Everybody loves a good deal, and stock market investors are no exception. But with the S&P 500 index trading at an average of 34 times earnings and companies like Tesla boasting market caps wildly out of line with fundamentals, value can be hard to find. General Motors (GM -0.04%) bucks the trend. With its rock-bottom valuation and convincing strategy to supercharge growth, the legacy automaker looks like a screaming buy.
Management plans to double revenue by 2030
If you thought GM had plateaued, think again. The company plans to transform itself into a diversified technology company focusing on electric vehicles, data, and autonomous driving software. According to management, this strategy could double revenue to $280 billion by the end of the decade and boost its profit margin.
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To set things off, GM streamlined its business by divesting loss-making assets in Europe and India to focus on North America and China where it now sells 88% of its global vehicle volume. North America is a key market for GM's high-margin trucks and SUVs, which will be key in helping it increase its operating profit margin (8.4% as of the second quarter) to between 12% and 14% over the next 10 years.
The divestments free up resources for GM to focus on opportunities like electric and autonomous technology through its commercial electric vehicle (EV) business, BrightDrop, and autonomous vehicle subsidiary, Cruise. GM is investing $35 billion in those two areas and expects to have 30 new EV models out by 2025. Over the next 10 years, CEO Mary Barra expects these new revenue streams to grow from $2 billion to $80 billion.
Overcoming near-term challenges
GM's second-quarter revenue soared 104% year over year to $34.2 billion, helped by an easy comparison to the pandemic situation this time last year. But it isn't all smooth sailing. The semiconductor chip shortage has forced the company to idle eight of its North American assembly plants, sending vehicle sales volume down 33% to 447,000 in the third quarter.
That said, GM is making the best of this difficult situation by identifying alternatives that can replace semiconductors and prioritizing more profitable segments like pickup trucks and SUVs. The company also plans to rework its supply chain by potentially forming joint ventures and other longer-term agreements with chipmakers.
Despite the challenges, management expects EPS of between $5.40 and $6.40 in 2021 -- a healthy increase from the $4.33 per share GM earned in 2020.
An unbeatable valuation
Valued at just nine times the high end of projected earnings, GM stock seems more affordable than the S&P 500's average of 34 -- and absolutely dirt cheap compared to Tesla, which boasts a forward price-to-earnings multiple of 115. GM enjoys tremendous upside potential as it pivots to electric vehicle technology and autonomous driving technology, and it isn't too late for investors to bet on the automaker's transformation.
