Over the last six months, General Motors’s shares have sunk to $49, producing a disappointing 8.4% loss while the S&P 500 was flat. This 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? See what our analysts have to say in our full research report, it’s free.
Why Is General Motors Not Exciting?
Even with the cheaper entry price, we're sitting this one out for now. 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 912,000 in the latest quarter, and over the last two years, averaged 5.8% 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 5.3%, a decrease from its 6.9% annualized growth for the past five years. This projection doesn't excite us 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 12.5% gross margin for General Motors over the last five years.
Final Judgment
General Motors isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 4.4× forward P/E (or $49 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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