Two months ago, General Motors (GM 1.20%) reported solid results for the final quarter of 2021, despite severe supply chain constraints. For the full year, GM delivered a record adjusted operating profit and record adjusted earnings per share (EPS) of $7.07. Moreover, management projected that the General would achieve equally strong results in 2022.
Despite this favorable outlook, GM stock has lost more than a quarter of its value so far in 2022 and has fallen about 20% since its earnings release. The continued divergence between GM's performance and its stock price makes GM shares look like a fantastic bargain.
Chip supply is the key variable
The global semiconductor shortage forced GM to sharply reduce production compared to pre-pandemic levels last year. In the key North America region -- where the U.S. auto giant generates the bulk of its revenue and profit -- wholesale volume fell from 802,000 units in the fourth quarter of 2020 to around 650,000 units per quarter in the first half of 2021 before bottoming out at just 423,000 units in the third quarter.
Wholesale volume began to recover in the fourth quarter, reaching 579,000 units. And as of early February, GM projected that its global wholesale volume would jump 25% to 30% year over year in 2022.
Since then, the war between Russia and Ukraine has further tangled global supply chains and threatened to create new shortages of key materials used in semiconductor manufacturing. This could exacerbate the ongoing chip shortage. Investors' fears about the potential impact on GM's production may well explain the sharp drop in GM stock over the past two months.
GM can continue to manage through the shortage
Chip availability has improved for GM this year, compared to 2021, thanks to the company's aggressive efforts to secure firm supply commitments. GM's output in North America improved again on a sequential basis in the first quarter. And in a statement on Friday, the head of GM's North America business projected that the company will "continue outperforming 2021 production levels, especially in the second half of the year."
On the other hand, GM's domestic vehicle deliveries declined 20% year over year last quarter, due to low dealer inventories. Furthermore, the automaker is taking two weeks of downtime at a truck plant in Indiana this month, demonstrating that it hasn't fully fixed its semiconductor supply chain.
Image source: General Motors.
Investors are likely overreacting, though. After all, GM earned a record profit last year in the face of even tighter supply constraints.
Notwithstanding the planned truck downtime this month, the General has continued to prioritize production and sales of its most profitable vehicles. Last quarter, GM's combined domestic deliveries of full-size trucks and SUVs and the Corvette sports car slipped just 1.5% year over year. Conversely, deliveries of subcompact vehicles plunged by more than 70%.
Tight supply of new vehicle inventory will also support used vehicle prices (albeit not quite at the all-time highs of 2021), helping the GM Financial unit continue churning out massive profits. Thus, production constraints aren't likely to derail GM's profitability.
Focus on the big picture
Even if the chip shortage impacts production more than expected in 2022, it would only increase the level of pent-up demand, supporting strong sales for years to come. Looking further ahead, GM is aggressively reinvesting its profits to expand its electric vehicle (EV) lineup and EV production capacity. That will keep the automaker relevant as the industry transitions away from gas-powered vehicles.
Meanwhile, General Motors recently increased its stake in Cruise -- its autonomous vehicle subsidiary -- buying out SoftBank's interest in the unit for $2.1 billion. Based on its last funding round, Cruise is worth more than $30 billion, putting the current value of GM's 80%-plus stake at $25 billion or more. That value could grow dramatically if Cruise succeeds in rolling out a robotaxi service at scale.
Based on GM stock's recent price of roughly $43 per share, the company's market cap is approximately $62 billion. Considering Cruise's potential value and that GM's core business could earn a $15 billion adjusted operating profit in 2022, the shares appear extremely undervalued at this level. As a result, patient investors who buy and hold GM stock could reap big gains over the next decade.
