(ticker: TSLA) stock seems unstoppable—but
(GM) shares are a better buy.
Let’s make one thing clear: We aren’t betting against Tesla (TSLA). That has been a disastrous idea for a long time, as Tesla stock has gained more than 800% over the past year and about 25% during the past week alone. But we do sense a bit of froth in its shares—Tesla is valued at, roughly, $1 million per vehicle delivered—and we’d rather let the trade play out heading into this week’s stock split than jump in right now.
General Motors, on the other hand, is valued at less than $10,000 per car delivered, less than 1/100th of Tesla’s valuation, after dropping 21% this year. That’s far worse than the returns of the
Dow Jones Industrial Average.
GM stock rose about 3% this past week, to $28.56.
There are fundamental reasons for the divergence in performance. GM’s 2020 earnings, for instance, are expected to be cut in half relative to 2019. Tesla’s earnings, on the other hand, are improving despite the pandemic, and are expected to double in 2021. Tesla is firing on all cylinders—even though its vehicles have no cylinders.
But with Tesla valued as it is, there is a strong sum-of-the-parts case to be made for GM stock. That’s a way of valuing a company by looking at its component pieces to identify where valuation anomalies exist. In fact, analysts use this method to help justify Tesla’s extreme valuation on simpler metrics like price/earnings; it trades for 140 times estimated 2021 earnings.
Tesla sells cars, but it also has a solar-panel and energy-storage business, and it might sell batteries to other auto makers in the future, too. What’s more, CEO Elon Musk has plans for a robo taxi service based on used Tesla vehicles and internally developed autonomous-driving software. Add those parts up, and you could get a valuation of roughly $475 billion based on Wall Street’s blue-sky scenarios. That compares with a current market cap of $382 billion.
There’s a sum-of-the-parts case to be made for GM, too. It has its legacy car business, but also a growing electric-vehicle business and an autonomous-driving unit. Morgan Stanley analyst Adam Jonas believes that GM’s electric-vehicle business could be worth up to $100 billion—based on how the market is treating other EV companies these days. (EV stocks that Barron’s tracks are up more than 250% year to date, on average.)
The $100 billion figure is a huge number. To justify it, Jonas assumes that GM’s electric-vehicle mix will be 80% of total sales by 2040. That would represent average annual growth of roughly 25%, based on GM’s size today.
That’s a long way off. But Jonas’ thinking isn’t unique. Deutsche Bank analyst Emmanuel Rosner sees GM selling up to 500,000 electric vehicles by 2025. That would represent average annual growth of more than 50% between now and 2025.
The question now is how to unlock that value. Rosner, for one, thinks GM should spin off its EV unit as a separate company, something it could do because it has no European operations or joint ventures in China to complicate matters. A spin would make it easier for GM to raise needed funds for EV development and provide investors with another EV stock to value separately.
Rosner believes General Motors’ EV business could be valued between $15 billion and $95 billion. Around a midpoint of $50 billion, GM-EV would be worth very close to where GM stock trades today, and worth about one-eighth what Tesla is worth.
An EV spin leaves investors to value a shrinking gasoline-powered car business. It’s profitable. But at even five times estimated 2021 earnings, the legacy car business could be worth roughly $20 a share, or almost $30 billion.
GM Cruise, the autonomous-driving unit, is worth up to $19 billion based on recent investments from automotive players. The book value of GM’s lending unit is another $12 billion. Adding it all up and adjusting for debt and pensions, GM stock could hit $60—more than double where it is today.
Yes, that’s probably the best-case scenario, and Jonas has a $46 price target on GM stock, while Rosner’s is $33. But even the average of those targets—about $40—point to sizable gains.
If investors look at GM’s business closely, they could find that it’s the next hot EV stock.
Write to Al Root at [email protected]