This Top Stock Could Win Big as It Completely Flips Margins

General Motors (NYSE: GM) is doing plenty right for investors these days. It has a cash cow business with its high-margin trucks and SUV sales, has executed significant cost reduction programs, has significantly reduced share count to drive earnings-per-share power, and is expanding its software revenue for additional high-margin business. Those developments helped GM's stock double over the past three years, and the good news is that more high-margin business is on the way, and many investors have overlooked the potential of what's happening.

Image source: General Motors.

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Flipping industry margins

The mainstream automotive industry is known for being capital-intensive and for generating razor-thin margins. That changes for the better as you move higher into luxury auto brands, or even super-luxury (such as Ferrari), but largely the automotive industry isn't looked at as lucrative. That's beginning to change, and GM's push with OnStar and Super Cruise is showing signs of its potential to drive significant profits.

This year, GM expects to generate $3.1 billion in realized revenue and $7.5 billion in deferred revenue from OnStar and Super Cruise subscriptions. That's a sizable jump from only 2020, when those two subscriptions drove $1.7 billion in realized revenue and only $200 million in deferred revenue. As more and more vehicles hitting the roads today are loaded with infotainment technology, sensors, and computers to analyze conditions for autonomous driving, among other things, those subscriptions can certainly energize GM's business model.

A brave new auto world

"These software-like margins that are coming in the connected business can actually drive, and potentially over time, dwarf even the wholesale business, which is remarkably strong and remarkably large," GM CFO Paul Jacobson told investors at Bank of America's Global Automotive Summit earlier this month.

One hurdle GM must navigate is subscription fatigue as consumers face mounting subscriptions in nearly every facet of life, from food delivery to streaming platform options. To battle this fatigue, GM is playing the long game and giving consumers long-term subscriptions with vehicle purchases beginning with the 2025 model year -- it will include an eight-year basic subscription to OnStar and three years with Super Cruise.

Rather than consumers receiving a short free trial, GM is banking on consumers growing accustomed to these services and renewing the subscriptions, as well as opting for them directly with the next purchase. Already, GM is seeing roughly one-third of its customers with basic OnStar subscriptions upgrading for additional features, and at least 30% of expiring Super Cruise subscriptions renewed in 2025.

The long road ahead

GM's software and subscription services have the ability to transform its core business over the long term. GM averaged just over 16% gross margin over the past decade, and software services typically boast margins pushing closer to 70%. The Detroit automaker is casting the largest net possible by giving consumers these long-term subscriptions in all new models, and all investors need to do is have patience, as it will take time for millions of these newer vehicles and subscriptions to fill the roads. A decade from now, GM's gross margin could look substantially more enticing, and investors along for the ride could win big.

Bank of America is an advertising partner of Motley Fool Money. Daniel Miller has positions in General Motors. The Motley Fool has positions in and recommends Ferrari. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.