In this piece, I evaluated two automobile stocks, General Motors Company (GM) and Nikola Corporation (NKLA), to determine which is a better investment. Based on a fundamental comparison of these stocks, I believe GM is the better buy for the reasons explained throughout this article.
Supply chain disruptions, high inflation, and rising interest rates led to a decline in the sales of light vehicles last year to their lowest level since 2012. Over 13.75 million light vehicles were sold the previous year, representing a year-over-year decline of 8% to 9%. However, GM stood out as it registered a 2.5% year-over-year rise in vehicle sales last year.
Last year, the company also reclaimed the top spot as America’s leading automaker from Toyota Motor Corporation (TM). Auto sales are expected to bounce back this year. According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units.
Automakers are slowly shifting their focus from internal combustion engine (ICE) vehicles to electric vehicles (EVs). Many automakers plan to phase out their entire ICE vehicle lineup as early as 2030. Strict government regulations and subsidies on EVs are driving the sales of EVs.
While NKLA has been a pure-play EV and hydrogen fuel cell electric vehicle (FCEV) player, GM has been focusing on expanding its EV business lately. GM has plans to build one million EVs in North America by 2025 and to stop selling gasoline-powered vehicles by 2035.
GM surpassed the consensus EPS and revenue estimates in the first quarter. Its EPS came 26.9% above analyst estimates, while its revenue beat the consensus estimate by 1.5%. On the other hand, NKLA’s EPS and revenue came below analyst estimates. Its earnings came 2.3% below analyst estimates, while its revenue fell short of the consensus estimate by 10% during the first quarter.
GM updated its fiscal 2023 guidance with its GAAP net income attributable to stockholders now expected to come between $8.40 billion and $9.90 billion, compared to the previous expectation of between $8.70 billion and $10.10 billion. Its adjusted EBIT is expected to come between $11 billion and $13 billion, compared to the previous outlook of between $10.50 billion and $12.50 billion.
It also raised its outlook for net automotive cash provided by operating activities to $16.50 billion and $20.50 billion, compared to the previously expected $16 billion and $20 billion.
NKLA received orders for 140 hydrogen fuel cell trucks during the first quarter. The company said it was selling its stake in its European joint venture to Iveco Group in exchange for $35 million cash and the return of 20.6 million shares of NKLA held by Iveco.
When it comes to price performance, GM has performed better than NKLA despite both companies reporting negative price performance. GM’s stock has declined 0.7% in price year-to-date and 7.2% over the past year. In comparison, NKLA’s stock has declined 63.9% year-to-date and 87.5% over the past year.
Here are the reasons I think GM could perform better in the near term:
Recent Financial Results
GM’s revenue for the first quarter ended March 31, 2023, increased 11.1% year-over-year to $39.99 billion. Its adjusted EPS came in at $2.21, representing an increase of 5.7% over the prior-year quarter. The company’s automotive operating cash flow increased 36.5% year-over-year to $2.23 billion. Also, its adjusted net income attributable to common stockholders increased 0.9% year-over-year to $3.10 billion.
For the fiscal first quarter ended March 31, 2023, NKLA’s gross loss came in at $32.91 million, compared to a gross profit of $431 thousand in the year-ago quarter. Its adjusted EBITDA loss widened 60.1% year-over-year to $126.72 million. The company’s net loss widened 10.6% over the prior-year quarter to $169.09 million. Also, its non-GAAP loss per share widened 23.8% year-over-year to $0.26.
Expected Financial Performance
GM’s EPS for fiscal 2023 and 2024 is expected to decline 12.7% and 2.8% year-over-year to $6.63 and $6.44. Its revenue for fiscal 2023 and 2024 is expected to increase 4.9% and 2% year-over-year to $164.46 billion and $167.67 billion. Its EPS and revenue for the quarter ending June 30, 2023, are expected to increase 45.6% and 17.1% year-over-year to $1.66 and $41.87 billion, respectively.
For fiscal 2023 and 2024, NKLA’s EPS is expected to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 188% and 216.6% year-over-year to $146.38 million and $463.44 million. Its EPS for the quarter ending June 30, 2023, is expected to remain negative. Its revenue for the same quarter is expected to decline 21.1% year-over-year to $14.31 million.
Profitability
GM’s revenue is 2,676 times what NKLA generates. GM is more profitable, with a gross profit margin and Return on Equity of 13.39% and 13.09%, compared to NKLA’s negative 229.95% and 137.05%, respectively. Also, GM’s asset turnover of 0.62x compares to NKLA’s 0.06x%.
Valuation
In terms of forward EV/Sales, GM is currently trading at 0.87x, 492% lower than NKLA’s 5.15x. GM’s trailing-12-month Price/Sales ratio of 0.30x is significantly lower than NKLA’s 6.18x. Likewise, GM’s trailing-12-month Price to Book of 0.67x compares to NKLA’s 0.85x.
Thus, GM is relatively more affordable.
POWR Ratings
GM has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, NKLA has an overall rating of F, translating to a Strong Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GM has a B grade for Value, in sync with its discounted valuation. NKLA’s stretched valuation justifies its D grade for Value.
Of the 58 stocks in the Auto & Vehicle Manufacturers industry, GM is ranked #19, while NKLA is ranked #55 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, Sentiment, and Quality. Click here to view GM’s ratings. Get all the ratings of NKLA here.
The Winner
The automobile industry is rapidly moving towards an electrified cleaner future. NKLA started the electric vehicle journey earlier than GM, but GM is making rapid inroads into the EV market. GM’s strong fundamentals, investments in battery manufacturing, and agreements for a non-disrupted supply of essential chips will likely fuel its future growth.
On the other hand, NKLA continues to face tough competition from its much-fancied peers like Tesla, Inc. (TSLA). Although the company has set bold production targets for fiscal 2023, one has to be careful while considering these predictions, as it has previously failed to meet its production targets.
Considering these factors, GM could be a better choice than NKLA.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry here.
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GM shares were trading at $32.09 per share on Wednesday afternoon, down $1.33 (-3.98%). Year-to-date, GM has declined -4.39%, versus a 7.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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