The automobile market is going through something of a renaissance right now. Car manufacturers worldwide are investing significant sums into battery-powered vehicles -- perhaps the bedrock of the green energy movement.
Moreover, the notion of self-driving cars has become increasingly more prominent among car manufacturers and tech companies alike. General Motors (GM 0.48%) has been trying to make inroads in self-driving technology for years. Most notably, the company acquired a majority stake in a start-up called Cruise back in 2016.
However, over the years, Cruise has been plagued with operational setbacks. Most recently, several public reports suggest that Cruise's valuation has been lowered by more than half.
Let's dig into why this is important news and how Tesla (TSLA -1.11%) could end up emerging as the biggest winner of all from GM's latest debacle.
Driving on cruise control?
Cruise is just one of many companies exploring autonomous driving technology. Alphabet has been exploring self-driving for years through its subsidiary, Waymo. Moreover, Tesla has long been considered the leader when it comes to self-driving vehicles. In fact, famed mutual fund investor Ron Baron has gone as far as to say the super-compute capability behind Tesla's autonomous driving unit, called Dojo, could be a $1 trillion business itself.
It's no wonder other investors, including Honda and Microsoft, have helped pour billions into Cruise. But while self-driving prospects are both intriguing and lucrative, Cruise has been no stranger to controversy.
More recently, toward the end of 2023, Cruise hit several bumps in the road. The company was forced to suspend operations in California following a collision between one of its robotaxis and a pedestrian. Shortly thereafter, the company halted operations in other markets across the U.S.
Following these operational hurdles, Cruise implemented a series of layoffs as the company continued to hemorrhage cash. And finally, the company's founder, Kyle Vogt, resigned amid all the mismanagement hoopla.
Image source: Getty Images.
Cruise and GM haven't been a match made in heaven
Generally speaking, when a company is exploring a new type of technology, leadership will often weigh the pros and cons of building internally versus exploring external alternatives. Namely, these alternatives typically come in the form of mergers and acquisitions (M&A). While M&A can definitely fast-track entrance into a new market, these deals often come with headaches, including integration efforts, cultural challenges, and unforeseen capital requirements.
When General Motors decided to invest in Cruise, my guess is that the company viewed this as a way to gain entry to self-driving technology without spending years on research and development. The benefits of accessing the autonomous driving market are obvious.
Should General Motors have demonstrated success in self-driving, the company would have been able to differentiate its legacy vehicle models in an entirely new way. Moreover, ride-hailing businesses, such as Uber and Lyft, or delivery services, like Amazon, Instacart, and DoorDash, would likely be eager to partner with General Motors, given the massive cost-savings opportunities robotaxis present.
The problem is that these ideas look great on paper but are monumentally difficult to execute.
Between 2022 and 2023, General Motors spent a whopping $5.7 billion on Cruise. So far, the investment does not appear to be paying off, as the self-driving subsidiary has generated $4.6 billion in operating losses for General Motors over the last two years.
Despite Cruise's $1.3 billion of cash on the balance sheet, its current burn rate doesn't bode much confidence. Frankly, I see General Motors needing to inject far more capital into Cruise sooner rather than later.
Here's why Tesla could emerge as the big winner
The reported valuation drop in Cruise shouldn't inspire confidence for General Motors investors. While General Motors presents an interesting alternative to other electric vehicle (EV) and self-driving car opportunities, I think the company is rapidly falling behind in both areas. It seems General Motors miscalculated the sophistication of autonomous driving and tried to buy its way into the market.
TSLA Free Cash Flow (Quarterly) data by YCharts.
By contrast, Tesla spent years reinvesting cash flow into the business as it remained steadfast in developing the most superior automobile technology on the market. While the timeline for Tesla's commercialized self-driving technology remains somewhat of an enigma, the company's CEO, Elon Musk, has teased that it could be here sooner than people think.
While management deserves some credit for identifying emerging growth areas, the problems at Cruise are exposing General Motors as just another car company with little (if any) real innovative edge. On the other hand, Tesla has proven it can develop industry-leading technology that consumers actually want.
Although Tesla is still very much a car company today, I am bullish that it will evolve into a more prolific technology operation in the coming years. As such, even though General Motors isn't giving up on self-driving entirely, I think investors are much better off as buyers of Tesla stock at this moment. The recent woes at Cruise are just another setback for an already beat-up operation, and I wouldn't be surprised to see more challenges ensue for General Motors.
In the long run, should Tesla succeed in its self-driving ambitions, the company will have an enormous opportunity to license this software to other car companies, similar to what it is already doing with its supercharger network. For this reason, I see Tesla emerging as the ultimate winner in the autonomous driving race and think the company has a multibillion-dollar opportunity in the palm of its hands.
