The auto makers and big banks have pretty much missed the market’s rally post-recession. Perhaps it is the market’s way of punishing those industries for their respective parts in the recession. What’s shocking is that auto sales have been one of the few consistent bright spots, yet General Motors Company (NYSE:GM) stock has fallen 10% since the end of 2010 versus a 74% gain in the S&P 500.
Looking ahead, we believe this trend is very likely to change. Never-mind the fact that GM stock pays a near 5% dividend yield, is gaining market share, and trades at only 5.4x FY2017 EPS. The big catalyst here is its Maven program. We believe that Maven will be a huge success, and its success will finally set General Motors stock free.
Why Maven is good for GM stock
Maven is a GM program that works in two different ways. First, GM rents cars at $8/hour which includes insurance and gas. This service is a direct competition to ZipCar and Enterprise’s car-sharing service.
Second, and most importantly, is Maven offers weekly rentals to Lyft drivers to drive GM vehicles. The program started in Chicago with 125 Chevrolet Equinox SUVs in Chicago at $99/week. However, the program has quickly spread into Boston, Washington, D.C., and Baltimore among other major U.S. cities.
The key takeaway here is that Maven allows GM to enter the “rent-a-car” business while also cementing its foot in the ride-share space. Initially, it seemed like GM would make the program exclusive for Lyft drivers after its $500 million investment in the company, but GM has since launched the hourly rental program, car rentals for consumers, and even a partnership to let Uber drivers use Maven to rent vehicles on a weekly basis. It is clear that GM sees Maven as a means to drive growth, in an industry where new car sales are now falling and more consumers prefer to lease or use car-sharing services exclusively versus owning their own vehicle.
Furthermore, Maven creates a recurring revenue stream in an enormous market for GM. In retrospect, General Motors figured out how to profit from the market that Lyft and Uber created, a market that is seen as bad for the likes of GM. And we believe the profits will be enormous.
According to Lyft, there are more than 150,000 people who were denied employment at Lyft due to vehicle specifications. Uber is several times larger than Lyft, so we have to believe the number is even greater at Uber. GM offers a solution, allowing those who are denied to rent their vehicles and be approved for employment. This “solution” could create billions of dollars in recurring revenue each year, and because GM would be manufacturing and selling the vehicles itself, the costs will be low and margins far higher than car sales. This bodes well for GM stock.
Why General Motors stock could double
Let’s say General Motors can eventually create a $10 billion business renting vehicles to consumers and ride-sharing employees. That’s still small relative to its current size, $162 billion in trailing 12-month revenue. However, it is important to remember two things.
First, the gained revenue won’t cost GM in lost revenue elsewhere, as it directly targets consumers who have abandoned car ownership and Lyft/Uber drivers who currently do not own a new vehicle. Thus, it creates growth, and really the market could be several times larger than $10 billion for General Motors.
Second, and most importantly, Maven’s success will finally cause stock multiple expansion. If you look throughout the market, companies with the highest valuation have a recurring revenue business model, whereas GM still creates revenue via one-time product sales. Maven puts GM front-and-center in an industry with hyper growth, something it lacks.
For proof, Uber is more valuable than General Motors at $65 billion. While Uber is nowhere near the size of GM, investors value Uber for its growth and long-term potential. We believe that once investors see and realize the growth potential of Maven, it will finally create real excitement for General Motors. And fact is GM stock could double from this point and still be dirt cheap at 11x forward earnings.
As the Maven program grows over the next two years, that’s exactly what we expect from General Motors stock.