Self-Driving Unit At GM Worth More Than Entire Company

Summary

• The global market for self-driving vehicles and services could expand at a rate of 39.5% compounded annually and reach $556.7 billion.
• Experts believe Waymo is the clear leader in this space, but it’s followed closely by GM’s self-driving Cruise division.
• Cruise is currently worth $14.6 billion, has over $6 billion in cash, and may IPO soon.
• Buying GM is a no-brainer for growth investors.

Before I go any further, I want to give a shoutout to Steve Eisman for suggesting this title in an interview. Eisman is the managing director at Neuberger Berman, but he’s best known for being portrayed by Steve Carrell in 2015’s the Big Short.

Lately, he’s been touting two key positions in his portfolio - a short position on Tesla (TSLA) and a long position in General Motors (NYSE:GM). That latter bet is based on Eisman’s belief that the company’s turnaround is likely to be successful and that their self-driving car unit could already be worth more than the entire parent company. In the interview with ETN, he said someday a financial writer would write about this odd phenomenon, so that’s exactly what I’m doing here.

I want to take a closer look at the self-driving car section, pull it apart from the rest of the company, and value it independently. The objective is to figure out if this legacy stock’s notorious reputation and bleak investor sentiment is hiding an undervalued tech gem in plain sight.

What is self-driving worth?

By at least one estimate, from Portland-based Allied Market Research, the global market for self-driving vehicles and services is currently worth $54.23 billion. By 2026, this market could expand at a rate of 39.5% compounded annually and reach $556.7 billion. At least one other estimate concludes that the market will be worth a jaw-dropping $7 trillion by 2050.

For any growth-oriented investor, those figures are simply astounding. What’s more interesting is the fact that there are only a handful of companies involved in the space today. Two of the leaders in the market are Google’s (GOOG) (GOOGL) Waymo and GM’s Cruise.

Now it might seem odd to say that a company that’s been around for more than 110 years, was on the verge of bankruptcy a few years ago, and is generally considered the most boring car company on the planet is now at the bleeding-edge of the autonomous car world. But experts seem to agree that GM’s Cruise unit has surpassed most rivals and is now one of the most sophisticated platforms out there.

Here’s a quote from Brian Collie, head of Boston Consulting Group’s U.S. automotive practice:

“Waymo has developed a phenomenal system and is ahead of the pack, but that’s very different from being able to manufacture an autonomous vehicle. You have to look at GM. In Europe, Daimler is leading the pack.”

Sam Abuelsamid, senior analyst with Navigant Research and author of the Leaderboard: Automated Driving Vehicles study, said:

“GM's technology is as good as Waymo's, and they have the capability to develop and service those vehicles. They're in good shape.”

Market researchers aren’t the only ones excited. Last year, Honda Motor Co. (HMC) announced a $2.75 billion investment in GM's Cruise LLC following SoftBank’s (OTCPK:SFTBY) $2.25 billion investment in the unit on May 31, in addition to a fresh $1.1 billion from GM.

Source: Wired

SoftBank, by the way, is the same company that owns massive chunks of ride-sharing startups like Uber Technologies Inc. (UBER), Lyft (LYFT), India’s Ola, Singapore’s Grab, and China’s Didi Chuxing. There’s an obvious synergy here that promises an exciting future for GM Cruise.

What’s GM Cruise worth?

Unlike most exciting startups that are private companies with vague valuations, GM Cruise has an exact market capitalization at the moment - $14.6 billion.

That figure is derived from the recent investments from Honda and SoftBank, but also from the stock options offered as compensation to the Cruise division’s new chief executive Dan Ammann. According to Reuters, the structure of Ammann’s compensation indicates that GM is looking at a potential IPO of the unit in the near future.

A spin-off will unlock tremendous value for current shareholders, as Cruise can step away from GM’s legacy and long shadow and be valued as a tech startup. There’s little doubt an IPO will value the company at more than the current $14.6 billion. After all, Uber itself is worth an estimated $120 billion. Self-driving should be worth more than ride-sharing in the near future.

Also, note that artificial intelligence is a winner-take-all market, so an early leader has a tangible first-mover advantage. The capabilities compound as the self-driving cars clock more miles.

Meanwhile, GM’s market cap is $56.4 billion. The stock trades at a price-to-earnings ratio of 7.2x and even offers a dividend of 3.85%. By itself, GM’s core business is a healthy car company with a solid balance sheet, a global distribution network, and a steady stream of cash flows.

Data by YCharts

Investors who pick up GM stock today get a great company that’s fairly valued, with one of the most exciting self-driving startups thrown in for nearly free. Getting paid a 3.85% dividend yield while you wait for this exciting startup to take off should be a no-brainer for tech investors.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Apple Dan]

And self-driving could be worth $700 gajillion in the year 2170. The problem is that it is too far away. The same can be said for FSD. It is decades away. It is just too compex. Elon was complaining the other day that just reading freakin stoplights was too complicated. This is not a simple and easy solution.

[Tdot]

Yes we've noticed in the Youtube videos that Teslas have a tendency to run red lights, and fail to yield to other traffic in making left turns and such, and staying in a proper lane in turns is especially challenging when the lane markers have been driven-over and faded.

[trsales]

And Tesla has not advanced their technology in 2 years. They may have had a lead at one time but now they are an also-ran.
Despite Elon's latest pronouncement on twitter I don't think they are going to jump from level 2 to level 4+ this year with the constrained budget issues Tesla faces. Another funding secured moment.

[Donald Johnson]

I just sold GM at a 37% profit in my ROTH. The charts are at resistance. Worse, the fundamentals look to worsen. See China, tariffs, world economic slow downs and even recessions will spread to America.

GM's products are lousy. See Consumer Reports. Visit their showrooms. Look at their resale prices.

GM's huge investments in self driving cars, electric vehicles are a waste of money.

I like the CEO because she's cutting losses on losing products. She needs to focus on making profitable vehicles, not appealing to Socialists and climate change nuts.

Preserving capital is more important to me than collecting dividends, which are replicable in better industries than the auto industry, I think.

[NBR Market Monitor Monitor]

144 Btu per pound mean anything to you?

[RickJensen]

Ahh, it's good to have been there and haven't forgotten all the BS about the "internet". Funny thing is, they are still selling the internet BS today. And people are still wasting vast sums on "valuation".
Everybody had a billion $ company back then, until they didn't.

[NBR Market Monitor Monitor]

GM screwed over all the stakeholders once and they can do it again and again and again................

[RJL13152]

I believe that LYFT is going to do an IPO this year. If I recall correctly, GM has a 9% ownership stake in LYFT.

[trsales]

Conservatively should be worth about 2.5 to 3 billion.

[bobpaulo]

Step one is to IPO just some shares, at a set price, then see what the market does to determine potential valuation of Cruise and it's share price.

GM shares are still undervalued without Cruise.

[J2568]

Bob it’s worth what someone will pay for it. So far SoftBank and Honda set the valuation. If they really have something that valuation will look conservative if not.....

[Tdot]

Correction - Honda and Softbank speculated on the valuation.

The valuation could also be negative, or zero at best, given that they lost $700 million of it last year.

[J2568]

Correction! The last independent transaction is the best look we have at the valuation. You have two knowledgeable players putting material money into the deal. It’s hard to come up with a better way to value a company....strange that Ford despite its best efforts can’t find anyone that thinks it’s technology is investable.....I guess that suggests a valuation as well.....

[ivan0034]

Steve, yes its still a good investment.

[Steve Rasher]

Thanks for the article and intetesting analysis. GM as just a vehicle manufacturer is performing well, and based on that performance and its nice dividend is good value. Significantly, it is also meaningfully engaged in projects at the forefront of the industry, such as electric vehicles and AV. Although these important endeavors are not yet reflected in the price of the stock, I am willing to be patient, and in the meantime collect the nice dividend. Steve

[RickJensen]

With Mary's recent recanting of projections for AV, I'd be very cautious.
What we do know is that Mary has pulled back on all her "we're way ahead" talk. Now she won't give even anything close to guidance. (Just vague "safety talk", gee think she read Ford's "Matter of Trust)

No one knows what Cruise is worth, because no one knows if it's better or worse than the competition. So with Mary and management, promises are not worth the time it took to say them. I suspect Cruise is having major issues and it's 25 mph limit could be a hard limit (for several reasons).
They might make some commercial vehicles by year end, but you notice NOBODY is saying they will go faster than 25.
Then there is this:
"Waymo CEO John Krafcik gained worldwide attention when he promised that, within months, the company would allow the general public to begin riding in driverless vehicles without anyone behind the wheel.
“It’s not happening in 2020; it’s happening today,” he said in the November 2017 speech. “Fully self-driving cars are here.”
However, when Waymo, a unit of Alphabet, launched the commercial service in suburban Phoenix last month, safety operators remained behind the wheel. During a presentation at CES, Krafcik said those operators act like concierges to answer passenger questions."
-- That's what a cell phone can do, but they put a driver in there "just for questions".

Then there's Mary's "guidance" that the 1,100 people on Cruise is the right amount to go forward. But nobody told Dan Kan, (Cruise’s COO).
He said he needed many more, up to 200. So who's right, and who's fluffing the "guidance". When the head and the foot move in different directions, that's not good.
Finally, those of us who have been saying AVs are not going to happen in years, are almost certainly being shown we are right. Full AV maybe impossible. Level 4 at best. gm's current "lead" and "best" are a vapor, it is hopeful "guidance".

Here's the real world Waymo car report from Dec. Watch the whole thing, and you wouldn't want to get into one,... without a brake pedal. (www.youtube.com/...)

You will not see any appreciable number of L4 AVs that go faster than 25 mph any time soon. Like years. Maybe even a couple decades to see any real impact on your ever day Joe. EV is another matter altogether. But AV and anyone who says it ready soon is either lying about it or unqualified to have an informed opinion.

[ivan0034]

Ric, is it possible you and j38765 agree on somthing? For the record Fords mobility division dropped around 180 million last quarter and thats a lot of investment dollars for such a vague return in the future.

[RickJensen]

F won't tell us what's going on. So, I can't offer an opinion of the worth/capability.

The positive is that F won't say, and when they won't say, like the EV F-150, it's probably to protect competitive advantage. I REALLY doubt that Hackett wouldn't protect Mobility, until he knows he's got the timing down to announce.
F's mobility could be pretty simple or incredibly complex. Car to car, Car to customer, Car to plane, ship, train, emergency vehicle, traffic control, traffic flow, embedded sensors, municiple systems, billing systems, recharger infrastructure, you name it.

My job used to be going into any business and making all the systems work right, and talk to each other as much as possible. And then if we could, automate as much as possible. I could see a target rich environment for all the systems integrating and or interoperability. It would be smart to integrate as much as possible for "know" capability. Then interoperability.

Just imagine that data from airplanes, trains, semis, ships at sea, helicopters, scooters and baby carriages all supplied information from sensors, and built a giant point cloud. It would have very little resolution until it was interoperable. But just the weather conditions and traffic and scheduling would keep me busy for years.

Too bad I'm 3 years from retirement. I really wanted to work on the upgrade of the FAA to NextGen. I'll just take all that and use it to invest. If the politicians don't get involved, I'll get rich.

[Tdot]

ivan / Ric - GM Cruise also dropped $200 million in 4Q18, and $700 million for the year, right down the rabbit hole. Obviously the whole autonomous thing is still in infancy.

And remember - J was saying through most of last year that GM would be offering retail autonomous taxi services for a profit by 4Q18, and that therefore GM was "several years" ahead of Ford, defining "several" as anything more than one. So there's that.

Meanwhile Ford has been testing and demonstrating autonomous vehicles and sensors and things for about 6 years now, and says they are not rushing to market just to be "first": they want to do it "the right way".

[ivan0034]

And yet neither GM or Waymo have really put forth any plan to monetize these companies and both have admitted that true level 5 artificial intelligence is years away. The thought that Uber could be worth 120 billion is absurd. I wouldn’t touch any of these IPO’s with these insane valuations cooked in to the price.

[J2568]

Ivan that is indeed the rub on AV and EV. I think both will be very profitable at some point in time. The problem for all the companies is the gap between now and when the new technologies can turn a profit. How long that gap is will be a key driver of stock valuations in the near and mid term.

[jguillory]

Here is an unreleased photo of the Cruise team at the time of the GM purchase. This is what GM bought for 800 million USD:

https://img.frl/e3j1i

Eighty percent of the people in the photo are engineers. Many of the engineers are fresh graduates. We had no technology at the time.

GM was impressed by (and then paid for) a free, open-source robotics system that's mostly used for school projects:

en.wikipedia.org/...

Waymo has valuable technology. In contrast, GM obtained little or no advantage through buying Cruise. (Edited)

[Jan Blanckaert]

Why would Honda and Softbang invest Billion is there is no value?

[jguillory]

Why did Honda and Softbank invest? A journalist asked them. Read their responses near the end of the following article:

www.businessinsider.com/...

[Tdot]

Simple answer, Honda and Softbank are hedging their bets that autonomous may or may not make money some day. Like any investment, there is risk and possible reward.

[PoorGM]

Yes potential of higher valuation exists, but cannot be realized by the existing leadership. Berra and the team is weak and always behind the eight-ball. No vision - No Operational Excellence!!

[mikeRetirement]

Do some research on GM management......Concensus is Mary Barra and team are among best in the business......

[chicagotim1]

@mikeRetirement
Hi, Mike, I agree re Barra. She's not some sort of caretaker, happy to maintain the status quo. She's been making hard decisions re product and market geographies (sedans, Europe, China), has a vision for where transportation is going, and how GM can leverage the opportunity ("TaaS", BEVs), and seems to have been relentless in focusing on improving operating margins.

This isn't to say she's popular in places like Lordstown, OH. And some of the bets she's making may simply not pan out. But she is providing leadership and vision, and seems to be doing a good job of it.

I'm 63, retired, and can't believe I'm talking "GM" and "vision" in the same breath.

Best of luck.

[Jan Blanckaert]

What % ownership does GM hold n cruise . Honda and soft bank investment already diluted GM stake already probably for 1/3 . Are there other investor in Cruise already.?

[Wolfstar]

How can an investor in GM see signs that Cruise is about to IPO?

[trsales]

The lining up of partners sets a valuation for the unit and shows its growth over time.
I am not sure that an IPO would unlock its full value as I believe GM would retain a majority ownership position. The value of their being connected at the hip gives them an advantage over Waymo and will be protected.

[chicagotim1]

Hi, thanks for the article. I'm long GM, modestly. I, too, have my doubts about 'full self-driving'. However, I wouldn't confuse such a capability, installed on a privately owned vehicle, such as a Cadillac, with transportation as a service, or "TaaS"; aka 'robo taxis'. TaaS is where the money is, I think. There's this debate over whose approach is better, TSLA's, or GM/Waymo's; I'm not trying to pass myself off as some sort of expert, but GM is pursuing, as I understand it, an approach that involves 'geofencing'; it'll only work in geographies that have been extensively mapped (someone correct me if I'm wrong). TSLA's approach promises full self driving anywhere, any time, in any population/traffic density. TSLA's approach to true self driving ("level 5") is also years away, and, to me, the business model that company will pursue to monetize self-driving is ill-defined.

GM intends to offer robo taxis to particular geographies; cities, such as SanFrancisco and Phoenix to start, I believe. Their approach makes sense, I think, and is supposed to start this year on a limited basis. Plus, I'd assume they'd set up a separately capitalized entity for the service, so as to make for easier transparency for taxes, insurance, financial, and operating metric purposes. If this service works ('if'), a number of benefits accrue to GM, not the least of which is recurring, fee-based income.

Best of luck to all.

[Tdot]

You can study up on the SAE Level 0-5 Automation.

Tesla's current Autopilot would be rated at somewhere between SAE Level 2 and 3, in that the driver must keep hands at the wheel and feet at the pedals at all times, and fully alert with eyes on the road, or else risk having the autopilot system drift off-course and smash into something.

Most of the proposed autopilot systems at other automakers are far more sophisticated, Level 3+ to 4, and able to accurately scan the environment and not crash into things. But yes SAE Level 4 are limited to operating autonomously without a driver in pre-scanned "geofenced" routes that are constantly getting updated as things change (detours, road construction, lane closures, etc.

The consensus is that, in spite of Musk's dreams, that treu SAE Level 5, fully unrestricted autonomy, is at least a decade away and requires monstrous computing and redundant sensor capacity.

In the mean time, Level 4 should at least provide sufficient Taxi and Delivery services, and advanced Automated Driver Assist functions that won't randomly kill people if they fall asleep and It gets confused between a blue semi-trailer and the blue sky. Or a firetruck and nothing. Or a concrete lane divider and open road. Or a bridge abutment and an open lane on the freeway. Some common things that Tesla's Autopilot has struggled with since it was introduced.

[SA-NJ52]

I am an engineer who has worked with software since 1970.

I see all the hype about self-driving cars and I find it hard to believe that this will be successful for many years.

If every car on the freeway was self-driving, it would be like stormtroopers in star wars marching in unison. But once you drive in snowy conditions on bumpy slippery road, and the oncoming car has a burned out headlight, I would think a self driving car, at least in this century, is a death trap.

The driver assist features make perfect sense. Pulling out of a parking spot where you are blind and radar can see where you cannot, is a great feature. If both cars have driver assist, an accident can be prevented.

But that is about it.

This self driving hype is slightly more credible than Bitcoin but that is about it.

@gandc

[475F]

yeah, it was only a generation ago that all things "internet" commanded huge stock price premiums; look at how that turned out. A major irony of self-driving is that it would be much easier to implement if ALL vehicles on a given road system were autonomous. Tons of inter-car communications going on. Toss a single human-driven car in and the complexity of things really escalates.

I'm thinking GM should seek to monetize this now, with some optionality to use the technology as it does really take off.

[Tdot]

... since 1970? Probably safe to say they won't be using Fortran 66 or 77.

[KimBEAV]

In the meantime we wait and wait for a tommorow that never seems to arrive.....

[mjr136]

We can all shake our heads and ask why the stock price of GM hasn't yet reflected some version of the author's enthusiasm for Cruise, but I take solace with one key fact: Dan Ammann was always the sharpest knife in the drawer (yes, that includes Mary) at the reborn GM (came from Morgan Stanley). He left the job of President of GM to run Cruise for a reason--one helluva payday when this company goes through an IPO. I always vowed I would sell my GM stock if he left or got hit by a bus, unless it was to fulfill a higher purpose within their ownership structure. This is that higher purpose and I believe patience will be rewarded.

[InvestorMan Sr.]

For the life of me I just can’t get myself to buy into the idea of self driving cars. Smarter cars, yes. More driver support, warning, correction systems... sure. But the idea of buying a $30-40-50,000 car, hoping in and telling it to take me to my lakeside cottage in Vermont while I scroll through my iPhone eludes me.

[Cantankerous Millennial Dad]

I think you're presenting a key example as to why self driving cars will likely never reach anywhere near 100% penetration of the auto market. I too find it hard to believe that artificial intelligence will ever impart self driving cars with the capability of navigating in rural and or off-highway environments. Except in carefully constrained, mostly urban operating scenarios, the need for human intervention will persist indefinitely. Fully autonomous vehicles that do not permit human input will not likely be practical for suburban or rural operation.

[Compound Knowledge]

The transition is not likely to happen within 5-10 years since the transition from semi-autonomous to completely autonomous is still in its infancy stages. Similar to when the first car was made in the late 1800s there were no seat belts, airbags, or appropriate traffic regulations to accommodate. When there is an excess of supply to meet the demand the prices of autonomous cars will drop into cheaper/affordable price points.

[RJL13152]

warnbeeb - The idea of an 80 something wanting to go shopping or whatever in Florida does not elude me. While you might not need a self driving car, there are many others who see it as a liberating tool.

[Xandi]

So why isn't this being reflected in the stock price. Who do we believe anymore. The stock is where it was many years ago. No hope. Looks like it's the same for all the car stocks like F, Fiat and GM. We could have invested the monies we are investing in these companies in tech companies that are producing real gains to shareholders.

[mikeRetirement]

Yes, that’s true, currently.......GM’ value remains compelling, (particularly VS. Tesla), leader in AI, great product, great dividend many levers to pull to propel stock forward......

[Vlae Kershner]

There's an analogy in 3Com and Palm. Remember the Palm Pilot, the hot product of the late '90s? It was bought by 3Com, which was kind of a dog next to Cisco. Shareholders didn't give 3Com credit for owning Palm until they announced a spinoff, and then the stock went up like a rocket until the day of Palm's IPO. On that day and for a few more weeks, the value of Palm stock in 3Com's portfolio was greater than 3Com's market cap, strange as it may seem.

[Stewart Foreman]

Xandi,

I notice Google is not exactly getting a windfall either from Waymo. Jonas recently valued Waymo at something well over $100 billion recently. That’s up from virtually zero a couple years. Granted Google is coming from a whole different business. It’s basically an obscene cash cow with its core business, then it has all these moonshots attached to it. So who knows exactly where it should be trading. Still, it’s striking in how unremarkable Google has been trading if you are to believe that one of its moonshots is suddenly worth over $100b.

I’m thinking a lot of investors are simply not willing to believe the valuations of self driving networks. At least not right now.