Electric vehicle stocks like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) have been among the hottest stocks in the market. But General Motors (NYSE:GM) stock is the best way to invest in EV technology at an attractive valuation.
Tesla and Nio are hoping to grow into what GM is today maybe 10 years down the line. Both companies are struggling to turn a profit. Both companies are diluting shareholders by repeatedly raising capital. Meanwhile, GM’s business is a cash cow, and it’s stock is dirt cheap.
If you’re investing in high-flying EV stocks, you’re buying into a classic stock market bubble. It won’t end well. But if you are buying GM stock, you are investing in an EV stock with an attractive valuation. The GM rally may be just getting started.
GM Stock Is an EV Play
Tesla shares have skyrocketed to absurd levels in the last 18 months because Tesla is a story stock. Story stocks are stocks that people buy because they believe in a story. The story for Tesla is that EVs are the future, and Tesla is the biggest and best EV maker.
In reality, Tesla’s entire business is a small fraction of the size of GM’s business. Last quarter, for example, Tesla reported $8.7 billion in revenue and $331 million in profits. The same quarter, GM reported $35.4 billion in revenue and $4 billion in profits.
Tesla’s shareholders are paying a high cost for its future via dilutive equity offerings. GM’s legacy internal combustion engine vehicle sales are funding its EV future.
In November, GM announced it plans to invest $27 billion on EV and autonomous vehicles through 2025. GM also plans to release 30 EV models globally by 2025. For comparison, Tesla currently has exactly four EV models.
Tesla just missed its target of 500,000 EV sales in 2020. GM plans to sell twice as many EVs annually by 2025. Meanwhile, those ICE sales and profits are going to keep flowing in for GM. Tesla will continue to struggle to break even as its regulatory credit sales dry up in coming quarters.
GM also beat Tesla to the punch with autonomous vehicle technology. GM recently began testing fully autonomous vehicles in San Francisco. This testing involves vehicles without driver monitors in the car. Tesla’s “Full Self-Driving” option requires a driver to stay alert and be prepared to take over at any time. So GM’s technology is fully self driving while Tesla’s FSD is not.
GM Is a Value Stock
Tesla shares are up 1,680% in the past 18 months. GM stock is up 12.4% in that time. Tesla shares trade at 1,615 times 2021 earnings. GM trades at 7.3 times 2021 earnings. Tesla trades at 27.4 times sales. GM stock trades at 0.5 times sales.
I don’t mean to single out Tesla. Nio trades at 44.3 times sales. Workhorse (NASDAQ:WKHS) trades at 5,110 times sales. Nikola (NASDAQ:NKLA) trades at 49,773 times sales.
Virtually every pure EV stock on the market is trading at bubble valuations. Yet none of these EV stocks have the cash flow of a legacy ICE business to fund their next-generation EV and AV technology. Not only is GM stock undervalued compared to other EV stocks, it’s significantly undervalued compared to the rest of the market. GM stock trades at about a 70% discount to the S&P 500’s forward earnings multiple of 24.1.
Analysts’ Take
I’m not the only person who thinks EV stocks are overvalued. The Wall Street analysts that cover Tesla have an average price target of $495, about 39% below its current share price. The analysts that cover NIO stock have an average target of $50.20, or about 7% below its current price. For GM, the average analyst price target of $52 represents more than 20% upside.
“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 says. He has a “buy” rating and $72 target for GM stock.
In the near term, Morningstar analyst David Whiston says GM is poised to report some big fourth-quarter numbers in February.
“We see potential for good quarterly earnings, scheduled for Feb. 10, due to strong retail demand from GM’s pickups and full-size SUVs, which are the most profitable vehicles it sells,” Whiston says.
Morningstar has a “buy” rating and $52 fair value estimate for GM stock.
Bottom Line
Market bubbles inflate and then they burst. The pattern happens over and over again. Momentum stocks have momentum until they don’t. EV stocks have all the momentum right now in a wild market.
I believe investing in EV technology is a smart idea. But paying bubble prices for EV stocks like Tesla and Nio is a dumb idea. In the long term, fundamentals always win out. GM investors don’t need to tell themselves a story. The story is right there in the valuation numbers. GM stock is an EV play that provides long-term exposure to next-generation auto tech at an extremely low valuation.
On the date of publication, Wayne Duggan held a long positions in GM.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. He is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.