Electric vehicle maker Tesla hosted an analyst event Monday to discuss its autonomous driving technology. The technology is impressive. Barronâ€™s wouldnâ€™t claim otherwise. But the event got us thinking, just how much of Teslaâ€™s market value is tied up in nonautomotive manufacturing technologies?
After all, Tesla (ticker: TSLA) makes batteries, solar panels, and charging stations, not to mention the autonomous computing technologies on display Monday. The value of each component is difficult to quantify separately, but most analysts would agree there is value in each piece of the Tesla-pie.
Before you roll your eyes about the monetary potential of technology developed in Michigan versus the monetary potential of technology developed in Silicon Valley consider that GM Cruise is a West Coast company. It was a proper start-up purchased by GM from a venture-capital firm in 2016.
Whatâ€™s more, GM Cruise has raised more than $5 billion from external sources recently. In May 2018, SoftBank (9984.Japan) invested $2.3 billion for about 20% of Cruise. In October 2018, Honda (HMC) invested $750 million. The Honda deal included commitments for $2 billion in future investmentâ€”and some of the $2 billion is fee revenue. That means GM Cruise has something many start-ups lack: sales.
But what does Cruise do anyway? Itâ€™s an autonomous driving platform technology company. â€śOur mission here is to deploy autonomous vehicle technology safely and at massive scale,â€ť explained GM President Dan Ammann after announcing the Honda investment last year. Cruise isnâ€™t all that different from the software engineering going into Teslaâ€™s autonomous driving solutions.
Autonomous driving is the future, but itâ€™s already big business. Intel (INTC) bought car-camera pioneer Mobileye in 2017 for almost $15 billion. Nvidia (NVDA), a microchip maker that makes processors for autonomous driving, has a market value of more than $100 billion. (Nvidia already generate $641 million in automotive chip sales annually.) Of course, Tesla has a market value of more than $45 billion.
GMâ€™s market value is about $55 billion, and if you include the unfunded portion of its pension liability that figure jumps to $66 billion. It appears there isnâ€™t a lot in GMâ€™s stock price for Cruise. Determining exactly how much is in the stock is tough. Sum of the parts analysisâ€”where analysts try to estimate the value of separate parts of a business to derive a stock-price targetâ€”only work if there is a catalyst to unlock the hidden value. GM could spin off Cruise to shareholders. That is the type of catalyst we are talking about.
If Cruise is spun off, separated from GM and valued in the marketplace as a stand-alone entity, the remaining GM car company would still generate about $14 billion in pretax earnings in North America (including GM Financial) and as well as having a Chinese franchise that earned $2 billion in equity income in 2018.
Even if we canâ€™t agree on what GM is worth excluding Cruise, we can approach the problem another way. We can assume the market just isnâ€™t paying for Cruise yet. After all, GM stock trades for six times earnings, in line with its historical average.
Cruise was last valued, based on the SoftBank and Honda investments, at about $15 billion. GM owns about 75% of Cruise. That means GMâ€™s stake is worth roughly $11 billion or 20% of GMâ€™s current market capitalization.
It may feel strange that a little financial engineering could generate a 20% stock price bump. Still, there is something to tech-branding and having Cruise behave like a separate company. After all, itâ€™s probably difficult to get software engineers to choose Detroit over Palo Alto.
GM, one of Barronâ€™s Dinos of the Dow, is up 18% year to date, better than the 14% gain in the Dow Jones Industrial Average and better than the 15% gain in the Russell 3000 Auto & Auto Parts Index. GM reports first quarter earnings on April 30.
Write to Al Root at firstname.lastname@example.org