With the electric vehicle (EV) industry on the cusp of thinning the competitive herd via a price war, many sector upstarts feel the heat. However, that might not apply to General Motors (NYSE:GM). As a well-capitalized entity among the major legacy automakers, General Motors might cynically benefit from a potential EV sector implosion. Therefore, I am bullish on GM stock.
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The King Has Spoken
Truly, cynicism might be the fuel that keeps GM stock in the driver’s seat. Indeed, the present optimistic narrative for the Detroit automaker doesn’t necessarily center on its doings. And don’t get that wrong – General Motors does plenty to spark positive investor interest. However, EV industry king Tesla (NASDAQ:TSLA) effectively declared war on the sector’s startup enterprises. Thus, GM just needs to stay out of the crossfire.
Recently, Tesla announced its earnings results for the first quarter of Fiscal Year 2023. Earnings came in at 85 cents, slightly missing analysts’ call for 86 cents. Also, while sales increased 24.2% year-over-year to $23.3 billion, they, too, missed analysts’ consensus target of $23.36 billion.
However, what really caught Wall Street’s attention focused on Tesla’s aggressive price cuts on its popular EV models. From the U.S. market to abroad, the EV specialist has been slashing prices in a bid to maximize sales. Management must believe that it can boost profitability once it takes care of the competition. Given the social cachet of the Tesla brand, it’s not an unreasonable assumption – not by a long shot.
At the same time, TSLA might not be the beneficiary but rather GM stock. Interestingly, in the one-week period ending April 21, the former slipped more than 11%, while the latter only gave up 2.44%. Over time, it’s quite possible that GM can substantively rise higher from the price war that’s erupting.
Tesla’s Sacrifice Puts GM Stock Up One
In chess, advanced players may be forced to sacrifice a piece to gain a tactical or positional advantage. Put another way, a player concedes a short-term convenience in exchange for a longer-term benefit. If played right, this benefit may lead to victory. Tesla’s sacrifice intends to shock the system of EV competitors. However, it also puts legacy automotive giant General Motors up on the exchange, thus benefiting GM stock.
What’s more, GM stock could end up being the long-term winner, not Tesla. Still, the beauty of the burgeoning price war that may lead to a sector-wide culling is that GM doesn’t need to pip Tesla to achieve a massive victory. Again, it just needs to stay out of the crossfire. Once the aspirational upstarts suffer defeat, GM can get down to business.
To make a long story short, General Motors represents one of the few EV players that enjoy the capital strengths to withstand a war of attrition. For instance, in the first quarter of 2023, the automaker posted net income of $2.395 billion. It also adjusted its full-year 2023 guidance for automotive free cash flow (FCF) to a range between $5.5 billion to $7.5 billion. This compares favorably to the prior forecast of $5 billion to $7 billion.
To be fair, it doesn’t have the best financials in the space. However, the EV competition will almost certainly thin out if Tesla continues its aggressive price cuts. Having fewer distractions should ultimately benefit GM stock.
An Undervalued Profile Entices a Shot at GM Stock
For those willing to gamble on the old dog in this EV race, GM stock delivers an attractive multiple. Prior to the company’s disclosure of its Q1 earnings report, the market priced GM at a trailing multiple of 5.36. This ranks better (lower) than 90.67% of the competition.
With the inclusion of Q1 data (specifically the diluted earnings per share of $1.69), GM stock remains undervalued. The trailing multiple, in this case, would be near 5.0 times with respect to the latest share price.
Is GM Stock a Buy, According to Analysts?
Turning to Wall Street, GM stock has a Moderate Buy consensus rating based on six Buys, six Holds, and zero Sell ratings. The average GM stock price target is $50.18, implying 55.3% upside potential.
The Takeaway: Tesla Will Do the Dirty Work for GM
While industry players don’t necessarily desire price wars, if one materializes, it’s better to be financially well-stocked. That’s arguably the case for General Motors as Tesla decides to cull the competition. Over time, the thinning of the herd should benefit GM stock. Basically, Tesla did the dirty work, with GM needing to worry about fewer distractions.
