The big news for today (as I'm writing this from Newark airport, still on May 31st) is the Softbank investment in GM Cruise.
Given that GM was my largest holding, I'm naturally happy to see it go up, as I did not plan to buy more of it in the near future (at current price).
But I think the implied valuation of $8.2B now and $15.5B at the point of commercialization is well below the true value of Cruise at this point. I estimated that segment to be worth ~$200B as of today, by discounting future cashflows.
It is true that it's still early stage and there are still non-trivial risks (we have discount rate for that), but the chances of any other firm catching on with Cruise are narrow and chances of Waymo getting to scale fast enough are slim.
We're talking about multi-trillion market with relatively high profit margin, first-mover advantages and big network effects and valuing a clear leader to capture it at only $15.5B.
I completely understand why SoftBank did this and would do it on their side any minute.
GM was very shareholder oriented all the time and I think it continues to be. I see two potential motivations on GM side:
1) Frustration on permanently depressed valuation and lack of patience to wait until it catches with intrinsic value (which I'm estimating at close to $200, vs. today's ~$40).
2) Being "blackmailed" into this deal by SoftBank. Maybe they effectively threatened that they will buy other AV startups and subsidize the human-operated ride sharing competitors of GM's future network in the markets GM will deploy. That way, GM wouldn't be able to reach scale on the demand side, until SoftBank-funded AV technologies catch up and become good-enough for commercial deployment through existing ride-sharing networks. Few companies have capability to outspend SoftBank and GM's shareholders might not have a stomach for that. Alphabet of course has the resources, but I doubt they will be able to deploy at the same pace that GM will.
But it's good that GM keeps the option of having their own network open, per Seeking Alpha transcript:
John Murphy
But Dan the concern I guess is like what we’ve seen in the past with other fleet sales and obviously is a very different thing than what we’ve seen in the past with these. But there is some concern that you would be supplying vehicles to a fleet and then be diminished in value in value capture. So I mean is there way that even if you partner with somebody else and selling to a fleet or partnering with a fleet that you can really protect yourself in economics. Do you think even that has been in the past in the value chain?
Dan Ammann
We see this in a very different way. We think the -- bringing this technology to scale with the right level of safety and really operationalizing and then commercializing and it’s been an extraordinarily unique challenge, and we don’t see a number of people being successful with that in the near term. It’s also important as we talked about before to understand that the rate of improvement and rate of iteration that we’ve been talking about, that continues just as much the day after commercial deployment as it does between now and then. This is a product and a service that will continue to improve rapidly over time. That’s why we think rate of development is so important. That’s we think first mover advantage is so important. And so we think this is a completely different dynamic versus some of the other business models that you alluded to.
It is true that selling AV fleets will not be the same as selling dumb car fleets, but I doubt there is much value to be captured beyond the value of the TaaS service itself. This means, that as soon as a few players can deploy cars at scale, a race towards basic economics is almost inevitable and will put a tough ceiling on profits of even the most efficient and successful company.
There's also an interesting theory in the comment:
What I gather from this transcript is:
1. Most Analysts are still crueless.
2. No spin-off is planned.
3, GM will be valued as Sum-of-Parts: OEM and Taas.
4. Masayoshi Son is a great partner for global TaaS market.
5. There’re two segments of TaaS:
1). Moving people.
2). moving goods.
6. On moving goods, GM’partners are:
1). US-Amazon
2). China-Alibaba.
7. On Moving people, GM partners are:
1). US-Uber.
2). China- ?
I agree with first 3 points. I also think that GM will likely partner with others on retail part of 'moving goods' segment. For "Uber Rush" equivalent, I can see them potentially going alone too.
For moving people, which I expect to be the core of TaaS business, I think anything except Cruise deploying their own network would be a mistake.
Given that economics of AV win hands down with human-operated ones, especially in mature markets, I think it won't be hard for GM to quickly take over customers from Uber and Lyft. The very high Customer Lifetime Value of ride-sharing users, can easily justify Customer Acquisition Cost even into the thousands and the product is going to be very sticky.
To sum up, I see this as a validation of my thesis, that reduces risk of my GM stake, but also reduces the potential reward, as I just 'lost' 20% of it to SoftBank in exchange for them being presumably less aggressive in this space and some pocket change.
Given that GM was my largest holding, I'm naturally happy to see it go up, as I did not plan to buy more of it in the near future (at current price).
But I think the implied valuation of $8.2B now and $15.5B at the point of commercialization is well below the true value of Cruise at this point. I estimated that segment to be worth ~$200B as of today, by discounting future cashflows.
It is true that it's still early stage and there are still non-trivial risks (we have discount rate for that), but the chances of any other firm catching on with Cruise are narrow and chances of Waymo getting to scale fast enough are slim.
We're talking about multi-trillion market with relatively high profit margin, first-mover advantages and big network effects and valuing a clear leader to capture it at only $15.5B.
I completely understand why SoftBank did this and would do it on their side any minute.
GM was very shareholder oriented all the time and I think it continues to be. I see two potential motivations on GM side:
1) Frustration on permanently depressed valuation and lack of patience to wait until it catches with intrinsic value (which I'm estimating at close to $200, vs. today's ~$40).
2) Being "blackmailed" into this deal by SoftBank. Maybe they effectively threatened that they will buy other AV startups and subsidize the human-operated ride sharing competitors of GM's future network in the markets GM will deploy. That way, GM wouldn't be able to reach scale on the demand side, until SoftBank-funded AV technologies catch up and become good-enough for commercial deployment through existing ride-sharing networks. Few companies have capability to outspend SoftBank and GM's shareholders might not have a stomach for that. Alphabet of course has the resources, but I doubt they will be able to deploy at the same pace that GM will.
But it's good that GM keeps the option of having their own network open, per Seeking Alpha transcript:
John Murphy
But Dan the concern I guess is like what we’ve seen in the past with other fleet sales and obviously is a very different thing than what we’ve seen in the past with these. But there is some concern that you would be supplying vehicles to a fleet and then be diminished in value in value capture. So I mean is there way that even if you partner with somebody else and selling to a fleet or partnering with a fleet that you can really protect yourself in economics. Do you think even that has been in the past in the value chain?
Dan Ammann
We see this in a very different way. We think the -- bringing this technology to scale with the right level of safety and really operationalizing and then commercializing and it’s been an extraordinarily unique challenge, and we don’t see a number of people being successful with that in the near term. It’s also important as we talked about before to understand that the rate of improvement and rate of iteration that we’ve been talking about, that continues just as much the day after commercial deployment as it does between now and then. This is a product and a service that will continue to improve rapidly over time. That’s why we think rate of development is so important. That’s we think first mover advantage is so important. And so we think this is a completely different dynamic versus some of the other business models that you alluded to.
It is true that selling AV fleets will not be the same as selling dumb car fleets, but I doubt there is much value to be captured beyond the value of the TaaS service itself. This means, that as soon as a few players can deploy cars at scale, a race towards basic economics is almost inevitable and will put a tough ceiling on profits of even the most efficient and successful company.
There's also an interesting theory in the comment:
What I gather from this transcript is:
1. Most Analysts are still crueless.
2. No spin-off is planned.
3, GM will be valued as Sum-of-Parts: OEM and Taas.
4. Masayoshi Son is a great partner for global TaaS market.
5. There’re two segments of TaaS:
1). Moving people.
2). moving goods.
6. On moving goods, GM’partners are:
1). US-Amazon
2). China-Alibaba.
7. On Moving people, GM partners are:
1). US-Uber.
2). China- ?
I agree with first 3 points. I also think that GM will likely partner with others on retail part of 'moving goods' segment. For "Uber Rush" equivalent, I can see them potentially going alone too.
For moving people, which I expect to be the core of TaaS business, I think anything except Cruise deploying their own network would be a mistake.
Given that economics of AV win hands down with human-operated ones, especially in mature markets, I think it won't be hard for GM to quickly take over customers from Uber and Lyft. The very high Customer Lifetime Value of ride-sharing users, can easily justify Customer Acquisition Cost even into the thousands and the product is going to be very sticky.
To sum up, I see this as a validation of my thesis, that reduces risk of my GM stake, but also reduces the potential reward, as I just 'lost' 20% of it to SoftBank in exchange for them being presumably less aggressive in this space and some pocket change.
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