U.S. auto demand crashed earlier this year as the COVID-19 pandemic swept across the country in March and April. This drove huge share-price declines for auto stocks. Shares of industry leader General Motors (GM -0.55%) briefly lost more than half of their value in March.

However, auto demand came roaring back over the summer, enabling auto stocks to regain much of the ground they lost in March. On Thursday, GM provided additional confirmation of this nascent recovery, reporting solid U.S. delivery results for the third quarter.

Sales declines moderate

Last quarter, GM and its dealers delivered 665,192 vehicles in the U.S. -- down 10% year over year. This marked a big sequential improvement, though. In the second quarter, GM's U.S. deliveries totaled just 492,489 units, down 34% year over year.

General Motors' total domestic sales decrease for Q3 was roughly in line with the market's performance. Fiat Chrysler Automobiles and Toyota Motor -- two of its top competitors -- also reported declines in the 10% to 11% range. Furthermore, GM estimates that it gained retail market share last quarter.

While auto sales are still falling on a year-over-year basis, tight inventory has been a big constraint recently. (Most U.S. auto factories were closed for about two months during the peak of the pandemic.) GM has faced particularly severe inventory constraints, because it entered 2020 with low inventory due to a six-week United Auto Workers strike last fall. The flip side is that with limited inventory for popular models, automakers have been able to pull back on discounting, contributing to a profit-boosting surge in average transaction prices.

A white Chevy Silverado driving on a dirt road, with rolling fields in the background

Image source: General Motors.

Digging into the numbers

Importantly, while total deliveries fell 10% last quarter, GM reported a modest 3% dip in deliveries of its full-size pickups: the Chevy Silverado and GMC Sierra. Those models account for the bulk of GM's profit, so it's encouraging to see solid sales there.

Instead, the 73,446-unit drop in domestic sales had three key drivers. First, deliveries of full-size SUVs, like the Chevy Tahoe and Cadillac Escalade, fell by 18,440 units. However, this was driven by supply factors, as GM just launched all-new versions of these SUVs and the pandemic disrupted the production ramp-up. Today, the assembly facility that builds these models is operating on three shifts with maximum overtime -- as are the plants that build GM's pickups -- enabling dealers to rebuild inventory.

Second, a slew of discontinued car models across the Buick, Cadillac, and Chevrolet brands accounted for 21,385 units of the year-over-year drop in deliveries. These models weren't profitable to build for the most part, and the plants that assembled them have been closed or converted to new uses, cutting costs.

Third, several high-volume Chevy models that are often sold to commercial and rental-car fleet customers (including the Chevy Express and Chevy Malibu) suffered significant sales declines in Q3. Lower fleet demand probably cost General Motors tens of thousands of deliveries last quarter. Fleet sales are expected to remain weak in the near term, due to low rental-car demand and weak business conditions.

GM stock has room to run

While GM stock has doubled from the low it hit in the early days of the pandemic, there's still plenty of upside for investors: Shares trade for just 7 times forward earnings (based on analysts' consensus for 2021).

Moreover, analysts are probably underestimating the company's earnings power. GM books revenue when it ships vehicles to dealers, rather than when they are sold to customers. As a result, it's poised to post strong revenue and earnings results over the next few quarters, as it replenishes inventory of its lucrative full-size pickups and builds inventory of its all-new SUV models.

Because GM has invested heavily over the past decade in developing electric vehicles and autonomous vehicles, the risk is low that the General will suddenly find its business disrupted due to changing car-buying habits. As investors become more comfortable with General Motors' long-term potential in the years ahead, GM stock should continue to charge higher.