General Motors increases its electric vehicle investment to $27b — goes for electric gold - The Average Joe

    General Motors increases its electric vehicle investment to $27b — goes for electric gold

    Victor Lei — Head of Research

    Victor Lei — Head of Research

    November 24, 2020

    November 24, 2020

    “We are committed to fighting for electric vehicle (EV) market share in North America until we are number one.” — Mary Barra, CEO of GM

    GM isn’t backing down in an electric fight — especially not its CEO, who was brought in to turnaround the company in 2014.

    On Nov. 19, GM increased its planned investment into EV over 5 years from $20b to $27b with a goal of making 40% of its cars electric by 2025.

    It’s an electric world

    In Barra’s 6 year tenure, she prioritized two things: profitability and innovation.

    • In 2016, GM made a substantial investment in Lyft and acquired Cruise Automation, a self-driving car startup, for over $1b.
    • Exited unprofitable countries including Australia, Thailand and India — GM now operates in 9 countries, down from 25 in 2013.

    And on Sept. 6, GM announced a partnership with EV upstart, Nikola. A week later, Hindenburg Research accused Nikola of fraud — Nikola’s stock fell over 50% and its partnership with GM is now stuck in limbo.

    Despite Barra’s efforts to turn the company around, GM’s stock is only up 7% since Barra first joined the business 6 years ago. In the same period, Tesla is up 1,578% and Ford is down 45%.

    At the end of the day, investors are still valuing traditional car makers’ stock less than pure play electric car makers.

    If you’re not electric, you’re not welcome

    Traditional car makers are looking to go electric but they’ve got a big problem — they’re still traditional car manufacturers at their core and investors are treating their stock prices as such.

    The downside to being treated like an old car maker? Your stock is given a lower valuation — Tesla is valued at a price-to-revenue (P/R) ratio of 16.8x while GM trades at a P/R ratio of 0.5x.

    Meaning… Investors are willing to pay $16.8 for each dollar of revenue Tesla makes but will only pay 50 cents for each dollar GM makes — investors expect higher growth from companies that trade at a higher valuation (i.e. Tesla).

    For investors… Can GM become a growth company?

    Barra’s got two big tasks to give GM’s stock a boost and keep her shareholders happy:

    1. Successfully transform GM’s business towards electric vehicles, which will include repurposing its existing factories into building EV parts and revamping its workforce — an expensive process.
    2. Convince investors that GM is really an electric vehicle company — if it succeeds, investors could benefit from higher stock returns.

    Investor sentiment (i.e. general mood amongst investors) is important in investing and if GM fails at step 2, it’s stock could continue to underperform.

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