General Motors Company (GM) is one of the biggest automobile manufacturers in the United States, forming one of the big three companies in this sector. Though its high fixed costs led to a bankruptcy filing in 2009, GM has made a remarkable recovery to reach new highs more than a decade later. Despite its bankruptcy declaration in 2009, GM made one of the biggest IPO debuts in US history by raising $2.1 billion just a year later.
Nikola Corporation (NKLA) is a relatively new company pioneering electric vehicles, making its market debut in June 2020. Being dubbed “Tesla of trucking,” it is one of the first companies to develop a pipeline of hydrogen-powered trucks. Blank check company Vector IQ acquired NKLA through a special purpose acquisition, following which NKLA became a public company.
Both the companies have generated decent returns over the past month. However, GM is the clear winner with 23.5% gains over this period versus NKLA’s 7.5% returns. But which stock is the better buy right now? Let’s find out.
On September 8th, GM and NKLA announced a strategic partnership agreement between the two companies. GM invested $2 billion in NKLA in exchange for an 11% equity stake. This deal is expected to help NKLA cut down approximately $5 billion in costs over the next 10 years. In return, GM should gain over $4 billion through equity benefits, contract manufacturing of Nikola Badger and become the exclusive global supplier of fuel cells to NKLA outside of Europe.
On October 20th, GM announced conversion of the assembly plant in Spring Hills to a manufacturing unit for a capital investment of $2 billion. Earlier this month, the company invested $2.2 billion to develop its Detroit assembly plant as factory zero for exclusive electric vehicle assembly.
It is currently developing the GMC HUMMER EV, a neoteric electric super-truck, which is expected to hit the market by 2022. GM partnered with Uber Technologies (UBER) in September to boost the industry transition to electric vehicles through special pricing strategies. It also signed a memorandum of understanding with Honda to establish a strategic alliance in North America to share common vehicle platforms as well as collaborate on technological advancements.
NKLA raised $12 billion through its SPAC IPO and private investment in public equity (PIPE) from Fidelity management, Value Act Spring Fund, and P. Schoenfeld Asset management LP earlier this year. In July, NKLA announced the sale of 23.9 million shares following an exercise of warrant.
In September, NKLA’s founder and CEO Trevor Milton announced his stepping down, amid allegations of misleading investors by overstating the company’s progress.
Recent Financial Results
GM delivered over 771,400 vehicles in China in the third quarter that ended September 2020, indicating a 12% rise year-over-year.
NKLA generated $36,000 in solar revenues in the second quarter that ended June 2020. Its German manufacturing facility Iveco’s Ulm is currently under construction, and is expected to produce 10,000 units per year from the fourth quarter of 2021. NKLA is also building a production unit in Arizona, which is expected to deliver 30,000 trucks by the fourth quarter of 2021.
Expected Financial Performance
Analysts expect NKLA’s EPS to rise 2.3% next year, and at a rate of 21% per annum over the next five years. The consensus revenue estimate of $78.9 million for full year 2021 indicates a 78,800% surge year-over-year.
On the other hand, analysts expect GM’s EPS to grow 87.3% to $4.57 in 2021. Its EPS is expected to grow at 1.9% per annum over the next five years. The consensus revenue estimate of $133 billion for the next year indicates an 11.8% improvement from the year-ago value.
GM’s trailing 12-month revenue is 263,159.09 times what NKLA generates. However, NKLA is more profitable with a gross margin of 41.6% versus GM’s 8.3%.
In terms of trailing 12-month price/sales, NKLA is currently trading at 3,510.75x, nearly 100% more expensive than GM, which is currently trading at 0.44x. NKLA is also more expensive in terms of EV/Sales (16,433.89x versus 1.32x) and price/ book ratio (8.56x versus 1.28x).
Thus, GM is the more affordable stock here.
While GM is rated “Strong Buy” in our proprietary POWR Ratings system, NKLA is rated “Sell”. Here’s how the four components of overall POWR Rating are graded for both these stocks:
GM has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and “B” for Industry Rank. It is currently ranked #1 out of 29 stocks in the Auto & Vehicle Manufacturers industry.
NKLA holds an “F” for Trade Grade and Buy & Hold Grade, a “D” for Peer Grade, and a “B” for Industry Rank. It is currently ranked #20 in the same industry.
Though NKLA seems a good investment bet on paper, the company is yet to launch its vehicles in the market. It is currently building manufacturing factories, following which vehicle production is expected to begin. Also, NKLA is currently in the process of manufacturing hydrogen fuel cell EVs and trucks, which have no proven track records. While hydrogen big rigs are an impressive innovation and are expected to be more efficient that battery run cars like Tesla, the practicality of this venture is yet to be realized. In this regard, the former NKLA CEO made several false assertions regarding the technology used by the company, which led to SEC investigations and thereby impromptu resignation. The developments in just 4 months of public trading shed a negative light on the stock.
Conversely, GM’s performance has been consistently impressive over the years, and the company has managed to retain its position as one of the top three automobile manufacturers in the United States. A proven track record at an affordable valuation makes it a solid investment bet.
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GM shares were trading at $34.83 per share on Tuesday afternoon, down $0.99 (-2.76%). Year-to-date, GM has declined -3.68%, versus a 6.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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