To The Moon

$General Motors(GM)$

Lately, many investors have been eyeing General Motors. Since 2020, the company’s revenue has surged, and they've aggressively repurchased shares—buying back 15% year-over-year. With Trump potentially returning to office and promising higher tariffs on foreign automakers, some see GM as a strong investment opportunity. However, I believe there are significant weaknesses to consider.

The key factor for any automaker is vehicle deliveries, and GM’s have sharply declined. North America accounts for about half of its total sales, yet international revenue is only a small fraction of the total. The cars GM sells outside the U.S. are mostly low-priced and do not compete in the premium segment. This is evident in the company’s financials—over the last nine months, nearly all of GM’s profit came from North America, while international operations contributed almost nothing. Essentially, GM’s international presence is negligible, and its market share outside North America has been consistently shrinking.

The real concern is North American deliveries, which have dropped 20% since 2017. Although there was a post-2020 recovery, the long-term trend remains downward. This explains the stock’s strong rebound, but it also highlights that GM’s future hinges almost entirely on North America. The company has emphasized improved performance in China, but in reality, its international relevance is fading. Even if overseas revenue grows slightly, it won’t significantly impact overall profitability.

One key observation is pricing power. Despite a 20% drop in vehicle deliveries since 2017, revenue has skyrocketed—indicating significant price hikes. Consumers have undoubtedly noticed that new cars are more expensive than ever. However, despite these price increases, GM’s gross profit hasn’t grown much. Their gross margin, which was once around 14%, has dropped to 12%, suggesting that rising production costs are eating into their profits. This lack of efficiency makes it difficult for GM to compete with lower-cost Chinese automakers, further solidifying its dependence on the North American market.

Another important factor is GM’s debt. While high debt levels are normal for automakers, a closer look reveals that nearly all of GM’s long-term liabilities—$76 billion in long-term debt and $35 billion in short-term debt—are tied to GM Financial, the company’s leasing and financing division. This means a significant portion of GM’s balance sheet is linked to car loans rather than manufacturing operations.

Overall, while GM has managed to sustain revenue growth through price increases, its long-term competitiveness remains questionable. Investors should closely monitor North American deliveries, as they are the company’s primary driver of success.

When it comes to operating leases, GM’s heavy debt isn’t just about the cost of modernizing factories—it’s all tied to leverage within its financial segment. Unlike the automotive division, which generates $11 billion in profit, GM Financial only brings in around $2 billion. However, the automotive business heavily relies on GM Financial to keep revenues high. Consumers secure cheaper auto loans and leases through GM, fueling vehicle sales. Without this massive debt, GM Financial wouldn’t be able to issue as many loans or lease as many cars, and the company’s automotive revenue would be significantly lower.

But this comes with two major risks:

1. Loan Defaults – If more people start defaulting on their car loans, GM Financial could take serious losses.

2. Falling Used Car Prices – Lease agreements allow customers to either buy the car after their lease ends or return it to GM, which then resells it. If used car prices drop, GM could take a financial hit when trying to resell those vehicles.

Right now, neither of these risks has materialized. Used car prices are at all-time highs, and loan defaults remain low. However, interest rates aren’t expected to decline anytime soon—markets anticipate no rate cuts and possibly even rate hikes. U.S. bonds are currently expensive, which means borrowing costs remain high. If this situation worsens, GM could lose a substantial amount of money.

This also explains GM’s recent stock surge. Trump has proposed making interest on car loans tax-deductible, which would make financing more attractive and drive up car sales—benefiting GM. He has historically opposed high interest rates and would likely pressure the Federal Reserve to lower them. If that happens, auto loan rates would drop, further boosting GM’s sales.

However, the bigger picture remains: GM’s dominance is limited to North America. While its market share there has remained stable, it continues to shrink globally, particularly against low-cost Chinese competitors. If these companies successfully enter the U.S. market, GM could face serious challenges in the years ahead.

The Asia-Pacific region, particularly China, held significant promise for them, but they have lost 50% of their market share. North America's only hope is contingent on their ability to pass on their very high costs to the consumer. If Trump imposes tariffs on Chinese, European, and other foreign cars, GM has a good chance. In this scenario, net debt wouldn't be an issue, and net income would remain fairly stable. With a price-to-earnings ratio of 5, they could potentially buy back 10-15% of shares each year.

The Risks: GM Facing Disruption at Home

However, there are risks. If Americans refuse to pay high car prices and the government fails to prevent China from exporting vehicles cheaply to America, GM's stock could plummet back to the $27 range we saw not long ago. So, what am I willing to pay for GM right now? It's unrealistic to assume that revenue will continue growing as it has in recent years. There's a ceiling on pricing, and even if North America is completely closed off from foreign car makers, you can't indefinitely raise car prices. The economy and wages won't grow at the same rate as car prices have in the last few years, and deliveries will likely continue to decline.

Therefore, I prefer to be conservative. Even if Chinese manufacturers disrupt the market or gasoline vehicles become obsolete, GM might fall behind Tesla. A slight dip in deliveries or car prices could crush net income due to high fixed costs. This risk is substantial. If deliveries decline, share buybacks might cease, causing further decline.

Even if a Trump administration helps car makers, GM will struggle to massively cut costs without leaving America, which seems unlikely. That's why they're moving operations to Mexico, despite Trump's opposition. Assuming a stable market share but declining deliveries and prices, I expect GM to buy back 10-12% of shares, but net income will decline by 2-4%. No matter how much the industry is protected, it will face disruptions. With a 10x multiple, which is relatively high, $60 per share would offer a 21% upside. However, there's always the risk of a future administration lifting these barriers, allowing foreign manufacturers to flood the market and potentially destroy the company.

Valuation

We can’t assume revenue will continue growing at the same pace as in recent years. There’s a ceiling to how much consumers can pay for cars—wages aren’t increasing at the same rate as vehicle prices. Even if foreign automakers are blocked from the U.S. market, there’s still a limit. GM’s vehicle deliveries will likely continue declining, even under a Trump administration, unless the company finds a way to drastically cut costs without moving production outside the U.S.—which seems unlikely.

This is why GM has been shifting operations to Mexico, something Trump opposes. Assuming a stable market share but ongoing delivery declines, pricing alone won’t offset the drop in volume. Even with aggressive share buybacks of 10–12%, net income is still expected to shrink by 2–4% annually. No matter how much protectionism is in place, disruption is inevitable, and GM is heading toward it.

Valuation Scenarios

• If things go well: GM maintains net income, continues buying back shares aggressively, and even sees slight revenue growth. In this scenario, a 20x multiple would make it a strong turnaround story, but this seems highly unlikely. GM has struggled to cut costs meaningfully, and any increase in competition could send car prices tumbling. On top of that, their heavy reliance on loans poses a major financial risk.

• If things go poorly: Chinese automakers enter the U.S. market, gasoline vehicles lose relevance to EVs, and GM struggles to keep up with Tesla. If car prices or deliveries dip even slightly, GM’s high fixed costs could crush net income. In such a scenario, the stock could drop to $14 per share.

The Bottom Line

I expect reality to land somewhere between these extremes, but I don’t like investing in a company that is propped up primarily by rising car prices in North America—especially when those price hikes outpace wage growth and rely on tariffs shielding GM from competition. This feels like a ticking time bomb. Things might look fine for now—cars are selling, shares are being bought back—but eventually, the market will hit a ceiling. When it does, the correction will be swift and severe, not gradual.

I believe the outcome will fall somewhere between the worst and best scenarios. I don't favor a company reliant on North American car prices rising faster than wages and protected by tariffs. It's a ticking time bomb. While people might continue buying cars and shares being bought back, eventually, there's a ceiling. I think the disruption will hit suddenly, rather than gradually. Thus, I'll pass on GM at these prices due to high risk. I'm not particularly fond of car manufacturers anyway. What are your thoughts on this? Let me know below. Have a good day!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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