Is General Motors' (NYSE:GM) self-driving subsidiary worth $43 billion -- already?
That's the eye-popping conclusion that one Wall Street analyst put forth in a note to clients last week. The analyst thinks that GM Cruise, the San Francisco-based GM subsidiary that is gearing up to launch a self-driving taxi business, could become massively profitable over the next decade -- and that makes it worth quite a bit now.
If he's right, and if reports that GM is considering ways to unlock that value are accurate, then it's a powerful addition to the bull case for GM's shares. Let's take a look.
$32 billion in revenue in 2030?
The analyst in question is Joseph Spak, RBC Capital Markets' auto-industry analyst. In a note to clients last week, he reviewed what's known of GM's plans to begin rolling out a self-driving taxi fleet next year and looked at how that fleet could grow over time. His conclusion: GM Cruise could become a very profitable business by 2030.
For now, it appears GM's plans are to run its own transportation network company (TNC). If they can get the technology right and execute on this plan, then when we run this scenario, we see them having a fleet of ~800,000 vehicles by 2030 driving ~58 billion miles that year. At $0.55/mile and 29% EBIT margins, we see ~$17 billion of EBITDA. In our DCF (11x exit multiple) this values Cruise at $43 billion.
If GM is charging $0.55 per mile, and its vehicles drive 58 billion miles in 2030, that works out to $31.9 billion in revenue. Compared to the $145.6 billion in revenue that GM earned in 2017, that sounds more incremental than transformational -- but it's the margin that's the key to his valuation.
Spak's note talks about earnings before interest, taxes, depreciation, and amortization (EBITDA) because that's what one uses in a discounted cash flow analysis (DCF). But just for a moment, to keep it consistent with GM's standard reporting, let's talk about earnings before interest and tax (EBIT) -- or specifically, "EBIT-adjusted" -- GM's term for EBIT minus special items and some other small adjustments.
Spak assumes an EBIT margin of 29% -- far higher than GM's EBIT-adjusted margin of 8.8% in 2017. Applied to the $31.9 billion in revenue that Spak assumes for 2030, we get EBIT of $9.25 billion, which is not far at all from the $12.8 billion in EBIT-adjusted that GM earned last year. (We can ignore the "adjusted" part for now, because we don't have any idea what GM's special items will look like in 2030.)
From there, Spak estimated the EBITDA, used that to run his DCF assuming a multiple of 11 on GM Cruise's 2030 valuation, and came up with a net present value of $43 billion.
Given that GM's total market cap right now is about $55.7 billion, what does that mean for the value of GM's stock?
How much of this is reflected in GM's share price?
First, we should note that GM doesn't own 100% of GM Cruise anymore. In May, GM agreed to give SoftBank Group's (OTC:SFTBF) Vision Fund a 19.6% stake in Cruise, in exchange for a $2.25 billion investment -- a transaction that valued Cruise at $11.5 billion.
If Spak is right, then SoftBank got a heck of a deal. Of course, so did GM itself, when it bought then-tiny start-up Cruise Automation for $581 million plus employee incentives. GM invested about $600 million in Cruise last year, and it has said that it expects to spend another $1 billion in 2018 as it ramps up toward the commercial launch of its self-driving taxi service next year.
Even at 80.4% of that $11.5 billion (about $9.25 billion), it's clear that GM has already managed a nice return -- on paper, at least. But Spak's valuation is nearly four times the valuation that GM and SoftBank agreed on just two months ago. Is it for real?
The upshot: This is why GM is considering a Cruise spinoff
For now, Spak is hedging his bets quite a bit. His price target for GM's stock is a bullish-but-not-outrageous $53, of which he said the value added by its 80.4% stake in GM Cruise is $7 per share. That values GM's stake in Cruise at about $9.9 billion -- a slight premium over the valuation that GM and SoftBank agreed on in May.
For the moment, that's probably fair. But the evidence is mounting that GM is considering ways to unlock the value of Cruise. (Among other things, Cruise just hired its own heavy-hitter communications director: John Taylor, formerly of SpaceX.) Spak's analysis points up why GM would feel the need to consider such moves. And the possibility adds another reason for investors to think about buying GM's stock now: Any such share issue for Cruise would almost certainly be distributed to existing GM shareholders.
It's hard for growth-minded investors to get too excited about the stock of a century-old automaker (though GM does pay a solid dividend), even if it has a subsidiary that could grow dramatically between now and 2030. But if GM created a way for investors to buy just that growth potential, I suspect it would be quite popular -- and I suspect that Spak's valuation wouldn't be out of line.