GM beat expectations and raised guidance; Morgan Stanley maintains Overweight

Overview

This report is Morgan Stanley’s earnings review of General Motors Company. The core conclusion is that GM delivered a relatively clean 2Q earnings beat, raised 2026 EBIT guidance, and provided encouraging preliminary signals for revenue, EBIT, and FCF growth in 2027. The report argues that non-traditional auto businesses such as software and services, Defense, and Energy Storage, along with improving EV losses and greater certainty around capital returns, are key to the next phase of valuation re-rating.

Core views

Morgan Stanley maintains an Overweight rating on GM and raises the target price to $101.00. Its bullish thesis includes: strong North American business performance, better-than-expected pricing and cost control; the 2026 guidance increase reflects execution strength; while the 2027 growth bridge still includes pressure from commodities, DRAM, and tariffs, improving EV losses, warranty costs, and volume/price dynamics can offset these headwinds; software services are forming a higher-margin, less cyclical earnings engine; Defense and Energy Storage provide medium- to long-term optionality for growth; and after the EV business review is completed, uncertainty around capital returns declines.

Analysis framework

The report uses earnings variance analysis, interpretation of management guidance, a 2027 EBIT bridge, DCF valuation, bull/bear scenarios, and a risk-reward framework. It focuses on breaking down changes in earnings and valuation across GMNA operating performance, improving EV losses, warranty costs, pricing, commodity/DRAM costs, tariffs, software subscription revenue, Defense revenue, and capital allocation.

Methodology notes

• Valuation methodsDCF

  discounted cash flow valuation

  The $101.00 target price is derived from DCF, implying about 7.3x 2026 EPS of $13.93; assumptions include revenue and EBIT CAGR of +1.6% and +0.3%, respectively, through 2035, WACC of 11.2%, and an exit FCF multiple of 4.0x.

• scenario_analysisRisk Reward

  bull/bear scenario valuation

  The bull-case target price is $138.00, implying about 9.1x 2026 bull-case EPS of $15.09; the bear-case target price is $55.00, implying about 4.7x 2026 bear-case EPS of $11.83, used to characterize upside and downside risk ranges.

• modelingMorgan Stanley ModelWare

  Morgan Stanley internal forecasting model

  The report states that unless otherwise noted, key metrics are based on the Morgan Stanley ModelWare framework and are compared with Refinitiv consensus data and company guidance.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• General Motors Company equity (GM.N / GM.UN)

  Core covered asset; the report maintains Overweight and raises the target price.

  Strengths

  Strong North American business, improved pricing and cost management, higher 2026 guidance, high-margin growth in software services, and reduced uncertainty around EV-related charges.

  Weaknesses

  The traditional auto business remains exposed to cyclicality, costs, and policy factors; new businesses such as Energy Storage have limited short-term earnings contribution.

  Comparison

  Base case $101, bull case $138, bear case $55; base-case valuation is about 7.3x 2026 EPS.

  Risks

  Macro demand slowdown, weaker used car prices, soft SAAR, China losses, EV/AV execution risk, regulatory risk, and failure to achieve a valuation re-rating.

• GM Software and Services

  Viewed as an undervalued growth driver and source of valuation re-rating.

  Strengths

  Fast deferred revenue growth, gross margin around 70%, and Super Cruise penetration and subscription revenue can raise ARPU.

  Weaknesses

  Requires continued disclosure and actual revenue recognition to prove scalability.

  Comparison

  Compared with traditional auto sales, software services revenue carries higher margins and lower cyclicality.

  Risks

  Subscription conversion, feature iteration, insufficient disclosure, or slower-than-expected consumer adoption.

• GM Defense and Energy Storage

  Optional growth potential in non-auto businesses.

  Strengths

  Defense revenue in 2026 is approaching $700mn with a target of positive EBIT; sodium-ion batteries and the Peak Energy partnership provide a capital-light positioning.

  Weaknesses

  Defense is still less than 1% of total revenue at present; scaling energy storage capacity may not become meaningful until the end of the decade.

  Comparison

  Compared with the core auto business, these businesses are more like long-term options.

  Risks

  Slow scaling, delayed profit contribution, and uncertainty around technology pathways and commercialization execution.

Key data

• Target price change$100.00 -> $101.00The target price increase was mainly driven by a lower share count.
• Current share price$79.52As of the close on 2026-07-21.
• 2026 EBIT guidance$14bn-$16bnThe midpoint of guidance was raised by $500mn; Morgan Stanley estimates $15.4bn.
• 2027 adjusted EBIT forecastapproximately $16bnBased on management’s directional outlook and Morgan Stanley’s preliminary assumptions.
• Software and services deferred revenue2Q $6.3bn, year-end target $7.5bnUp 50% year over year in 2Q, expected to support double-digit growth in recognized revenue in 2027, with gross margin around 70%.
• Defense revenuenearly $700mnManagement expects Defense revenue to approach $700mn in 2026 and achieve positive EBIT.
• EV-related charges$2.3bnAdditional EV-related charges this quarter largely complete the multi-quarter EV business review.
• 2026 EPS forecast$13.93Above consensus; the base-case DCF target price implies about 7.3x.
• Revenue geographic exposureNorth America 80%-90%, Mainland China 10%-20%, Latin America 0%-10%From the report’s disclosed global revenue exposure.

Impact & implications

The report’s investment implication for GM is positive overall: in the short term, the earnings beat and guidance increase reinforce execution strength and earnings resilience; in the medium term, the 2027 EBIT growth bridge gives the market a clearer earnings path; in the long term, if software services, Super Cruise, Defense, and Energy Storage continue to disclose and deliver growth, GM may be re-rated from a traditional cyclical automaker to a higher-margin, more predictable revenue structure. In terms of capital returns, the completion of the EV business review helps reduce investor concern that future cash charges could weigh on buybacks or dividends.

Risks

• Rising commodity and DRAM costs could create a $250mn-$500mn headwind.
• Tariffs could create a $250mn-$500mn headwind, including the non-recurrence of the 2026 IEEPA refund.
• A slowdown in U.S. SAAR, weakening economic conditions, and changes in used car prices could affect demand and profitability.
• Losses in the China business remain a downside risk.
• Underwhelming execution of the EV/AV strategy could weigh on valuation re-rating.
• Regulatory risk could affect the business and capital allocation.
• If software, services, and non-auto businesses fail to deliver sufficient disclosure and earnings realization, valuation may not re-rate.

What to watch

• Whether 2026 EBIT lands at the high end of the $14bn-$16bn guidance range.
• Whether the 2027 outlook for revenue, EBIT, and FCF growth receives formal guidance confirmation.
• Whether improvements in EV losses and warranty costs continue.
• Whether software and services deferred revenue can reach $7.5bn by year-end and convert into double-digit recognized revenue growth in 2027.
• Super Cruise model coverage, subscription conversion, and ARPU improvement.
• Whether Defense revenue approaches $700mn and achieves positive EBIT, and whether annual revenue growth above 30% can be sustained in subsequent years.
• The commercialization progress of sodium-ion batteries and the Peak Energy partnership.
• Whether the pace of capital returns is affected by EV cash charges, macro demand, or policy changes.