My top pick for the year ahead is well-positioned for the future in both electric vehicles (EVs) and autonomous vehicles (AVs), in addition to having an under-appreciated stock given the catalysts ahead.
You got it, General Motors (GM) is my top stock pick for 2022.
GM has invested heavily to prepare for a carbon-neutral future where EVs are mainstream and AVs reduce traffic and congestion. The company will emerge as a leader in both, in my view, propelling the stock 30% to 40% higher in the upcoming year.
While GM has manufactured the Chevy Bolt since 2016, it only started building EVs equipped with the latest battery technology at the end of 2021. The Hummer, the first EV with Ultium batteries, was runner-up for MotorTrend's truck of the year. A steady flow of 30 models will roll out over the next four years -- more planned than any carmaker.
Focus on High-Value Revenue
The shift to EVs offers a massive opportunity to provide software and services. GM aims to double revenues by 2030, mostly from high-margin sources.
From robotaxis to delivery, numerous services are possible with AVs, and commercialization starts in 2022. GM believes autonomous driving services through Cruise can achieve revenue of $50 billion by the end of the decade. The stock market has yet to factor in this opportunity. Self-driving software on GM's vehicles will be another important revenue source that will become more apparent next year.
Brightdrop, GM's EV delivery division, delivered the first vans to FedEx (FDX) at the end of 2021. Based on GM's Ultium battery platform, Brightdrop EVs will help scale battery production while electrifying delivery fleets with an ecosystem of software and services. Additional orders and ramped-up production will make this division's value more recognizable to investors.
GM also has an opportunity to supply EV technology beyond their own vehicles. Deals with other OEMs should also become a stock catalyst down the road.
Consistent Profits to Invest in the Future
GM has been churning out steady profits over the past five years. The upcoming year will likely be another strong one for earnings, with the loosening of chip supplies reducing manufacturing bottlenecks.
Although GM has demonstrated an ability for operating efficiency even while investing billions into EVs and Cruise, Wall Street values the stock like a cyclical company, always preparing for the next downturn with a rock bottom P/E multiple. With a P/E of 8, GM's valuable assets are unrecognized in the valuation, and many analysts find the sum-of-the-parts far greater than the current price.
The majority-owned Cruise division is mostly unreflected, last valued at $30 billion, with GM's stake worth about $15/share. Cruise won't be spun off into a public company anytime soon to capitalize on the sum-of-the-parts value, but CEO Mary Barra deserves investors' faith on the strategic direction of the self-driving unit retaining more value as part of GM. Barra projects $50 billion in revenue from Cruise by 2030.
Wall Street has put outsized valuations on pure-play upstarts, Tesla (TSLA) , Rivian (RIVN) , and Lucid Motors (LCID) , along with high expectations of dominating the EV industry. While Tesla has proven itself a leader and formidable competitor, the others have not. There's a strong likelihood legacy automakers such as GM and Ford (F) -- with manufacturing, design, and supply chain expertise -- will also become a force in EVs. Plus, their strong current profitability helps fund the capital investments necessary to produce EVs.
Setbacks and Skepticism Create an Investment Opportunity
This past year, GM addressed a manufacturing defect in Chevy Bolt's battery that caused fires in several vehicles. A recall of all 140 thousand Bolts sold is underway to replace the battery packs. Although LG Chem, GM's battery partner, footed the $1.9 billion tab for the defect, the reputational and sales hit went to GM -- the shares fell about 20% at the time. Although the stock has mostly recovered from the battery recall, there's still an overhang from lingering Bolt production issues due to the limited supply of battery packs allocated toward recalled cars instead of newly manufactured ones.
The stock took another hit last week, falling about 10%, after the CEO of Cruise, abruptly departed the company following a strategic difference with GM's CEO Barra. In the interim, Cruise is under the capable leadership of its co-founder and CTO, Kyle Vogt. Yet, the market was quick to react skeptically regarding GM's future, which has helped keep the shares in a prime investable range. Ultimately, Cruise's autonomous technology will become a key differentiator for GM, currently not reflected in the stock price.
The path for GM's goal to double revenue by 2030 will likely become apparent in 2022, significantly lifting the stock. The low multiple to earnings, reflecting a deeply cyclical company, should start to expand as investors appreciate GM more as an innovative growth company.
In my view, an earnings multiple increase to a still modest 10 to 11 range will move the stock 30% to 40% higher next year -- making GM one to own in 2022.