Investors have spurned traditional automakers in recent years. Meanwhile, electric vehicle (EV) start-ups with big ambitions have garnered high valuations. The divergence in fortunes between EV stocks and other automaker stocks has accelerated dramatically in 2020.
Unsurprisingly, investors have put General Motors (GM -0.17%) in the "traditional automaker" bin. Its market cap currently sits a little below $40 billion, despite its standing as one of the largest automakers in the world. For comparison, Tesla's (TSLA -1.92%) market cap has surged past $300 billion this year.
GM Market Cap, data by YCharts.
Yet GM is actually one of the industry leaders in EV technology. Only Tesla has sold more electric vehicles in the U.S. Moreover, GM is investing heavily to develop a new battery system that will offer better performance at a much lower cost -- and dozens of new EVs to go with it. One industry analyst thinks that creates a valuable opportunity for GM to spin off its EV operations into a separate company that could latch on to investor enthusiasm for EVs. Let's take a look at this possibility.
The case for a spinoff
Deutsche Bank analyst Emmanuel Rosner has recently emerged as a major proponent of a General Motors EV spinoff. In a research note last week, Rosner and his team reiterated their assessment that GM has a strong foundation in the electric vehicle market and a promising product roadmap.
As a result, the analysts recommended that GM spin off its EV operations as a new pure-play company. That could create considerable shareholder value, in light of what investors have been willing to pay for other EV makers. Importantly, investor interest in clean-energy vehicles now extends far beyond Tesla. Hydrogen- and electric-truck start-up Nikola has already achieved a $17.4 billion market cap despite not having delivered a single vehicle yet. China's BYD now has a $30 billion market cap as well.
Creating a separate, highly valued EV company would have additional tangible benefits. It could help with recruiting and retaining a talented staff, particularly if compensation packages include stock options or other share-based compensation that would benefit from the high valuation (as is the case at Tesla). Furthermore, the high valuations awarded to EV companies allow them to raise capital at a very low cost.
Rosner and his team believe a GM EV spinoff's high growth potential could make it worth anywhere from $15 billion to as much as $95 billion. And given that investors aren't giving GM credit for its EV investments today, the spinoff wouldn't necessarily hurt the valuation of what remains.
Image source: General Motors.
It isn't a no-brainer
Clearly, there are good reasons for GM to consider an EV spinoff. Yet the case for doing so is not quite as "open and shut" as the Deutsche Bank analysts suggest.
First, while GM shareholders would love to tap into the enthusiasm for pure-play EV makers like Tesla and Nikola, earnings and cash flow drive long-term stock-price movements. If General Motors develops a successful EV franchise, it will eventually be rewarded with a higher valuation without having to spin off the EV business. And while it's helpful for pure-play EV makers to be able to issue stock at favorable valuations, GM generates plenty of cash from its legacy business to fund EV investments. (There's still arguably an opportunity cost to not being able to issue stock to fund operations, but that doesn't seem like a very significant problem.)
Second, GM doesn't have a separate EV brand. It would either have to create a new brand for the spinoff or split its existing brands between pure internal combustion (ICE) vehicles and EVs. This might prevent the spinoff from taking full advantage of GM's existing EV roadmap, which spans all of its major brands.
Third, if "legacy" GM permanently exits the EV market, it will shrink in the years ahead. In a couple of decades, it would probably be out of business, due to demand shifting away from ICE vehicles. Employees wouldn't like the sound of that. Legacy GM would also end up with too many production plants over time, while the EV spinoff would have too few. It would be much easier to transition people and plants from ICE production to EVs as a single company than as two separate entities.
A spinoff is still possible
Despite the challenges involved, GM isn't dismissing the EV spinoff idea out of hand. Rosner asked management about this concept during the company's second-quarter earnings call. CEO Mary Barra said that GM is "open to looking at and evaluat[ing] anything that we think is going to drive long-term shareholder value."
That may not seem like a compelling response. However, the idea of an EV spinoff was raised internally in 2018 and is getting serious attention, according to Bloomberg.
Perhaps General Motors will find workable solutions related to dividing up brands, manufacturing facilities, and employees. However, patience may be the best weapon GM shareholders can bring to bear. If the General's ambitious EV plans work out, GM stock could achieve massive gains over the next decade, with no spinoff required.
