GM's Net Income Plunged: Why You Shouldn't Care and Why It's Still a Buy

If all investors did was see that General Motors' (GM 1.98%) net income plunged 19% during the first quarter, down to $2.4 billion from the prior year, you might think it was a rough quarter. That would, of course, miss the fact that the decline was driven by a "Voluntary Separation Program" and that Detroit automaker beat expectations and also raised full-year guidance. 

Further, investors need to understand that declining net income wasn't a sign of poor vehicle pricing, bad inventory management, or lack of demand; it was rather a sign of GM's employee buyout cost -- which is also a part of business when avoiding layoffs.

Ignoring GM's first-quarter speed bump in terms of net income, there are still many signs that point to GM as arguably the top automotive stock to buy now. Here's why.

The rearview mirror

First, let's cover the 19% drop in GM's net income during the first quarter. Rather than laying off employees to lower global head count and fixed costs, GM instead offered employees the chance to participate in a buyout program. The voluntary separation program enabled GM to lower head count by 5,000 employees, but it also came at a $0.9 billion charge that dented its bottom-line during the first quarter. While this is occasionally a part of business in the automotive industry, it's also more of a one-time occurrence in terms of GM's near-term earnings potential and guidance.

Historically, investors know exactly what GM does well: It manufactures top-of-the-line trucks and SUVs, and it does so very profitably. Let's take a look at some additional highlights from the most recent quarter to reassure investors before we look at the automaker's long-term potential.

During the first quarter, GM grew its lucrative U.S. market share by 1.3 percentage points compared to the prior year, which was the most in the industry. It also boasted the top spot in fleet and commercial sales, which are secretly becoming more enticing now.

GM also expanded its U.S. battery cell production to support its ramp-up of electric vehicle (EV) production, while reaching over 20,000 EV sales in the U.S. -- ranking second in the industry. Management also noted it is on pace to reach its target of at least $2 billion in fixed cost reduction.

The automaker is still thriving with what it has done historically well, but arguably more important for investors is the future, and the company appears poised for strong growth.

Just Cruisin'

While crosstown rival Ford Motor Company (F 6.10%) decided to throw in the towel on developing its own fully autonomous vehicles for now, GM has dug in with Cruise, its autonomous driving subsidiary. In fact, Cruise means that GM is the only automaker with both Level 2 and Level 4 autonomous vehicle technology offerings and a vehicle built to be produced at scale.

Cruise CEO Kyle Vogt announced a goal of Cruise reaching $1 billion in revenue by 2025, which by most accounts is a fair target. This would be only the first step in a decades-long march toward a massive new revenue stream for the automaker.

However, let's be clear: Massive amounts of revenue does not mean eye-popping profitability. Investors must keep an eye on this over the coming years, and if Cruise can turn this autonomous robotaxi business into a profitable journey, it will pay off handsomely for investors -- but it's far from guaranteed.

Did we forget Ultium?

GM generates a massive number of headlines any given day, so it's easy for investors to lose sight of projects like Ultium.

GM's Ultium platform will be used to power and drive the future of its EV lineup, and Ultium's second-generation battery packs -- expected to be available by 2025 -- are projected to cost 60% less than today's versions in the Chevrolet Bolt EV, with twice the energy density. That's a fancy way to say many of GM's EVs later this decade will be driving further, faster, and more profitably.

But 2023 could be the year Ultium makes waves, launching in a number of segments and price points, including the Chevrolet Blazer and Equinox EVs, as well as the Cadillac LYRIQ and CELESTIQ. Ultium will also be found in GM's bread-and-butter full-size truck and SUV EVs, such as the GMC HUMMER EV (both the SUV and pickup version) and the Chevrolet Silverado EV.

And then there's BrightDrop

Lastly, if looking into GM's future as an investment, it would be wise not to skip over its innovative subsidiary.

GM's wholly owned subsidiary BrightDrop focuses on producing commercial EV vans and software to help fleets optimize last-mile delivery. BrightDrop has already inked major deals with industry behemoths like FedEx, Hertz, Ryder, and Walmart, among others.

More importantly than inking big-name partnerships is that BrightDrop is on track to reach $1 billion in revenue in 2023, one of the quickest a new company has reached such a milestone, and it's projected to reach $10 billion in revenue by 2030 at an impressive 20% profit margin. 

So is GM a buy?

Ignoring the fact that GM's net income dropped 19% during the first quarter, because it was still a very solid first quarter, investors have to see that the company is thriving with what it has always done well, and it's also poised for a very bright future.