Chit Chat Stocks - General Motors (Ticker: GM) with Travis Hoium

Episode Date: May 4, 2023

General Motors Company (GM) is a multinational corporation that designs, manufactures, and markets vehicles and vehicle parts, and has recently committed to electric vehicles with its Ultium platform, while also facing chip shortages and production disruptions. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Travis's work? Check out their Twitter here: https://twitter.com/TravisHoium?s=20 Contact us: [e-mail] Timestamps GM | (2:21) Cruise | (18:59) Risks | (41:51) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. My name is Ryan Henderson, and I am joined by my co-host, Brett Schaefer, as always. Today, we've got our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we have on the show, Travis Hoyum to talk General Motors. Travis is a friend through our contracting work at The Motley Fool. He has a really good understanding of General Motors, different business drivers. and I like that he looks at it differently than a lot of other people. He realizes the opportunity and potential that they have and you can tell he's an optimist in the way that he invests and the way that he describes the business. I think there's a lot to like, especially within their

cruise segment, but I will save that for the interview. Without further ado, here's our discussion with Travis Hoyum. welcome to chit chat money on this show host ryan henderson and brett shaffer interview industry experts and riff on the world of investing as a quick reminder to chat money is a ccm media group podcast ryan and brett are also general partners at arch capital and arch capital may have positions in the securities discussed in this podcast Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

Now, please enjoy this episode. Welcome to Chit Chat Money. Today, we are joined by a, I guess, longtime friend through The Motley Fool, a fellow Fool contractor, and has his own email newsletter called Asymmetric Investing. His name is Travis Hoyum. Travis, I guess, before we get into things, how are you? Welcome to the show. Doing well.

I'm excited to talk about a fun stock that may be a little bit divisive today. So hopefully we'll have a good conversation about it. Yeah, and we are going to be talking about, I'm sure listeners saw the title of the show, but we're going to be talking about General Motors or GM, which I'm guessing most people have some, whether they've looked at it or not, kind of have some existing beliefs on the company and probably think it's kind of old school legacy, but we'll get into kind of, I guess, more of why that narrative could be wrong. But for starters, let's talk about the automotive business. Can you go through their basic strategy, how they make money, what their

current products are, and just kind of a general company overview? The basics of General Motors is they sell vehicles, but specifically they sell trucks and SUVs, particularly in North America. That's about 90% of what they're selling right now. That's partially because during the pandemic, if you're an automaker, you go, okay, am I going to sell an $80,000 Tahoe that I can make a 20, 25% gross margin on, Or am I going to sell a $25,000 compact vehicle that I'm going to make a $2,000 gross margin on? Well, that decision is pretty easy. So GM and other legacy automakers really shifted, leaned in hard to trucks and SUVs, but they've been moving that direction for quite a while now.

So that's the biggest part of their business is specifically the North American truck and SUV market. They also have an international business. They have a joint venture in China, which is actually really big. They made 2.6 million vehicles last year, but it doesn't contribute much to the bottom line. Then there's a financial arm, which again is this strange thing because it's like the lubricant of the auto business. You go in and you want to buy a vehicle, but you don't have $60,000 in cash. When you walk in the door, you're not walking in with a briefcase. So you want to finance it. And GM Financial is going to be one of your leading options if you're going to a GM dealer. And then they have Cruise as their other business. That's actually a business that they've owned for quite a while now. They own about 80% of Cruise, but they're actually starting to include it specifically in their financial statements. And Kyle Boyd, the CEO of Cruise, is starting to make an appearance on conference calls. So it's sort of telling that that's a bigger piece of the business going forward. what are some of the go ahead ron what are some of the brands under the gmc umbrella

so you have uh chevy is going to be the biggest one gmc buick uh cadillac what am i missing here those are the big ones yeah yeah i think everyone yeah everyone's got those yeah it's different than ford where ford has the one where gm is it's just a little more confusing but we're gonna hit But everything that Travis just mentioned that we're going to hit the financing arm, which I think some people get a little bit confused about. I've seen stuff written about that, but so we'll explain that and maybe talking about how some of there's been a lot of disruption in the car pricing market and the used car prices and financing lately, especially with interest rates rising. We're going to hit Cruze, especially later in the episode, but I want to talk first about their transition to electric vehicles. That's very important as well. This industry is in a huge disruption cycle at the moment, probably the biggest since the original mass manufacturing of automobiles. So with that context, what is GM's current strategy for transitioning to EVs and what do you think about it?

the way that i think about the current strategy is they're kind of taking the existing both names and kind of styles of vehicles and but they're going all electric with them if you go back 10 or 15 years it isn't like cruise didn't see electric coming or or general motors uh sorry didn't see electric coming you know the volt was what was that 2008 or something like this it was a long time ago. But like a lot of legacy companies, they're not able to kind of dive in with both feet. So whereas Tesla is going, we're going to build EV from the ground up and we're going to take all of the advantages of being electric and we're going to build a car around that. So it has a lower center of gravity. You can have more space in the vehicle itself because

you don't have the drive shaft going through the middle of the vehicle. So that's why if you get into an electric vehicle, they just kind of generally feel more roomy than a traditional vehicle. You can put the batteries in the floor. Whereas even when I started covering this industry, they were just trying to shove a block of batteries kind of where the drive shaft goes in a vehicle. They've done all kinds of weird stuff. They also didn't go all electric. They went partially electric. So you go, okay, we're going to have 50 miles of electric range, but But then we don't want you to be too worried about having to fill up your car with electricity. So we're going to put an internal combustion engine in there too."

Well, you start to do all those things and suddenly you lose the threat. You lose the advantage of having an electric vehicle in the first place. So this is a classic disruption thing where Tesla is able to come in and rethink everything. And GM is in this mindset where they're kind of trying to dip their toes in the water, but they don't want to go too deep because they don't want to, like, mess it up. And now over the last, I would say like five years ago, they kind of made the transition, especially with the growth of Tesla and the success that they had. And they went, OK, so we need to redesign everything and we need to be all electric and we're not going to make these, you know, hybrid electric vehicles anymore. And so that's what we're only starting to see those roll out now. And I think that's what kind of makes this a really interesting time in the electric vehicle industry, because Tesla has

dominated this industry for so long. But if you look at, I saw a chart today when I was getting stuff ready that, I mean, GM basically didn't make any electric vehicles through the first quarter of 2022. And then suddenly they started to ramp things up. And that ramp rate is just going vertical right now. And by, I think they're still saying by 2035, they're going to be all electric. But if you look at their vehicles, it's a Silverado that's electric. So it looks a lot like a traditional vehicle. It's a Equinox that's electric. So it looks like a refresh of the Equinox. So they're not going with these body styles that are like, hey, this is an electric vehicle. The way that we were like a decade ago, where you go like, what's that goofy thing

driving around um they're going more with this is what we know people will buy and what the body styles are and we're gonna but we're gonna make it entirely electric so i think from a strategic standpoint that's the real mindset shift that has happened over the last uh few years under mary barra specifically is that they're they're just leaning into electric in a way that they haven't either been able to or have decided not to over the last decade or so do you think that they're you know let's take the chevy silverado for example that core kind of uh truck riding customer demographic do you think they'd have any aversion to an electric vehicle as opposed to an ice vehicle um the answer is no but it will take time to get there it's not going to be the

same adoption rate and i live in the midwest where we have a lot more trucks than um you know i know california is like it's like a completely different world when it comes to vehicle sales i i think they're selling about 40 of the vehicles on the market or new vehicles right now are electric whereas in the rest of the country it's like one or two so um there are some structural advantages to an electric vehicle if you're making a truck or an SUV. I mean, the torque is always something you talk about with a truck. There's more torque fundamentally in an electric motor than there is in a gasoline-powered motor. That's just bottom line. That's the way that the physics works. So if you're trying to pull something, it is fundamentally better to have an electric motor

pulling it rather than your gasoline-powered vehicle. So I think from that respect, There's not going to be probably as much resistance as you might think. The question is going to be, what does the cost look like? Are you going to be able to use it in the same way? Are you going to be able to do, are you going to have a place to charge it? You know, and trucks are kind of a strange market because there's a lot of people in the city who drive trucks because they want to drive a truck. They don't necessarily need a truck.

And then there are people who use trucks because that's what they use to work. And that might be a little bit different dynamic. because you might be sitting there running your truck all day. Well, is that an advantage to have an electric vehicle because you can keep the cabin cool and stuff like that without actually having it on? Maybe. So there's going to be some different dynamics.

And I think that adoption rate is just generally going to be slower than it is in certain other areas. But from a fundamental level, I don't see a big reason that trucks and SUVs won't eventually go electric when the costs make sense. And I think that's going to be kind of the big caveat here is like, this is what I, I have a lot of questions about Rivian over the next few quarters.

Like, are they going to be able to sell a kind of small third row electric vehicle for $80,000? I don't know. All right. Before we get, I want to talk about maybe the margins in a second, but what do you think of the frunk on some of these electric trucks?

Good for tailgating. Great for tailgating. i'm surprised nobody's rethought that like like rethought how a vehicle looks it it sort of shows how ingrained we are in the in the look of vehicles that it serves literally no purpose in an electric vehicle but we're not rethinking it in any way shape or form so yeah i mean i'm all for i think it'd be cool to have especially with kids you could just toss some toss some stuff in there um you know rivian's done some interesting stuff with with kind of that little tuck-in area behind the cabin where you can throw some stuff in there and have a little cooler or

something like that. So I'm surprised that it's still around, but the ones in the new trucks do look pretty cool. Okay. When it comes to margins, do you think EVs will have better, worse, or similar margins to the ICE vehicles that make up most of GM's business currently? Long term, I don't see any reason that margins would be significantly different than they are in the traditional business. Fundamentally, you're still manufacturing a truck, SUV, car. You still have the same fixed cost challenges that always come with manufacturing. You still have the same demand challenges of things are great when there's tons of demand. things are awful when there's only demand for 50% of your production. So the fundamental economics

don't change when you go from ICE to electric. Short term, that is probably not the case. And there's going to be some different dynamics. Tesla has shown that they can have higher margins in the auto business. What we don't really have a good feel for right now is what of that is because they own the dealerships. And so they're getting some benefits from that, especially over the last few years. What is a fundamental cost difference? They're not unionized the way that some of the legacy automakers are. There is some fundamental differences between a new automaker and a legacy automaker. But at the end of the day, I mean, 10 years from now, I don't think we're going to be talking about electric vehicles having a 25% gross margin and ice vehicles having a, you know,

8% gross margin because the dynamics that existed have existed for the past hundred years are just going to make their way to the electric business. I don't know. Go ahead. I just don't think we're done fundamentally doing anything different. Right. No. And it still remains, it's remained a fairly hyper-competitive industry for the last 100 years. And it looks like the dozen or so large companies around the world are going to remain investing in EVs as well. But let's move to, we're going to get to Cruise, which I know we have a few questions on that's going to be very fun to talk about, but I want to hit the financing arm, eat our veggies first. Can you explain the difference between the financing debt and the company debt on their

balance sheet? And maybe what are your thoughts on with the potential? I guess it hasn't shown up yet, but there's been a lot of thoughts about the prices falling out of the used car market and a lot of dealerships. You sent us over a note earlier today about some potential disruptions of dealerships. So anything that could affect this part of the business during an economic downturn? Yeah. I mean, this is the risk for a business like GM. And like I said, it's kind of like the lubricant of the auto business because you have to have that financing available. The challenge is that then you're effectively a bank. So you have a lot of the same risks that go along with being a bank, but you're very concentrated because you just have auto loans. So GM does break out their

auto debt and their financing debt. And the financing debt is going to be what's used to to finance purchases. So you're going to go in and say, hey, I need a $50,000 loan to buy this vehicle. They're going to give that to you, but then they're going to get financing for that $50,000 in various forms of debt. So just like a bank having debt is not bad, GM Financial having debt is not bad. The challenge is what risks are you taking with that debt? And one thing we've seen over the last six months in particular is a lot of these auto financing businesses have started to change the terms to be more conservative. So you don't see a lot of 0.9% financing anymore. I mean, we haven't been seeing that necessarily for a while because they didn't

have to. But the other piece is interest rates have gone up. So that's put more pressure on that side of the business. But then also they're not offering high loan to value loans as much as they used to as well. And this is something that it's going to be case by case for every buyer. But just generally what we're seeing is that it's going to be much, much harder for you to walk in and say, hey, I want to buy this $50,000 vehicle and I want to put $0 down. I have bought two vehicles with $0 down. I think it would be really hard for me or anybody to go into a dealership today and do that same thing. They're going to say, you know what? Our risk is that you drive off the lot and then maybe used car prices come down. So if we repossess that

vehicle, now we can't sell it for as much. So we have to take a loss. We have to cover ourselves there. Maybe the economy is not great. So we're worried that you're going to lose your job and you're going to stop paying for your vehicle. There's more risk. So now we're going to demand that you put 20% down, 30% down, whether that's in the form of a trade-in or whether that's in the form of cash out of your pocket. So we are seeing those adjustments and you're starting to see loan loss reserves in something like GM Financial go up. So it's a risk if the economy tanks, then it's a really big risk. And this is the kind of thing that this is how auto companies go bankrupt. And they do go bankrupt periodically. GM went bankrupt in 2009. And so there's something

to be aware of. And you want GM, if you're a shareholder, to start to be really conservative right now. And I think they're doing that. I think we're seeing that. But you kind of hold your breath a little bit through a down economic cycle yeah we've had we had a interview on ally financial kind of the last few months too and it sounds like a lot of the same exact risks gm's old financial arm yep yeah that's right um i guess let's talk about something a little more exciting which is cruise you uh had a lot of coverage of cruise in your write-up i guess maybe before we talk about what you like. Can you explain what Cruise is for anyone who isn't familiar and then what excites you about it? So Cruise is an autonomous driving company.

GM actually bought Cruise, I believe it was about a year into its life cycle. And instead of acquiring the company and then just folding it into GM, they actually kept it separate, which I think is really, really notable if you're a shareholder. A lot of times what companies will do is they'll see some sort of disruption tech from technology or business model standpoint, they'll see it coming. And then they'll go, well, we'll just buy that thing and absorb it. But then you, but then you kill it by absorbing it. Um, you know, Ford's Ford's autonomous driving arm, I think is a classic example of that. So they kept crews separate. They had external investors, including soft bank, which actually GM just bought out that stake last year. Uh,

Microsoft, Honda. So they had their own business, their own CEO, their own structure. And then Cruise is kind of like this. It's like a supportive parent, if you will. They're saying, hey, if you need more money, we've got money. We can invest more in you and take a bigger stake. And then the other thing is, as they get to commercialization, they've got a $5 billion line of credit to build out vehicles and commercialize. So cruise is building a level four autonomous vehicle. And I say level four specifically because this is going to be a geo fenced, fully autonomous, no driver ride sharing system in business. It's operational in San Francisco, Austin, Texas, and Phoenix, Arizona today. You can literally go get in a cruise

vehicle with no driver today. But it is geofenced. So the big difference and one of the criticisms that I always get on videos or articles is, yeah, but Tesla is doing level five autonomy. And my argument is I don't think people care about driving through the middle of Nebraska with an autonomous vehicle with no driver in the front. What they want to do is get from home to work or the bar or restaurant to home really simply like you would with an Uber, but without a driver so that's really what the business is is basically uber but no driver let me that's perfect oh brian you have a follow-up i'm gonna i i wish i could show all the listeners but i know a lot of people just listen to this and they don't watch it but i'm going to share

my screen just to show people what these vehicles look like because they're kind of they're kind of cool looking uh it's almost like this yeah yeah so so they're in their final testing for this right now it is being tested on the roads in california in the san francisco area right now um it does it is not yet licensed for commercial operations so that will happen later this year um i know that they're in that process uh with with regulators something that every vehicle goes through right you gotta go through crash tests and all that stuff so they're in that uh they've gone through the building it's like 100 of them um and you know doing the fit and finish and all that stuff so but yes that is the next generation for for cruise right and them and waymo are the

only two with level four uh or is it zoos now in there or no so neuro so the three that are licensed for commercial operations in california is cruise waymo and neuro neuro is the company that's delivering domino's pizzas around the bay area um it's kind of a little small vehicle it's not a personal ride-sharing vehicle. But this is where you're right. I think... And Zoox is the other one you brought up, Ryan, to put in there. So Zoox is owned by Amazon. Waymo is owned by Alphabet. The interesting thing with those two is I don't have any question that they can build the technology to do the same thing that Cruise is doing. But what is their business model going to be? Is Amazon going to put $5 billion into expanding Zoox and building a Uber and cruise

competitor? I don't know. They could, but is Amazon going to be a ride-sharing company? These kinds of transitions don't typically happen. Google is amazing at developing new technologies, they suck at launching products. So here's another case where they could do this, but right now they're driving around with like Chrysler Pacificas with a bunch of stuff on the roof. And I don't know, what does the ride sharing business look like five or 10 years from now? We just don't, we don't know. I'd love to say that there was, you know, three or four great competitors, but there's just not. Yeah. And I think what you outline this in your newsletter slash blog post, which again, we will link in the show notes for anyone that's

interested in looking at more of the numbers. But I think what these companies would argue is that the long-term economics of the autonomous vehicle market could be astounding. The old Uber founder said something along the lines of, we need to go driverless at some point because the margin is going to be that much better. So with your analysis you've done, what are the potential and maybe the current losses for cruise uh you know for the economics here of the autonomous vehicle market i want to caveat this by saying we're making up all these numbers and there's some there's some baselines here because and one of the reasons i like this biz the potential is this business so much is uber exists like we know that people will get in a vehicle

and pay a small amount of money to take it from point A to point B. We know that that's a massive market. Uber is a $32 billion business. And that's not including the revenue that goes to the drivers. So the actual money that Uber brings in is probably closer to $100 billion because they don't count the revenue that goes to the drivers as their own revenue. So this is a huge, huge business. And we know that people will use it.

the only question for, for, for cruise, you're not questioning, will people get in a vehicle and ride it? Like they do a taxi or an Uber it's, will they get into a vehicle without a driver? And so that's really the only kind of bridge to, to cross. But if we cross that bridge, the, the economics are potentially really great because Uber is not making money and they've been losing money, but they're also paying like, they're only making about 30 or 40% of the, the cost of a ride as revenue. So the revenue that crews would generate for each ride would be somewhere along the lines of 2 to 3x what Uber is generating per ride. Now you have to build the vehicle, you have to operate the vehicle, all that kind of stuff. But if you just think about

a huge cost of Uber is just paying the driver. You have to physically have somebody available and around and making a reasonable amount of money. Now you're saying, I'm just going to have this vehicle. It's a custom-made vehicle. We don't know exactly what it's going to cost, but I would assume that you're building it to be relatively efficient from a cost perspective, because you can make them all exactly the same. You don't have to have the niceties that we demand in vehicles. And they're building them to last a million miles. So potentially, and Uber was on this early, they saw that if you can kind of get rid of the driver and the uncertainty that that brings to the business model too, that's the other thing I think is hard to understand is

what is the opportunity for this business if it's never a problem getting a ride? I used to live in downtown Minneapolis and an Uber was always within a mile. I now live in a first ring suburb, which isn't that far from downtown. And now I need to plan 30 minutes ahead if I want to get an Uber. I can get one, but it's not at my fingertips because it might be five miles away. What if that supply question is answered? How much bigger is your market if supply is not the problem in ride sharing? I think that's where you go like, this could be a much bigger business than Uber. Okay. So let's do a few. Here's the sort of ballpark model that I put together. And the reason that I do this is how big is this business if you just kind of use

numbers that are plausible? So if crews can go from three cities today to 100 and have 100 cars operating in each city, to put that into context, they have 388 in San Francisco right now. So 100 is not very many and do 10 rides per day. So the vehicle is actually sitting, doing nothing a vast majority of the day and charge $12 per ride, which is about half of what Uber charges. You have about a $438 million business. That's a big business, but it's not a great business. Now let's go to the other end. Let's say they can go to a thousand cities. Uber's in 10,000 cities. So we're still not at the penetration of Uber. Cars per city, it goes to a thousand. Now you're doing 30 rides a day. So one an hour, a little over one an hour. I don't know. It seems reasonable maybe. And you

can play with these numbers if you want. They're all in the newsletter. And revenue of $18, again, an average Uber is about $25. That business now is a $200 billion business. And if it's a 30% operating margin, which we've kind of walked through, that's maybe plausible. That's a $60 billion operating profit business. That is bigger than GM's market cap. The operating profit is bigger than GM's market cap. By the way, that would be a million vehicles on the road. And my projection was 2033. I was saying 10 years from now. GM has said they want to have a million cruise vehicles on the road by 2030. So this is real and it's happening. And yet investors have zero appreciation for it because GM as a company is trading for like six times earnings.

It is. Yeah. And obviously the numbers can, it's hard to put any precision on the math right now because it's likely, you said 10 years out and you can toy with them as you want, but you can see why there's a lot of reason to be excited. What are the costs? I'm just trying to think through this. I mean, the energy and building the cars, is that pretty much it? Payments, payments. And then I'm guessing there's just a lot of R&D and then there's probably insurance, right, as well. I'm guessing. So the R&D would be something that you're going to be already incurring. So the costs that you're doing now, I think would just be kind of an ongoing cost. We don't know exactly what the maintenance and infrastructure buildout

would look like, but you're going to have to charge these vehicles. I would assume that you'd have kind of like take a map and just put dots around. Um, I assume you just have kind of like a parking lot where all these go and charge once a day or whatever it is. Um, but on a absolute basis, yeah, the costs aren't, aren't all that astounding. I mean, it's not that expensive to put a charger in. Um, you're talking about buying some land and, um, you know, maybe you leverage the dealerships that exist i don't i don't know if that'd be a great use of of everybody's time and space but um i know around here the dealerships have a lot of a lot of land and they're not using it right now for inventory so maybe that's something they can leverage but um yeah we can

again we can kind of ballpark the costs there would absolutely be build out to to go into this but this is one of the reasons that they're going into and they've explicitly said this that they're they're going into austin and and um phoenix is it's kind of a test run is the first thing you do is you go just drive around for like a month and just map the city because the the autonomous driving system is um is actually building a 3d map as well so it's it's monitoring you constantly and it's also building a 3d map so it's kind of referencing it knows where it's going all the time i see this with waymo all the time in seattle i i feel i feel bad for the drivers i look in there and they're just like everyone's taking pictures of them and it's yeah you're just you're like in

a zoo um but but yeah that i mean that's the they're gonna just have to repeat this process over and over and over again but once you get it up and running i think this is the other thing and and i think you you know had a question about this but like potentially the moat is pretty wide because we've even seen this with uber right like lyft is in trouble because uber has now kind of monopolize that entire business. So does the same thing happen with autonomous vehicles where cruise puts a thousand vehicles on the cities in Minneapolis, let's say, and gets all the riders and somebody else comes in and just doesn't get any traction. It is very possible that we have a huge first mover advantage for the first company that can kind of launch this and get

it going. So again, there's a case to be made that this is going to be really high margin business long-term. So speaking on that, yes, I think we should just hit this. We don't need to talk about maybe the race to the bottom technologically, kind of hit that already, but what are the major competitive threats in your opinion? As a shareholder, what are you looking at that scares you the most? The biggest thing is, are we actually going to move forward with this? Are we going to get to a point where we're starting to see some pushback on Tesla's FSD beta? I think that's very different than Cruz, who's working with regulators. You can go download the reports and see how many disengagements there were in 2021 and 2022. So there's a lot more data

out there. There's a lot more information going to regulators, but do we get to a point where just on a federal level, everybody goes like, you know what? Too much AI, too much autonomous driving. We're just going to nix it all right now. That's possible. It's absolutely possible. I don't think it's likely given the fact that we've been sort of pushing on this door for a decade now and nobody's really pushed back. Technology is one of those things you don't usually put it back in the bottle, but that's a risk. There's also the technology risk. If there's some accidents that people don't survive, that's going to be a huge problem for a company like Cruise. I think it's been strange that that's happened with Tesla vehicles and it hasn't been

a bigger problem. So I don't know, maybe psychologically we're past looking at this as a different risk profile than, than we are with regular driving, which is also a risky endeavor. But, you know, those are, those are the, the kind of things, you know, and, and just from a business model standpoint, it's possible that GM still screws this up somehow. Like that's very, very possible. I mean, when they, when they made the net, the announcement a week or two ago, that they were going to develop their own infotainment system instead of using CarPlay and Android Auto or whatever the Android one is called. I was like, this is a classic incumbent screwing up a perfectly good opportunity because the two things... I'm looking for a new

vehicle now. The two things I walk in the door and I say I need to have is USB-C ports, not USB ports, USB-C ports, and CarPlay. That's it. If you don't have those, I'm out. So they could still screw this up from just like basic, basic things like that. Or they, I mean, maybe they don't move fast enough too. You know, we've seen some disagreements between Cruz's old CEO left because there was disagreements with Mary Barra, the CEO of GM. I think she was probably right there. I think it sounds like he wanted to take the company public, which would probably have been a bad move a year or two ago. They might be in real trouble. But yeah, I mean, you're still a subsidiary of a big company that's making a lot of money that historically, these legacy

companies don't know how to add a lot of value long-term. Okay. Let's talk valuation. Obviously, two, I guess you could call it three different kinds of businesses under the GM umbrella. how are you valuing the company as a whole? And what do you think the return potential could be for GM from here? It's really hard to value auto companies because their business is so volatile. So just to sort of put that into perspective, I'm looking at the EBIT numbers, earnings before interest in taxes for last year, $14.5 billion for General Motors. The market cap is what? $50 billion today? You take any other tech company and say, I'll give it to you for four times, less than four times EBIT. And you'd be like, what's going on? It should be trading for 10

times that. But the auto business, I mean, when demand drops, it's so devastating to the bottom line because you have all these factories that you're incurring expenses and you're not selling vehicles, you're building inventory. So now you're having to discount. There's all kinds of stuff that goes into making hard goods like this. That is just a fundamentally really, really challenging business and tends to have really high risk and ultimate risk of bankruptcy, of going to zero. And so I think that the GM of 2023 has learned a lot of lessons from GM of 2008, 2009, but those risks still exist. And so how do you value a company like this? I look at a company, I look at General Motors and I go six times earnings. That's what I'm

paying for the stock. I'm getting a discount. And so if I'm right about this thesis that cruise is going to be the real value add here, then I'm basically getting cruise for free and I'm getting GM as a value stock. And what I need GM to do over the next five years or 10 years is just kind of bump along, just kind of keep doing what they're doing. And if they can do that, this will be an absolute home run. Um, there, there are risks and there are reasons that, you know, investors are generally more excited about Tesla than GM. It's a boring, boring company, even though it's, I believe outperformed Tesla over the last three years. But, um, but you know, that's, that's the risk is that this, the auto business is typically not a business that is very

shareholder-friendly long-term. Yeah. And I think an important part here that we want to hit on is capital allocation. Now I look at it and they have a lot of different places they can put their money. They can reinvest back into legacy business. They can put stuff into electric vehicles. They can give money to crews. They can return to shareholders. They can shore up the balance sheet for the financing arm if need be, although I'm no expert on that at all. So generally, what are your thoughts on the track record of the CEO, Mary Barra, and her capital allocation skills? I think that we're going to have, this is one of those things where we're going to look back in 10 years and I'll have a great answer to that because she's putting a ton

of money into electric vehicles right now that involves buying stakes in lithium companies. They're making kind of like raw material investments today. They've done a few of those over the last few months. They're investing in new plants that are building batteries and battery technology. So they're going to own some of that. New plants to manufacture vehicles like the Cruise Origin. Those I think are the right kind of investments, but do they pay off? We're not going to know for a while, probably a few years. I think they were talking about being positive, single-digit positive EBIT margins in the EV business late next year. So we're still in... This is the other thing that's kind of crazy is we're still in investment

mode for the electric vehicle business for GM, and they're still making a ton of money. And that's partly because of the dynamics of the pandemic. The auto business is in such a weird space because of the pandemic. And I don't think we really know what normal looks like yet because there's this huge lag between the supply chain disruptions and the buying trends that people went through over the last couple of years. And what happens when interest rates go from zero to 5% in a year, which they've never done, we don't know how all of this shakes out. And so that's why if you're running like GM Financial, you go, hey, we're taking risk off the table. And so we don't know. And I would love to say it seems like she's making the right moves. I think that I would be doing the same things. Like I said before, I really like the way that they've set up Cruise because they've kept it kind of arm's length.

And they've said, we will supply you money when you need it, but we don't want our legacy business to drown you. I think that's the right thing to do. And I think a lot of CEOs wouldn't have done that because they would want that to be their legacy. um but again it's going to take a while to kind of play this out and see if she's going to be looked at as as one of the the great auto ceos in history okay last question and you already kind of briefly answered it which was uh the demand cyclicality but we we want to ask about the premortem are there any other um risks that you want to call out to the investment in general motors that you think could potentially make this a poor investment from here there's still a lot of

questions with electric vehicles what happens when tesla increases their production 50 a year for the next look the last five years is one thing the next five years is something completely different going from yeah flooding the market yeah yeah flooding the market um we don't we've never seen something like that at least in the modern auto industry there and tesla's not the only one ramping production right now. You have Rivian and Lucid. So there's more competition coming, more supply coming into the market than there ever has been in, I don't know, the last 50 years at least. So that is a risk factor just because we don't know how that's going to play out. So far, so good, I would say for a company like GM, but we're definitely not

out of the woods. And then we still don't, the macro trends are always the same, right? If we go through a major recession, which some people are still calling for over the next year or so, as interest rates are really high, the bread and butter of GM is expensive trucks and SUVs. If demand for those vehicles dries up, the business goes from amazing to terrible pretty quickly. So the combination of those two things, what is the disruption of EVs? And then what is the impact when we do hit some sort of economic downturn?

Those are going to be the, those are going to be the challenges and inevitably they're going to have to go through them. But yeah, it's, it's GM has gone bankrupt in the last 15 years. It could, it could happen again. Okay. Well, that is all the questions we have for any listeners that enjoyed the interview, want to see more of your work, want to follow you or follow any of your writing. What are the best places to do that?

I'm on Twitter at Travis Hoyum. That's where you can find a lot of my stuff. The Motley Fool, got stuff coming out all the time there. And then Asymmetric Investing, you can find me at asyminvesting.com and that will get you to the newsletter. And a nice little write-up on Spotify as well for anyone interested.

Yes, another fun company coming later this week. So tease that. All right, a little tease. There we go. And that will be out by the time this goes out. So everyone check that one. All right. Well, that is going to do it.

We want to throw a disclosure on this. We want to remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital. So clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Travis, for joining us. And we will see you all next time.

Bye.