GM Doesn't Get Enough Credit for This Overlooked Revenue Stream

General Motors (NYSE: GM) has done a lot of good things for investors in recent years. It's repurchased billions in stock, turned around its money-losing operations in China, navigated choppy industry waters with speed bumps that include chip shortages and tariffs, and nearly doubled the S&P 500's return over the past three years.

GM's first quarter had another solid earnings report, but one aspect of the Detroit automaker's business is in early stages and isn't getting enough credit for its potential.

Image source: General Motors.

The segment is small but growing rapidly

GM is playing the long game with its OnStar and Super Cruise subscription business, which management thinks can become a major driver of profits in the future. The automaker is also going about things a little differently with its strategy to give every new vehicle an eight-year subscription to OnStar services, and vehicles that have Super Cruise a three-year subscription built into the price.

The idea is simple: Force a 100% take rate of the services built into the vehicle price and trust it gives plenty of time for consumers to get used to having them and eventually opt to continue the subscription. The early data is promising, with at least 30% of the 35,000 drivers with an expiring Super Cruise subscription renewing last year. Further, Super Cruise subscriber numbers were up around 70% during the first quarter compared to the prior year; they are expected to surpass 850,000 paid subscribers by the end of this year.

Let's try to put a little more perspective on the topic with dollar figures. OnStar ended the first quarter with deferred revenue checking in at $5.8 billion, up more than 50% compared to the prior year, and recognized revenue of over $750 million, which was up 20%. GM remains on track to boast 13 million subscribers by the end of this year. For Super Cruise, revenue was up 85% compared to the prior year's first quarter and is expected to reach nearly $400 million in 2026.

What it all means for GM's stock

"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 in March, according to Automotive News.

While GM will have to fight subscription fatigue, as it seems like consumers have a subscription for everything now, growing this high-margin connected business gives the automaker a chance to improve its margins in an industry often looked down upon for razor-thin margins. GM has previously noted it believes this connected business represents significant valuation that isn't fully reflected in GM's current share price. GM doesn't get enough credit for this revenue stream and high-margin business, but it's still in the early innings, and that gives investors an opportunity to consider an automaker that's done well for investors in recent years.

Daniel Miller has positions in General Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.