Will EV investment pay off for the General Motors share price?

General Motors stocks dipped last week after the auto giant reported a 43% drop in sales for the December quarter, but the company is banking on its investment in electric vehicles to accelerate growth.

Feb. 14, 2022

This content has been produced by Opto and was originally published on the Opto Blog.

GM plans to invest $35bn in electric vehicles in the next three years, with the aim of overtaking Tesla [TSLA] as the largest US-based EV maker by 2025. This aggressive growth strategy has hurt profits in the short term, with pretax adjusted earnings in Q4 coming in at $2.839bn, down from $3.712bn in the year-ago quarter.

The ongoing semiconductor shortage and higher commodities and logistics costs also put pressure on GM’s earnings, though CEO Mary Barra remained optimistic in the Q4 earnings call.

“We’re just going to keep going full out because we see the opportunity for substantial EV volume growth,” Barra said. The executive told shareholders that GM expects investments in the electric vehicle portfolio to help bring “meaningful revenue growth starting in 2023”.

GM stocks slump

Despite the company’s positive longer-term vision, the GM share price has been under pressure in 2022. It has fallen 14.2% since the start of the year to close at $50.34 on 10 February, while in comparison its rival Ford [F], which is also making moves in the EV space, was down 12.5% over the same period.

The EV acceleration means that stockholders should not expect a dividend any time soon. The auto firm cut its dividend in April 2020, in the early months of the pandemic, and Barra confirmed that General Motors is preserving capital to spend on developing its electric vehicle offering. The company expects annual capital spending of between $9bn and $10bn this year and for this to continue in the medium term.

“As we move forward, we will consider all opportunities to return excess capital to shareholders, but we will not reinstate a dividend at this time,” Barra said in the Q4 earnings call. “Our clear priority is to accelerate our EV plan and drive growth.”

EV demand surge

GM hopes to tap into the booming EV market by developing 30 new global EV models by 2025 and aims to only sell zero-emission vehicles by 2035. However, it is a long way off achieving this target, with a total of 26 EVs sold in the fourth quarter of 2021.

Nevertheless, Barra pointed out that General Motors has 110,000 reservations for its electric Silverado, 59,000 for the GMC Hummer EV pickup and SUV, and 25,000 cargo vans for its new BrightDrop electric commercial vehicle business. She also highlighted growing customer demand for its Ultium battery, which forms an integral part of the company’s plans to develop efficient and affordable EVs.

The firm is expected to announce the site for a fourth electric vehicle battery plant by the end of June, and is also in the process of converting its existing production capacity to pivot away from internal combustion engine vehicles and towards EVs.

Despite the global shortage of semiconductors, the company estimated production to increase by 25-30%, surprising many Wall Street analysts. It also expects net income in 2022 in the range of $9.4bn to $10.8bn, in line with its $10bn profit in 2021.

Analysts are mostly optimistic

Although GM’s EV ambitions have failed to rally its share price so far, some analysts are more positive.

According to 23 analysts polled by MarketScreener, General Motors stock has a consensus rating of ‘buy’ and average price target of $76.11, representing a potential upside of 51.2% from the current value.

RBC analyst Joseph Spak raised his price target on the GM stock from $74 to $85 on the back of the company’s forecast for 25-30% wholesale volume growth in 2022. Spak also cited GM’s confidence that the chip crunch is easing enough for it to achieve its quarterly production target.

However, others are still unconvinced. Nomura analyst Anindya Das downgraded General Motors from ‘buy’ to ‘neutral’ with a price target of $56. However, Das expects the company will recover from chip shortages by Q3 2022, and calls its plans to invest in EVs and its driverless car subsidiary Cruise “a prudent strategy”, The Fly reported.

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