The stock price of General Motors dropped almost 23% today, to a 60-year low of $3.36. The list of reasons for the company’s horrendous recent stock performance is expansive, but today’s sell-off was primarily triggered by two analyst’s new price targets for the stock price. Barclays believes it will hit $1.00, while Deutsche Bank has set a target of $0. Zero. Nothing. Nada.
It’s hard for me to conceive of this, but once-mighty General Motors may actually soon be worth nothing at all. In fact, if current trends continue, I feel this is unavoidable. A government bail-out could buy some time, but in my most optimistic thought exercise scenarios I don’t see a way out of this.
What does it mean for a stock to be worth zero? Well, there are a couple ways to look at it. Generally, a stock price reflects an expectation of future earnings. So, a stock price of $0 means that the expectation is that the company will never again make a profit. Ever. If you believed that the company would eventually be profitable, the stock should still have some value—a low value, to be sure, but not zero.
There’s another way to look at is this. Earnings (profitability) is a function of both revenue and expenses. Right now, GM can’t increase revenue, because nobody wants to buy cars (anyone’s cars), and even if they did, securing financing is difficult right now. So, all GM can do is control the expense side of the equation, by doing things such as reducing its workforce, idling factories, and selling under-performing assets like the Hummer brand.
But a stock price of zero reveals a deeper problem. It means that even if you sold off all of the company’s asset and then subtracted all of its liabilities (money it still owes), you’d have nothing left (or even still owe money). Put differently, if you sold off all of GM’s currently unsold vehicles and parts inventory, all of its facilities and the land they’re on, all of its manufacturing machinery, all of its computer systems, office furniture, staplers—literally everything—all the money you’d collect wouldn’t be enough to pay its current bills or other existing financial commitments. Complicating this severely is that it’s hard if not impossible to find buyers for any of GM’s assets, let alone at good prices. So even in a “fire sale” situation, investors would be left with nothing. Hence the $0 price target.
So GM is in the perfect storm. Sales are a standstill. Liabilities are climbing. It has assets, but can’t sell them. And the company will be out of cash in a few months. Unless you believe that a multi-billionaire (an oil sheik, perhaps) will sweep in, buy GM, and somehow turn it all around, I think Deutsche Bank’s estimate is fair.
I’ll talk more about the fate of the auto industry in future posts. But man, it’s depressing to think about.