General Motors (NYSE: GM) has had a good week.
After reporting a 25% increase in third quarter operating profit on Tuesday, the stock jumped nearly 10% in early trading Wednesday and is currently up nearly 14% for the week.
The $2.5 billion reported profit was thanks to higher vehicle prices and increased SUV and truck sales, with CFO Dhivya Suryadevara noting that the company’s efforts of “matching supply with demand and disciplined pricing” helped it increase sales.
“Our disciplined approach to the U.S. market, combined with strength in China and further growth of GM Financial, drove a very strong quarter,” said Suryadevara.
And investors have reason to be excited. This quarter happened despite the fact that the company sold fewer vehicles, which means that a dip in sales volume was offset by pricing increases. GM also expects fourth quarter performance to be strong, and anticipates solid sales of its highly profitable trucks. All of which justifies the stock’s current price of $36.
But the question now is, can the rally continue?
Considering the headwinds GM is up against, further gains don’t look likely.
First, the gains the stock has seen this week weren’t because the auto maker’s Q3 numbers were so fantastic, but rather the stock had been so beaten down that the good news got everyone excited.
Just five months ago, GM was trading at $45. Just before the Q3 results were reported, the stock was trading at just $30. Against such a dismal performance in the last several months, it’s no wonder why the stock jumped on the Q3 news.
Second, the Q3 report really wasn’t all that great. While the North American business is doing well, showing decent volumes and record high transaction prices, the company is losing market share everywhere else and volumes are down in international markets.
This is primarily because the automotive environment is changing rapidly, and that change isn’t expected to slow down any time soon.
One of the biggest issues in the space that’s putting pressure on automakers is the electric vehicle (EV) revolution. GM has a stake in that market with its Bolt EV, which is currently seeing accelerating demand, but as EV adoption continues to climb, there are more competitors in a market that’s still quite small and its likely that the company will continue to see its market share eaten up by EV makers like Tesla (NASDAQ: TSLA) over the long term.
Add to that the growth of the ride sharing and work-from-home trends—which will see the auto market compress as these trends gain traction—and the reality that interest rates are rising which will have a negative impact on car buying, and it’s clear that GM will have a very difficult time growing revenues sustainably over the next several years.
If you also consider that the stock has largely traded sideways since 2013 and revenues have been stuck between $140 and $150 billion in the same time frame, it gets even harder to imagine the stock price rising much higher against the headwinds the company is up against.
GM has demonstrated that it can charge higher prices on some of its vehicles which in turn improves margins, but my expectation is that doing so will only make the stock jump in the short term while the longer term picture looks more bearish.