General Motors (GM) is known for its pickups and SUVs, and UBS significantly adjusted its price target on the stock days before the company reports earnings, claiming investors have overlooked an important part of the business.
The bank believes the shares have a chance to move way higher than today’s price. General Motors investors and prospective buyers now have to decide whether the reason for the call is valid enough.
UBS lifts its General Motors price target to $114 before earnings
UBS analyst Joseph Spak raised his price target on General Motors to $114 from $102 on Monday, Sept. 14, and kept his Buy rating, according to TipRanks.
The new target is about 33% above the stock’s $85.62 close last Friday, Sept. 11, and it landed weeks before GM reports third-quarter results on Oct. 20.
Spak has followed General Motors for years, and he usually covers automakers for UBS, so his call has some influence. That’s why when he said “GM’s digital capabilities are an underappreciated and undervalued opportunity,” he caught investors’ attention.
He feels the market is not paying enough attention to GM’s fast-growing software business.
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How OnStar and Super Cruise reshape General Motors’ revenue
General Motors makes most of its money selling trucks and other vehicles under the Chevrolet, GMC, Buick, and Cadillac brands. It also lends to buyers, in the form of auto loans and vehicle leases, through GM Financial.
Software is a newer part of the business. The company owns OnStar, a connected-services platform that now has more than 12 million customers. It also owns Super Cruise, which is an automated highway driving system. These parts of the business are another source of recurring revenue.
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UBS expects that digital business to grow from about $3.2 billion in revenue this year to $9.6 billion by 2036, Proactive reported.
Spak said the change is noteworthy because “digital creates a recurring, less cyclical, higher margin revenue stream” that deserves a better valuation than GM’s core operations, Yahoo Finance confirmed. The digital business already makes up close to a fifth of GM’s operating profit.
Why steady software income could support General Motors stock
Recurring software income is something investors can expect every month. It also carries high margins once the hardware is built and holds up better when vehicle demand reduces.
GM CFO Paul Jacobson has called OnStar an “underappreciated asset that is growing,” and he sees it as the foundation for future software-driven vehicles.
The company raised its full-year profit outlook to between $14 billion and $16 billion after a strong first half, and it beat expectations on second-quarter earnings. Citi and other banks have also lifted their price targets on the stock.
What General Motors investors should watch before buying
Only 30% to 40% of Super Cruise users continue paying after the trial period, so its growth depends on keeping those customers for many years.
GM also took a hit of about $900 million in gross tariff costs in the second quarter and faces a proposed 50% duty on Canadian-built vehicles, according to Investing.com. The stock is also close to its 52-week high, which makes it highly vulnerable to a pullback if the third quarter disappoints.
Investors should pay close attention to the Oct. 20 report. Look for clearer figures on how much digital revenue the company actually makes, any increase in the number of Super Cruise subscribers, and any changes to guidance.
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