It's emotionally challenging to be a General Motors (GM 0.48%) investor these days because pessimism and bearish opinions about the automaker abound. Bears will tell you GM operates in a cyclical and capital-intensive industry with thin margins. Bears will tell you auto stocks sell off at a whim when macroeconomic problems appear, even if their profits are setting records. Bears will tell you the U.S. market is plateauing, and only getting more competitive.
All those points are true, but here are two reasons to believe GM still has massive upside.
Finally, a believer
Because all of those aforementioned bearish opinions, one thing General Motors has tried to do is convince investors it's transforming into something more than a typical vehicle manufacturer. It has developed a mobility brand, Maven, which is tackling ridehailing and other forms of car-sharing projects. And, most importantly, there's finally a believer that GM will strike gold with its autonomous vehicle ambitions.
In late May, Detroit's largest automaker announced that the SoftBank Vision Fund had agreed to invest $2.25 billion in GM Cruise Holdings, the automaker's self-driving unit. If you aren't familiar, GM Cruise was created when the company acquired start-up Cruise Automation in a deal worth roughly $1 billion in 2016. Since then, management has allowed its self-driving unit to continue its business as usual in Silicon Valley, and that's proven to be a great move.
SoftBank's investment values GM Cruise at $11.5 billion -- a massive increase from its acquisition price -- and it's clear these types of groundbreaking acquisitions can change the game for GM, which currently has a market capitalization of $61 billion. Beyond the improved valuation, arguably the biggest takeaway from SoftBank's investment in GM Cruise that it offers tangible proof to Wall Street that even legacy automakers can develop disruptive technology -- maybe you can teach an old dog new tricks.
GM Cruise autonomous vehicle. Image source: General Motors.
While the driverless car future is likely decades away, investors can expect GM Cruise to make a splash sooner rather than later. This spring, GM announced it would invest $100 million to upgrade two Michigan factories for the production of self-driving vehicles. GM Cruise is expected to deploy its first self-driving vehicle at scale next year as an automated taxi in an attempt to keep pace with Waymo LLC, Alphabet's self-driving subsidiary. That's huge news, because there will be a significant first-mover advantage in this space: The first company to produce these vehicles will gain a lead in gathering real-world road data from them, which in turn allow it to uncover issues and make crucial improvements -- a virtuous cycle that should result in it improving its vehicles and the consumer experience faster than the competition.
It's increasingly likely that in the distant future, General Motors could generate more revenue from smart mobility services, big data, and driverless vehicles/technology, than it does from manufacturing automobiles. That offers incredible upside potential to long-term investors.
High value products
GM Cruise will play a huge role in the automaker's future, but currently, management plans to focus on its high-value products. Those high-value products are increasingly revolving around three segments: trucks, SUVs, and Cadillac. Let's zero in on the first of those.
Investors already understand that full-size trucks are the jewel in Detroit automakers product-line crown, thanks to the strong consumer loyalty they engender, their increasing transaction prices (both new and used), and their notoriously strong margins. Consider that the brand loyalty of truck buyers is more than 30 percentage points higher than that for any other vehicle segment, with compact SUVs in a distant second-place.
Graphic source: Deutsche Bank Global Auto Industry Conference January 16, 2018.
That strong loyalty provides Detroit automakers -- especially GM, which sports a portfolio of full-size and mid-size trucks at a time when Ford is still waiting for its its next-generation mid-size Ranger to hit U.S. streets -- with a strong barrier to entry that Japanese automakers have so far failed to breech, despite their valiant efforts. In fact, the top three players in the full-size truck market captured 89% market share in 2008, and that figure has only grown in recent years to 92% as of 2017, per JD Power PIN.
The all-new 2019 Silverado Custom Trailboss. Image source: General Motors.
Chevrolet's new full-size Silverado 1500 launched in 2018 with the commercial 4500, 5500, and 6500 models right behind; the heavy-duty Silverado HD will roll out to dealerships in 2019 with a model 2020 year. Here's why that matters: Between 2013 and 2017, General Motors' early estimates pegged an 80% profit improvement on a 25% volume increase in its full-size trucks. Improvements like that would be incredibly difficult, if not impossible, to replicate with the next generation, but management has already noted it expects significant profit upside in 2019 and beyond.
Manufacturing vehicles is a tough business, no doubt, and GM has had its share of challenges over the decades, including its 2009 bankruptcy. But management has exited less profitable markets, focused its new product development on highly profitable segments such as trucks, SUVs and luxury vehicles, and made a brilliant acquisition to support its driverless vehicle ambitions. Together, despite the slowing sales of new vehicles in the U.S., these factors give GM investors long-term upside.
