This article was originally published on Opto – Understand What Really Moves Markets.
This may be disappointing given GM’s early prominence in the US electric vehicle (EV) market and the theme’s upwards trajectory in 2020. Tesla’s [TSLA] share price, meanwhile, saw a 684% increase last year, making it the most highly valued automobile company in the world, and rival EV manufacturer Nio’s [NIO] share price jumped an impressive 1,288%.
Despite Tesla and Nio’s phenomenal runs, they have also become poster children for a potentially overextended bull market. For investors considering involvement with the EV theme, industry mainstay GM could be a better bet.
Why could GM’s share price benefit from EV investment?
GM’s shift to cleaner automobiles started in the spring of 2020, when it announced it would invest $20bn in EV production by 2025. At the time, Bank of America Global Research described the shift away from its more profitable petrol fleet as a “near term” risk, but acknowledged battery-powered vehicles are where the market is inevitably heading.
“The very active shift GM is making shows the confidence that they have to move where the market is going,” BoA analyst John Murphy said during a conference call in June.
In November, GM said it would have 30 EV models on the market by 2025. These would range from standard family cars to more luxury options. To get there, GM increased the amount it plans to invest to $27bn.
“We are pivoting to a growth strategy. We are committed to fighting for EV market share in North America until we are number one,” Mary Barra, CEO, told investors in November.
It’s no surprise that GM is ramping up investment in the EV theme. Research from IDTechEx shows that EVs will make up 80% of the worldwide automobile market by 2040. Adding impetus are US president-elect Joe Biden’s plans to invest heavily in clean energy and European cities adopting emission fines at an increasing rate.
Where next for GM’s share price?
The final answer as to which company will dominate the US EV market could ultimately come down to price. Battery technology is expected to make EVs as affordable as petrol vehicles between 2022 and 2024.
According to the Financial Times, Emmanuel Rosner, a Deutsche Bank analyst, predicts GM will get battery costs down to circa $75 per kilowatt-hour by 2025. While that’s well below the 2019 average of $156 KWh, it’s higher than Tesla’s target of $50 by the same year.
Still, as an established, profitable business, GM’s share price trades at a reasonable 7.84 price to earnings multiple, compared to Tesla’s 222.79X. GM’s share price is also lower in real terms — as of 15 January’s close, GM cost $49.97 per share, while Tesla sat at $826.16 per share. While Tesla has had a head start in the space, EVs will become the core business for all major car manufacturers. Given the scope of GM’s investment plans and its current share price, it could be a decent option for cost conscious investors looking to buy into the shift to EVs.
“GM continues to execute well on its Core and Future businesses, and remains one of the best positioned companies in our coverage over the long run,” Bank of America analyst John Murphy wrote in a note to investors last year.
Murphy rates the car manufacturer a buy, with a $72 target for GM’s share price. The analyst also has a $900 target on Tesla’s share price. Among the analysts tracking the stock on the Financial Times, GM has a median $51.50 price target — a slight 3% upside on its price through 15 January’s close. Tesla’s median target on the same site is $483, which would see a 41.5% downside on its current price (as of 15 January’s close).
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