Autonomous autos – Pie in the sky pt. II

The autonomous software industry has a value of $44.3bn.

• Microsoft has participated in a $2bn funding round that values Cruise at more than $30bn which seems to be assuming that Cruise will end up the biggest player with over 50% market share.
• 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.
• Consequently, how Cruise is valued at $30bn with Waymo on a figure larger than that remains a complete mystery.
• The problem here is that no one has any idea what these companies are worth (if anything) which is putting hype, speculation and FOMO (fear of missing out) in the driving seat.
• Valuations make even less sense now than they did in 2019 when I last ran a valuation exercise on this industry and so it is worthwhile to re-run this exercise in light of recent developments.
• Given I am cautious on the outlook, I have been as generous as I can in tilting the numbers towards the upside and the parameters I am using are as follows:
  • First, vehicles sold: Global vehicle sales fall to 33.5m by 2047 due to autonomous vehicles causing better utilisation and fewer vehicles being needed to be present at any one point in time to meet demand.
  • 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 35% and tax rates of 20%.
  • 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 with an enterprise value of $63.9bn in 2028.
• Bringing that back to today using the same discount rate, I calculate that the entire global industry is worth $44.3bn in today’s money.
• This means that investors in Cruise have already paid for global dominance with very little certainty that this will indeed come to pass.
• There are currently over 30 companies working on a solution for autonomous driving and the 2019 data (see here) showed a tightening at the top meaning that the middle of the market is catching up with the leaders.
• Hence, fierce competition looks to be coming in this space which is not ideal when it comes to earning a return to the vast amounts of capital that has been and continues to be sunk into it.
• 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 of both capital and market participants.
• Furthermore, the valuations demand so much that only heavy losses beckon, even for investing in the winners.
• Rational humans should still steer well clear of this segment.