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John Engle
John Engle
Articles (595) 

Is General Motors Now a Tech Stock?

By focusing attention on electric vehicles and autonomous driving technology, GM hopes to change its investment narrative

December 01, 2020 | About:

On Nov. 26, 2018, General Motors Co. (GM) announced a historic transformation plan committing the venerable automaker to double its investment in electric vehicles and autonomous driving technology by the end of 2020. In the two years since, GM has not wavered in its vision. Given its committment to the future of driving, could this mature stock eventually gain a tech stock valuation from investors?

Betting big on EVs

On Nov. 19, 2020, GM inaugurated the next phase of its grand EV strategy. Speaking at the Barclays Global Automotive Conference, CEO Mary Barra announced fresh investment commitments aimed at accelerating GM's transition to an all-electric platform:

"Climate change is real, and we want to be part of the solution by putting everyone in an electric vehicle. We are transitioning to an all-electric portfolio from a position of strength and we're focused on growth."

To achieve its lofty goals, which include bringing 30 all-electric vehicles to market by 2025, GM will invest $27 billion over the next five years, up from the $20 billion it had committed previously. As I discussed in a previous article for GuruFocus, some auto industry observers were skeptical of GM's green transition promises when they were announced in 2018. However, few can doubt their sincerity now.

Battery breakthrough on the horizon

GM's EV strategy is built on its Ultium battery and propulsion technology, which was unveiled in March to much fanfare. Ultium's pouch-cells use a proprietary battery chemistry that reduces the need for expensive cobalt without losing out on storage capacity and effective vehicle distance. As the Associated Press reported on Nov. 19, GM is promising a major battery breakthrough with its Ultium platform:

"General Motors says a pending breakthrough in battery chemistry will cut the price of its electric vehicles so they equal those powered by gasoline within five years. The technology also will increase the range per charge to as much as 450 miles."

If GM can deliver on its promised range improvements and cost reductions, which it says will be helped by its engineers' ability to optimize battery storage and layout in each vehicle they design, the venerable automaker could take a commanding lead in the EV technology race.

Shifting the investment narrative

The automotive industry is highly capital intensive, deeply cyclical and fiercely competitive. Consequently, the stocks of automakers tend to bear little resemblance to those of tech companies, a fact reflected historically by wildly different valuation multiples.

In recent years, however, this obvious distinction has been broken down by a wave of new entrants to the auto industry that have managed to garner valuation multiples more akin to those of tech stocks than to those of their established automaker peers. Tesla Inc. (TSLA) started a trend that has been followed by numerous others, such as Nikola Motor Corp. (NKLA).

With its latest media blitz highlighting its technological prowess, GM may be seeking to change its own narrative and to gain the premium valuation attached to its zippier rivals. If successful, it would mark a remarkable narrative shift of almost unprecedented scale for a company so thoroughly established in the marketplace.

My verdict

Can GM convince the market to reevaluate its business along similar lines by focusing on its progress on EV technology? That remains to be seen, but I have my doubts.

While new entrants have proven they can claim tech company narratives and their attendant tech stock valuation multiples, it may prove harder for a venerable incumbent to do likewise. More likely, the valuations of the high-flying newcomers will end up falling into line with their established peers.

Disclosure: Author is short Tesla.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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