Yahoo Finance GM Stock: How General Motors Will Respond to the Tesla Model 3
When Elon Musk, CEO of Tesla Motors (TSLA), unveiled his company's Model 3 electric car, even he must have been relieved to see pre-orders stream in. Orders surpassed 325,000 within a week, even though production won't begin until next year.
It could be a sign that the futuristic technology that automotive engineers have promised for years has finally found a place for middle-class consumers. But for traditional car companies like General Motors Co. (GM), many of its future goals remain just that: for the future.
The automotive industry is going under a metamorphosis of sorts. Instead of investing in new factories or models, many have looked toward technology to shape their fate. Through teaming up with startups and testing new products in the market, we're seeing incubators of sorts come from these traditionally conservative companies.
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GM is investing in autonomous vehicles, electric cars and even ride-sharing services. Whether these efforts have a significant impact on the bottom line remains to be seen.
Electric vehicles lack profits. While Musk's Model 3 and its $35,000 price tag has gotten the headlines, GM already has an all-electric vehicle that's set to become available this year. The 2017 Chevy Volt will have a range of more than 200 miles per charge and is priced similarly to the Model 3.
However, don't expect GM sales to mimic Tesla's new darling -- most automakers haven't actually figured out how to make profits off an all-electric vehicle. Automakers "know what they (Tesla) have, know how they're doing it, but have no idea how they will make any money on the new vehicle," says Matthew Stover, an analyst for Susquehanna Financial.
Keep in mind that Tesla has yet to turn a quarterly profit. Musk says that Tesla is expected to be profitable this year on an adjusted basis, and Tesla says Model 3 orders represents $14 billion in implied future sales.
GM's challenge will be to find profit in Volt sales. The expense to build an all-electric vehicle and the lack of scale in terms of sales makes the venture enticing, but still very much an experimental enterprise.
But the Volt allows GM to have more of a place in the California market, where Honda Motor Co. (HMC) and Toyota Motor Corp. (TM) have reigned, says Morningstar analyst David Whiston. By developing the Volt, GM also ensures it passes U.S. emissions regulations.
Even if GM loses money on Volt sales, the project is a worthy experiment because GM can refine the process and reduce costs for future endeavors. Plus, GM can "easily subsidize losses on it, thanks to the other nearly 10 million vehicles they sell every year," Whiston says.
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Autonomous vehicles remain in the ether. If there's one thing that could transform the automobile industry in the next few years, it's self-driving technology. Some of the tools being developed by carmakers, startups and tech stalwarts, like Apple (AAPL) and Alphabet (GOOG, GOOGL), will "impact the business," Stover says.
GM has taken strides to ensure the trend doesn't completely pass it by.
The automaker has created a separate unit focused on autonomous vehicles, bought a navigation company, Cruise Automation, for more than $1 billion, and invested $500 million into ride-sharing startup Lyft, which includes a plan to deploy self-driving vehicles.
While analysts agree that GM should be making these investments into the future, Stover says it's not doing "a good job of clarifying its real strategy." Since no one knows what technology will end up leading to the tipping point, nor do they know the fallout once self-driving vehicles are on the road, GM is hedging its bets by investing in a variety of ideas.
Take its partnership with Lyft, for example. Lyft can help expose riders to self-driving cars, but there's also a fear that people in cities will own fewer cars while community vehicles become more the norm. If management was concerned by this trend, then should it consider developing its own share-riding service?
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You get a bonus if you wait. The appeal of GM is not what it's doing for the future, but what it's done recently. Low oil prices have boosted consumer demand for SUVs and full-size pickups, which are GM's most profitable vehicles. It recently renegotiated labor contracts for its workforce, which gives employees more money, but also provides GM with the ability to maneuver should U.S. sales suffer. And it has taken steps to address a recall related to an ignition switch malfunction that contributed mightily to a 19 percent drop in GM stock over the past year.
GM also is starting to use its size to its advantage, cutting costs in the development of vehicles. For instance, GM will reduce the number of platforms it builds its cars on from 26 to four by 2025.
"They're doing a good job of meeting the demand for today," Whiston says. But it's also "planting some good seeds for the future."
And the company pays you to wait for those opportunities with a nearly 5 percent dividend yield. Even without the potential that the new technologies bring, Whiston sees a 62 percent upside in GM stock.
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