Montana Digital News > Blog > BUSINESS > A way to generate income on GM and possibly buy it on the cheap using options
A way to generate income on GM and possibly buy it on the cheap using options
MontanaDigitalNews.com1 month ago
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29
GM’s decision to integrate Cruise into its operations and pivot away from the development of robotaxis could have significant implications for the company and competitors and collaborators like Lyft, Uber, Waymo (Alphabet), and Tesla. I’ll discuss it and lay out how to trade it with options. GM’s move appears to prioritize scalable, near-term technologies over speculative long-term projects like robotaxis. A few years ago, when Meta focused massive resources toward building virtual reality at Mark Zuckerberg’s direction, equity investors revolted. The stock fell sharply, and despite Zuckerberg’s voting control of the company, the punishment of the stock’s significant declines eventually contributed to a course correction by management, which reduced their investment in speculative endeavors. Meta’s earnings and free cash flow soared as a result. Some equity investors may view the GM’s cost-cutting efforts similarly. I’m not one of them. While absorbing Cruise may streamline operations and cut costs, GM is (or was) a front-runner in autonomous driving technology and the front-runner among legacy US automakers. The decision effectively cedes the space to newcomer Tesla . The steep declines in Lyft and Uber suggest that this is more than just the case of eliminating a potential competitor. GM’s move splashed cold water on autonomous ride-hailing generally. Tesla has focused mainly on advanced driver-assistance systems (ADAS) for consumer vehicles rather than robotaxis. While GM’s shift may validate Tesla’s more incremental approach, it ignores an important reality. The world is moving increasingly towards artificial intelligence, autonomy, and robotics. It is not whether they will transform the automotive world; it’s when. It’s pretty likely that in the not-too-distant future, the regulatory question will not be whether or not cars can drive themselves but whether humans should be permitted to. Actuarial data will likely end the debate if and when autonomous vehicles are demonstrably safer than those piloted by humans. GM TSLA YTD mountain GM vs. Tesla, YTD Both GM and Waymo, using a broader suite of sensors, were making a considerably more significant investment per vehicle to provide additional safeguards than Tesla does with its camera-only approach. Still, regulators haven’t shied away from mandating additional safety features in cars, contributing to their rapid price appreciation. However, those higher unit costs could be acceptable, provided vehicles continue to become more reliable, longer-lasting, and less crash-prone, justifying higher prices. Within the past few months, I have highlighted the enviable technology stack in the AV space that GM possesses with Cruise, second only to Waymo. Still, this move may cause GM to revert to another legacy automaker — just another steel-bender. In a world where they’re competing with newcomers like Tesla and legacy powerhouses like Toyota, GM is no longer striving to be a leader in the new world order but rather a cog in a competitive, cyclical business. I have a theory that two forces shaped this outcome. The first was the unfortunate accident where a pedestrian, jaywalking, was struck by a car driven by a human and thrown into the path of a Cruise vehicle that could not stop in time. This led to Cruise suspending operations in San Francisco just as they were beginning to show tremendous promise. The second was the massive $5.6 billion cash infusion spearheaded by Alphabet into Waymo, which was announced in late October. GM YTD mountain GM, YTD General Motors will likely generate over $12 billion in free cash flow for FY2024. As substantial as that is, it’s dwarfed by the $74 billion anticipated for Alphabet over the same period. Next year, the Street expects Alphabet’s free cash flow to grow to nearly $92 billion, while a worsening new car market sees forecasts for GM’s to shrink to $7.7 billion. GM management may view their adversary as too financially formidable, but there’s no victory in surrender. The trade I still view GM as inexpensive, trading at just 5 times FY 2024 earnings estimates, but it’s challenging to identify the catalyst that will push shares meaningfully higher in the short term. Technically, there appears to be support around $49-$50 on the downside and resistance between $54-$55 on the upside. Selling a cash-covered put is a way to take a neutral to mildly bullish posture seeking to collect options premium. The February $50 puts would yield about 4% of the current stock price over the next two months, with the downside risk of purchasing the shares at $50 if they fall below that level as of February expiration, but net of the premium collected the effective purchase price would be $48 share, a nearly 8% discount to Wednesday’s closing price. I’ve provided an example of the trade here : Sell GM Feb. 21 $50 put As for Alphabet? That company posted its largest single-day gain in over seven months on news of breakthroughs involving its Willow quantum computing chip. Stay long, be long either GOOGL (voting) or GOOG (non-voting). DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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