3 Reasons to Sell GM and 1 Stock to Buy Instead

What a fantastic six months it’s been for General Motors. Shares of the company have skyrocketed 59.3%, hitting $75.26. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy General Motors, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is General Motors Not Exciting?

Despite the momentum, we don't have much confidence in General Motors. Here are three reasons why GM doesn't excite us and a stock we'd rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Automobile Manufacturing company because there’s a ceiling to what customers will pay.

General Motors’s units sold came in at 977,000 in the latest quarter, and over the last two years, averaged 1.6% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect General Motors’s revenue to drop by 1.1%, a decrease from its 10.1% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges.

3. Low Gross Margin Reveals Weak Structural Profitability

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

General Motors has bad unit economics for an industrials business, signaling it operates in a competitive market. This is also because it’s an automobile manufacturer.

Automobile manufacturers have structurally lower profitability as they often break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years later - this explains why new entrants such as Rivian, Lucid, and Nikola have negative gross margins. As you can see below, these dynamics culminated in an average 12.2% gross margin for General Motors over the last five years.

Final Judgment

General Motors isn’t a terrible business, but it doesn’t pass our bar. Following the recent rally, the stock trades at 6.9× forward P/E (or $75.26 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere. Let us point you toward a top digital advertising platform riding the creator economy.

Stocks We Would Buy Instead of General Motors

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