GM in Danger of Passing the Speed Limit

In 2016, General Motors (GM) bought Cruise Automation for $1 billion.

It was totally out of character. GM, known for being careful, was jumping into self-driving cars headfirst. One year later, the Detroit icon is promising fully autonomous vehicles — in 2019.

It seems too good to be true. And it probably is. Investors should beware.

In Silicon Valley, there is an appropriate adage: “Move fast and break things.” It’s common for young, aggressive companies to believe they can change the world. Except for the venture capital of their early investors, they have nothing to lose. When older companies like GM proceed with the same reckless abandon, they tend to fall, and they don’t get up.

Cruise Automation had a storied past. As a two-year-old company, it made quite a splash when it fitted one of its kits on a late model Audi, and engineers began tooling around San Francisco, hands-free. The fanfare allowed the startup to raise $18 million, at a $90 million valuation. By all accounts, GM had every intention of becoming one of those early investors when it approached the company last year.

Something changed when GM executives arrived in San Francisco. A strategic investment became a billion-dollar buyout. Six weeks later, the deal was struck.

It wasn’t the first big move by Mary Barra, GM’s new CEO. Although she took the helm at GM in January 2015, the Michigander and Stanford graduate wasted no time moving the company toward a self-driving future. One year into the job, she engineered a $500 million investment in the ride-hailing startup, Lyft.

The Cruise buyout months later was another piece of the puzzle. Like most automakers, GM is looking into the future, where owning a car makes less sense. Cruise, and the investment in Lyft, gives GM a way to get by selling car fleets, while its old business model deteriorates.

To be fair, the robot revolution has been underway for a while. It started with advanced driver-assistance systems, like backup cameras, emergency braking systems, adaptive cruise control and self-parking systems. They were nice, non-threatening tricks that car companies could upsell as value added features.

But they were just the opening foray. Ultimately, the industry is moving toward full autonomy. It’s the reason companies like Uber and Lyft command such lofty valuations despite not coming close to profitability.

Ride-hailing is a way to forever change the value proposition. You don’t need to own a car … or pay for fuel, maintenance and insurance … if you can summon one with your smartphone, hop in and go wherever you need to go.

Many studies find the typical car is used only 4% of the time. Cars are mostly parked at your home or workplace. Ride hailing, even with human drivers, increases usage several-fold. If companies can remove the driver, and that expense, then fares decline, usage increases further and the business model blossoms. This is the appeal of ride-hailing startups.

It’s good for consumers because it removes the cost of ownership. It’s good for ride-hailing companies. It’s not so good for carmakers. As usage escalates, fewer cars will be required. For the industry, it’s all quite daunting. Except, according to McKinsey & Co., a global consultancy, it could be a decade away.

And that brings me full circle to GM …

Don’t get fooled by GM’s 25% year-to-date gain. Sales growth has
slowed in Europe and America this year.

I get that Barra wants to prove she’s running a new GM. It’s forward thinking, fresh and ready to embrace the future. Got it. But the company is pushing into the future too fast. There is no reason to be first to a mass autonomous car market that does not yet exist.

One of the services I provide to members of my newsletter, The Power Elite, is helping them avoid the pitfalls of getting stuck in stocks that suck. Don’t fool yourself that you can avoid them altogether, because there are plenty of these clunkers hiding in plain sight.

These stocks suck because the companies just don’t play to their strengths. They are often too busy chasing trends to focus on what they do well.

Initially, the market for those autonomous vehicles is going to be tiny. If it follows tradition, the feature will come first to the high end. Self-driving taxis will need regulatory approval and years to make inroads with consumers.

It’s a good time to take profits in GM if you’ve got them.

Best wishes,

Jon Markman

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Comments 6

  1. James December 5, 2017

    Automatic Vehicle identification is the future of transportation economics. We will also see a future of electronic toll charging. We also see a future of single occupancy vehicles and dual occupancy vehicles. The transport economy will go in a boom, recession, depression, recovery and growth. We could be in for a massive boom, an even bigger boom then the last boom. The economy always goes in a boom, recession, depression, recovery and growth model. The kondratieff wave is a 45 to 60 year cycle of prosperity, recession, depression, and improvements in the economic cycle. We could be in a Kuznets cycle where international wars are ramping up, this is possibly what’s happening over in Syria. If we are in a Kuznets cycle we are possibly in an economic cycle of 15 to 20 years. We could possibly be in a jugular cycle of 7 to 12 years. We might even be in a kitchin cycle of 4 months, the kitchin cycle is a cycle of prosperity, recession, depression, and improvements in the economic cycle. The kondratieff wave, is an economic cycle of boom, recession, depression, recovery, and growth. We have an economy of prosperity, recession, depression, and improvements in the economy. We might have an economy of boom, recession, depression, recovery and growth. We might even be in for one of the biggest booms the world has ever seen. What’s gonna happen to human beings individual retirement accounts? Could this be possibly the biggest boom the world economy has ever seen. There looks like there could be growth in the solow steady state residual. It could be both endogenous growth, or exogenous growth. There also be growth in the golden steady state level of income. The precious metals markets will boom. There could possibly be a gold tranche or a gold rush. Silver and Gold is what to buy.

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  2. john gordon December 5, 2017

    I could not disagree more! Take your profits in GM before you get the ride of your investing life and miss the “boat” for what promises to be the most disruptive advance since the beginning of time; i.e. the autonomous car!

    Not a chance I am following this lost navigators advice –not only is he lost, but, he must be living under a rock! I own no GM stock but I am contemplating it. My bets for driverless tech are on Apple, Nvidia, Google, Tesla….GM is on my watch list as is Ford. Don’t get talked out of the biggest investment opportunity of your lifetime!

    Reply

  3. anthony barbuto December 5, 2017

    all this talk about autonomous driving…. I wish I could invest in plaintive lawyers. I foresee huge amounts of lawsuits as the first autonomous cars bang into thing s and people…..Fewer cars is a good thing but driving is getting worse and worse. As auto makers put more “toys” into cars, for drivers to play with, the accident rate will go up…..and now states are legalizing marijuana….where is that stock to invest in plaintive lawyers?!!
    Going electric vehicle is a good thing. Elon Musk is a genius becasue he is getting us to electric vehicles,. solving the home and business solar storage problem ( The Tesla Power Wall) and getting us off this planet and getting us to MARS…( SpaceX) and his Mars program….
    But I don’t see a real future for autonomous driving…it will be years in regulations then the law suits…
    GM should be investing in electric cars……we have them already and there is a market….China and India, many European countries…Autonomous cars are much farther down the road, to use a driving metaphor.
    I don;t see GM winning I see Elon Musk winning …..my bet and investment is with him,.. not GM..

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  4. janet stratton December 5, 2017

    just bought some GM good dividends and forward thinking sorry I wont sell just now

    Reply

  5. Presto December 5, 2017

    Better brush up on your history! If you delve into the past 100 plus years of GM innovation you will find that they actually developed and brought to market many technologies that were unthinkable at the time. GM originally developed and patented many of our modern day Convenience and Safety features that have been standard on all automobiles for decades. Here are but just a handful of First for GM…the electric starter, 4-wheel brakes, the airbag, the catalytic converter, the first mass produced electric vehicle, and on and on.

    I do not own any GM stock nor do I work for them. I am a car guy. To me, they are just innovating as they have throughout their rich history.

    For GM to pursue and develop the stated technology doesn’t seem unrealistic given their history and “The Law of Accelerating Returns”. This law proposes that “the rate of change in a wide variety of evolutionary systems (including but not limited to the growth of technologies) tends to increase exponentially”.

    Cheers

    Reply

  6. Bob December 5, 2017

    My experience with auto company FORD, bought stock for $16.18 during 2 years it went down to $12 then up to $16.20 and I sold quick. Why does the best & toughest truck F-150 need $123 million in advertising??
    GM builds overly expensive junk, always breaking down and very expensive and difficult to repair. That is why all I have owned for the past 35 years is Honda or Toyota. My Corolla has 281,000 miles, never broke-down.
    The future is Toyota’s Hydrogen car, (UCLA has discovered a way to produce hydrogen with a solar cell in water) or the Fisker Electric which has a 500 mile battery that can be recharged in 15 minutes but too expensive for the masses at this time. (secret is NOT lithium but graphite-graphine) Oh, self-driving cars…not for me, I like to drive.

    Reply