Autonomous autos – Pie in the sky.

The whole industry is worth $16.7bn.

• The valuations being attributed to autonomous driving hopefuls are so high, that I think investors must be assuming that there will only be one successful solution that can charge what it likes for its autonomous driving software.
• By contrast, I think that there will be many offerings and the time will eventually come when autonomous driving becomes as simple as the software that runs elevators today.
• VW appears to be poised to invest in Argo, a middle-of-the-road autonomous driving start-up at an eye-watering valuation of $7bn.
• This comes hot on the heels of Toyota and Denso investing $667m in Uber’s autonomous driving unit at an equally unbelievable valuation of $7.8bn.
• This valuation is particularly unbelievable as a quick glance at Uber’s autonomous driving unit quickly reveals that it is by far the worst in the industry.
• Furthermore, it has deteriorated meaningfully in the last 12 months and I think that the best solution will be to throw it all away and start again (see here).
• These numbers are clearly being justified by Softbank’s and Honda’s recent investment in Cruise which valued it at $19bn.
• The problem here is that no one has any idea what these companies are worth (if anything) which is putting hype, speculation and fear of missing out in the driving seat.
• Consequently, I think its worth having a very rough stab at what the autonomous driving industry might be worth.
• I will use the following assumptions based on RFM’s research:
  • First, vehicles sold: Global vehicle sales fall to 40m due to autonomous vehicles causing better utilisation and fewer vehicles being needed to be present at any one point in time.
  • Second, Price: I assume that an OEM will pay $1,000 per unit for autonomous driving software (excluding all hardware).
  • Third, time: RFM forecasts that autonomous driving will become a commercial reality in 2028 with full penetration by 2047.
  • Fourth competition: There is every indication that there will be plenty of competition.
  • Hence, prices will not be that high and margins will not be astronomical and I have assumed EBIT margins of 30% and tax rates of 25%.
  • Fifth, risk: I have been very generous and assumed that the appropriate discount rate for this industry is 8%.
  • This is roughly equivalent to the long-term return of the equity market which I think is far less risky than investing in autonomous driving software.
• Taking these assumptions and creating a discounted cash flow analysis from 2028 to 2047 with a steady-state after that reveals an industry that will be worth $33.3bn in 2028.
• Bringing that back to today using the same discount rate, I calculate that the entire global industry is worth $16.7bn in today’s money.
• This means that investors in Cruise have already paid for total world dominance with very little certainty that this will indeed come to pass.
• Investors in Uber autonomous driving and now Argo have also paid up at a price that assumes more than 50% global market share each.
• While there are plenty of caveats in my very rough, back of the envelope calculation, it is at least grounded in well documented financial theory while the others seem to be based on pie in the sky.
• I continue to see no reason at all to any put money into this sector as there is already a massive oversupply.
• Furthermore, the valuations demand so much that only heavy losses beckon, even for investing in the winners.
• Rational humans should steer well clear of this segment.