Back when cross-town rival Ford Motor Company (F -1.92%) threw the towel in on Argo AI, its project to directly develop autonomous driving vehicles, General Motors (GM 0.48%) seemed to be doubling down on its Cruise start-up. Investors ate it up, myself included, as we saw a bright future for the juggernaut automaker that could combine its growing EV prowess and its majority-owned silicon valley driverless technology start-up.
Fast forward to today, and Cruise is facing serious questions. Is this the speed bump that caused Warren Buffett to dump all his shares of GM? Not so fast -- here's what investors might be missing.
Go big or go home
GM's Cruise, which was a big investment to create a robo-taxi service, was anticipated to deliver $50 billion in revenue by 2030. That plan hit a massive pothole when California regulators opened an investigation into the safety of Cruise's self-driving vehicles.
Currently, Cruise has roughly nine months of cash on hand, with Honda -- a second smaller stakeholder that invested previously -- admitting it doesn't intend to invest more capital, sending Cruise into a spree of layoffs and a review of operations.
To put in perspective how much faith investors had in GM's Cruise, consider that in the spring of 2022 Cruise was valued at roughly $30 billion -- a sky-high valuation when General Motors was valued at roughly $65 billion.
Again, fast forward to today. Former CEO of Cruise Kyle Vogt has resigned, and another Cruise co-founder, Daniel Kan, quit. New leadership was installed, but the shakeup will likely continue.
Cruise sputtering is no doubt shaking investors' long-term faith in the bright future it once seemed to be driving, but is it the reason Warren Buffett recently dumped all his remaining GM shares during the third quarter?
Not so fast
The truth is, investors sell shares of companies for many, many reasons. When you look at the previous holdings of Berkshire Hathaway, you'll see a pretty clear trend, and a trend that stays true to Buffett's investing mantra.
Image source: Author. Information source: Insider Monkey.
The graph above compares the number of billionaire hedge funds holding shares of GM compared to the number of shares Warren Buffett held in Berkshire Hathaway, along with the price of GM shares at the time.
What it emphasizes is that Buffett's pile of GM shares peaked in mid-2020, during the COVID-19 pandemic when everyone was fearful of owning automakers. As hedge funds began pouring back into the oversold automaker and potentially getting greedy, Buffett immediately starting trimming his holdings at the end of 2020 and through 2021, before finally closing out his position in the third quarter of 2023.
It's also likely that Buffett became weary of looming changes with the Union Auto Workers (UAW). As negotiations and small strikes took place, it became clear it was going to cost automakers one way or another to get a new contract completed. Ford recently reintroduced its full-year guidance with adjustments for the new contract, which includes a 30% wage increase over the four-and-a-half year contract, costing the company over $8.8 billion over that timeframe. The story is similar for GM which reduced its 2023 guidance for net income attributable to stockholders from a range of $9.3 billion to $10.7 billion down to a range of $9.1 billion to $9.7 billion. In other words, the new contract adds about $575 in costs per vehicle over the life of GM's deal and, in a notoriously capital intensive industry with low margins, it could have been the last straw for the Oracle of Omaha.
Whether it was looming contract negotiations, inflation, the risk of vehicle prices coming down, or perhaps having better opportunities to deploy its capital, Buffett to reduce his position in the Detroit automaker long before Cruise hit a massive pothole.
The bottom line
Right now General Motors management is saying all the right things, that there's still a future for Cruise and it has the capability to fund the start-up to reach that future. It's also fairly clear Buffett didn't close his position in the Detroit automaker because of recent Cruise adversity.
However, for investors this brings up a valuable learning moment. With one cross-town rival throwing in the towel on its own driverless development, costing it a whopping $2.7 billion write-off, and saying it could likely buy the technology later when it's more feasible, we should pump the brakes on the lofty expectations held for GM's Cruise.
There could still be a very bright future for GM's driverless ambitions, and one I doubt it completely throws the towel in on. But for the near term, investors would be wise to take lofty valuations and expectations of Cruise with a grain of salt and realize it's going to be a black hole for capital long before it's a bright spot for earnings -- and that's OK too.
