises to eliminate what has historically been a money-losing effort, leaving it even more concentrated on what has been a solid North American market. What's arguably most surprising about General Motors lately has been its moves to keep up with changing consumer trends. The early success of the Chevy Bolt actually challenges Tesla's focus on electric vehicles, and GM announced late in the year that it will release 20 or more all-electric vehicles using a combination of battery and fuel-cell technology. Add to that its efforts in autonomous driving, and General Motors is staking its own claim to hold onto its status as industry leader.
For Tesla, the rollout of the mass-market Model 3 sedan has been a big focus in 2017. Delays in anticipated production plagued the company, with battery module assembly issues holding back its ability to ramp-up throughput more effectively, but the episode didn't have a notable downward impact on Tesla's share price. Instead, investors kept focusing on the future, as the company released more details on an all-electric semi tractor-trailer truck for commercial use as well as an update to its planned roadster. Bulls on the stock point to greater customer excitement about Tesla's products as potentially driving it toward profitability and beyond in the years to come.
What you know, or what could be?
By these measures, General Motors is a better buy than Tesla, but the two companies are different enough in their mindset that most Tesla investors would reject the criteria by which I've evaluated the two stocks as being biased against the upstart automaker. That might well be true, but Tesla still has a long way to go before it can establish its ability to usurp the role of leading the auto industry forward.