GM / Cruise – Cruise control

Accounting gives GM an instant paper profit.

• General Motors is buying SoftBank out of its stake in Cruise in what will end as a good investment for SoftBank, but I still think that the valuations in this sector remain much too high.
• In 2018 SoftBank closed a two-tranche deal with Cruise where it purchased 11% for $900m and would then add a further $1.35bn when commercial vehicles were ready for deployment giving it a total position of 20%.
• This means that SoftBank agreed to a 2018 valuation of $8.2bn for its first tranche and $15bn for the second giving an average investment valuation of $11.25bn.
• However, SoftBank never made the second tranche meaning that its total investment was $900m at $8.2bn.
• General Motors will buy SoftBank out for $2.1bn for SoftBank’s 11% stake and then invest the $1.35bn that SoftBank was going to put in it itself giving it a total holding of 80% at a valuation of $19.1bn.
• Effectively GM will take over, SoftBank’s position which presumably means that the extra $1.35bn that GM is putting in will go in at the previously agreed valuation of $15bn.
• The $2.1bn that GM is paying gives SoftBank a reasonable return over the 4 years it has been invested and also means that General Motors will register an instant paper profit on the second tranche it is putting in.
• This is a nice accounting trick that helps to hide the reams of red ink still coming from Cruise which I do not expect to end any time soon.
• However, now that GM owns that vast majority of Cruise, it is unlikely to get into any real financial difficulty as a result of further delays.
• All the indications are that there will be more delays and that real autonomous driving will not be a commercial reality much before 2028.
• RFM does not consider vehicles where there is human oversight either in the driving seat or remotely as autonomous driving.
• This is because it is not until you remove the humans that the real benefit of autonomous driving in terms of reducing the cost of vehicle transportation can really be achieved.
• For example, ride-hailing costs somewhere around $2.40 per mile to provide of which the cost of the human is something like $1.70 or 71% of the total cost.
• Having human oversight in remote centres is likely to be even more expensive given the extra skill required but if one human can safely oversee multiple vehicles, then the cost can start to fall.
• Hence, I continue to think that autonomous driving is still very far away meaning that the valuations being paid are still too high.
• The public market is clearly pricing some of this expectation with many of the EV and autonomous driving-related SPACs having declined from the listing prices by 50% or more.
• This creates opportunities because all of the companies are being given indiscriminate treatment meaning that the few gems available are now very cheap.
• One of these is Ouster, which is a manufacturer of solid-state Lidar (the eyes of autonomous machines) which has met expectations it gave when it listed, has real customers and real revenue.
• With $220m in the bank and the share price at $3, the company is trading at 3x 2022 EV / Revenues which is a tiny fraction of many of its peers which I consider to be inferior technically.
• I took a position in Ouster some time ago at $3.20 which combined with nuclear power is, in my opinion, the best way to play the EV / autonomous transition.
• Cruise has a decent autonomous driving offering but then so does Waymo, Baidu, Yandex, Mobileye, AutoX and others meaning that there will be many solutions available, and Cruise is likely to face stiff competition for its robotaxi service.
• With a valuation of $19.1bn, no revenues and the prospect of brutal competition in autonomous ride-hailing, I suspect the time will come when GM writes down the valuation of Cruise substantially.
• Hence, I still remain very cautious on investing in this area given how over capitalised it remains.