(Bloomberg) -- It was expected to be the comeback year for the shares of century-old carmakers, General Motors Co. and Ford Motor Co., but a long overdue catch-up rally is already stalling.
Their deep lineups of gas-driven vehicles were set to win back investors just as demand for electric cars started to falter. But a pair of downgrades this week warned investors of the challenges that have been piling up; flagging interest in American cars from Chinese buyers, prohibitive costs for US customers and traditional automakers’ need to raise massive amounts of capital to build the infrastructure for battery-driven cars and self-driving technologies.
The outlook in China is so bleak that one analyst said GM should consider exiting the country completely. Even before the euphoria dissipated the pair of stocks were trading at some of the cheapest multiples in the benchmark S&P 500 Index. All together, these forces are pushing Wall Street to recalibrate expectations.
“The broadening market rally and some of the early EV hype wearing off gave a bump to stocks like GM and Ford,” said Cole Wilcox, portfolio manager at Longboard Asset Management. “However, in the bigger picture this is not a group of companies that have an answer to where the world is going, which is software and autonomous transportation. They are at best a commodity business.”
GM shares were flirting with their first quarterly drop after three straight quarters of gains before reversing on Friday, Ford’s stock is down 13% over the same stretch. EV-giant Tesla Inc. has fared better, shares of the Elon Musk-led company have gained nearly 30% in the period.
Tesla’s turnaround comes ahead of the much-anticipated Robotaxi Day on Oct. 10, when the company is expected to unveil its self-driving technology. It’s the main focus for the company’s investors right now, even though Tesla is due to report sales numbers for the three months ending in September next week. Analysts have been ratcheting up their expectations recently, pointing to a sharp acceleration in EV sales in China.
That’s left a divide between Tesla and the traditional carmakers, but only for now. Given the massive scale of auto production in China, analysts say it will be difficult for any US company to retain market share there. More importantly though, Chinese rivals could soon hit the US market, some warn.
The China Risk
China, the world’s second-largest economy, is a major automotive producer and consumer. Both Adam Jonas at Morgan Stanley and Daniel Roeska at Bernstein flagged that country as a major pain point for GM, as well as for other US automakers, with Roeska saying that it “may be time for GM to exit” that market. Investors may hear the company’s response when GM holds its investor day on Oct. 8.
“It’s easy to think US autos is a tariff-protected ‘citadel’ that China can’t touch,” Morgan Stanley’s Jonas wrote in a Wednesday note. “This is wrong.”
Chinese firms’ excess capacity doesn’t have to directly enter the US in order to hurt American carmakers, the analyst said, noting that rising pressure in other lucrative markets can push global auto companies to “fight harder” for sales in America.
Bernstein’s Roeska expects GM’s international business volume to contract by 35% in the second half of the year as its joint ventures in China continue to languish. He also estimates double-digit declines in average selling prices for the China ventures, noting that discounts have soared to nearly 50% off listed prices.
“As far as losses are concerned, there is no end in sight in China, and it is unclear how they can fix the continued underperformance,” the analyst added.
For Tesla, with a market capitalization nearly 9-times GM and Ford’s combined, valuation is largely pinned on the company’s potential to become a leading player in self-driving cars, making the China risk appear less urgent.
GM and Ford stocks trade at mid-single-digit multiples to their forward 12 month earnings, valued as traditional car manufacturers, while Tesla trades at 92 times — dwarfing even mega-cap technology companies such as Nvidia Corp. and Apple Inc.
“GM and Ford are pulling back from technologically advanced vehicles and concentrated on traditional ones, while Tesla is still seen as being on the cutting edge of the next generation of vehicles like the Robotaxi, so they command a much higher valuation,” said Matt Maley, chief market strategist at Miller Tabak + Co.
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