Expanding EV Portfolio And Super Cruise Will Shape Automaker's Future

Key Takeaways

• GM's EV expansion, coupled with scale optimization and cost reductions, aims to enhance profitability by improving net margins and manufacturing efficiency.
  
• Strategic partnerships and restructuring efforts target increased profitability and efficiency, boosting net margins and earnings through cost savings and sustainable operations.
  
• Strategic shifts and external challenges threaten GM's profitability and market position, with restructuring, policy changes, and competition impacting revenue and margins.

Catalysts

Designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide.

• GM's EV portfolio is expected to significantly impact revenue growth as the company plans to wholesale around 300,000 EV units in 2025, up from 189,000 units in 2024. Optimizing scale and reducing cell costs could lead to improved profitability. This would improve net margins by lowering production costs and increasing manufacturing efficiency.
  
• The restructuring initiatives in China, including new product launches and operational adjustments, are expected to make GM's joint venture operations sustainably profitable. This should positively impact equity income and overall earnings.
  
• Planned enhancements and expansions of Super Cruise capabilities are forecasted to double the customer base in 2025. The resulting high-margin subscription revenue is expected to approach $2 billion annually within five years, significantly boosting net margins and recurring revenue.
  
• Partnering with Hyundai on product and purchasing collaborations is aimed at lowering costs and becoming more capital efficient. These efforts could increase net margins by reducing production costs through shared efficiencies across the global supply chain.
  
• GM's streamlined autonomous driving strategy, ending robotaxi development at Cruise, is projected to save about $1 billion annually. Refocusing resources on personal vehicle autonomy could improve overall earnings as costs are reduced without sacrificing innovation and technology leadership.

General Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Motors's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $7.8 billion (and earnings per share of $8.49) by about January 2028, up from $6.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.8 billion in earnings, and the most bearish expecting $5.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.6x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the US Auto industry at 17.3x.
• Analysts expect the number of shares outstanding to decline by 5.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

General Motors Future Earnings Per Share Growth

Risks

• GM faces challenges in China, needing extensive restructuring to achieve sustainable profitability, which could negatively impact their international revenue and net margins.
  
• The decision to stop funding Cruise's robotaxi development implies a shift in strategy, creating uncertainty around future revenue streams and impacting long-term earnings potential.
  
• High warranty costs, due to inflation in parts and labor, could burden profit margins unless effectively mitigated over time.
  
• A potential reversal in EV policies or changes in incentives under the new U.S. administration could alter the resource allocation strategy, possibly affecting EV-related revenues and profits.
  
• Intense competition and irrational pricing practices within the EV market may lead to pricing pressure affecting GM’s ability to maintain or increase its market share and profit margins in this sector.

Valuation

• The analysts have a consensus price target of $60.05 for General Motors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $194.7 billion, earnings will come to $7.8 billion, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $50.04, the analyst's price target of $60.05 is 16.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.