Back in 2016, General Motors (NYSE: GM) spent over $1 billion to acquire self-driving car start-up Cruise Automation. Since then, GM has invested aggressively to accelerate Cruise's development of autonomous vehicle (AV) technology, with the goal of launching a robo-taxi service using the all-electric Chevy Bolt.
Last June, GM won a big seal of approval for its AV efforts, as the SoftBank Vision Fund -- which has funded numerous high-growth tech companies -- committed $2.25 billion to help Cruise commercialize its technology. Furthermore, the value of Cruise has continued to rise over the past year. This was highlighted by a new investment round completed this week at Cruise's highest-ever valuation.
General Motors takes outside investment in Cruise
GM Cruise lost more than $600 million in 2017 and more than $700 million last year, as the unit does not generate revenue yet and it is very expensive to develop self-driving car technology. GM expects the unit's losses to increase to $1 billion in 2019, as it ramps up hiring to accelerate the development of AV technology.
While General Motors' core business generates adequate cash flow to fund Cruise, the automaker started to seek outside investments in Cruise last year. This has allowed it to recruit strategic partners, spread more broadly the risks related to developing cutting-edge technology, and return more of its own cash flow to shareholders.
The SoftBank Vision Fund was the first outside investor. Under a deal announced nearly a year ago, SoftBank agreed to provide $900 million in cash up front, plus another $1.35 billion when "Cruise AVs are ready for commercial deployment," in return for a 19.6% stake in GM Cruise. This valued GM's self-driving unit at about $11.5 billion (including the investments pledged by SoftBank).
GM Cruise has lined up billions of dollars of external funding over the past year. Image source: General Motors.
GM lined up another strategic partner in October, as Honda Motor (NYSE: HMC) agreed to invest $750 million in GM Cruise at a post-investment valuation of $14.6 billion. Honda will also work with General Motors and Cruise on AV development and commercial deployment opportunities. It has committed to invest $2 billion over 12 years on these efforts.
Cruise raises more cash
As of the end of last quarter, Cruise had $2.2 billion of cash and investments on its balance sheet. That's plenty of money for now, but spending will increase dramatically when it actually begins the commercial rollout of its planned robo-taxi service. SoftBank will provide another $1.35 billion of cash at that point, but that probably won't be enough on its own, because losses are likely to accelerate at first as the Cruise robo-taxi business fights for market share.
This made it prudent to lock down more funding now. On Tuesday, General Motors announced that the three existing partners (GM, SoftBank, and Honda) plus various institutional investors have invested another $1.15 billion in Cruise at a post-investment valuation of $19 billion.
The new investment's terms imply that Cruise's valuation has risen nearly 50% since last June, excluding the new capital raised. That puts the value of GM's stake in Cruise at more than $13 billion. (The exact amount depends on how much the General provided in the current investment round, which hasn't been disclosed.)
Investors still aren't giving GM the credit it deserves
Based on Cruise's new $19 billion valuation, General Motors' stake in its AV subsidiary is now worth more than $9 per share. That means investors are currently valuing the rest of GM at around $29 per share: a mere four times the company's projected adjusted earnings per share for 2019, excluding losses related to Cruise.
The rise of electric and autonomous vehicles does pose a long-term threat to GM's core business. That said, General Motors' lucrative truck and SUV franchises -- which account for the vast majority of the automaker's earnings -- are likely to remain highly profitable for many years to come. Moreover, an ongoing restructuring plan should drive strong growth in free cash flow over the next two years or so.
As a result, GM's core business appears to be worth significantly more than the value investors are currently attaching to it. Shareholders should stay patient while CEO Mary Barra continues to reshape the company as a leaner, more profitable business.
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