GM, Honda Partner on Autonomous Driving; Cruise Valuation Soars

Shares of General Motors (GM) popped higher Wednesday, rising about 5% near the open.

While the stock has since given back some of those gains, the move is worth paying attention to. The rally wasn't sparked by trade resolution in Washington and sales didn't come in ahead of estimates. In fact, Washington still remains a big headwind for automakers like General Motors and Ford (F) , while recent sales data for the month of September were down year-over-year.

So what led to today's gains?

Instead, Honda Motor Co.  (HMC) is making an investment in Cruise Automation, the self-driving vehicle company that GM bought about two years ago.

We're proud to announce another step toward making our vision of zero crashes, zero emissions and zero congestion a reality. @HondaInAmerica @Cruise #Autonomous https://t.co/I1U5Wqn9fr pic.twitter.com/2uZl72868l

— General Motors (@GM) October 3, 2018
From GM's short video announcing the deal, "General Motors and Cruise are joining forces with Honda to develop a shared autonomous vehicle. Together."

CEO Mary Barra's deal-making prowess is showing just how talented she really is. With incentives, General Motors reportedly paid about $1 billion for Cruise in 2016. A few months ago in June, SoftBank (SFTBY) made a $2 billion investment in Cruise for a near-20% stake, valuing the entity at roughly $11.5 billion.

That valuation continues to grow, as the $750 million investment from Honda values Cruise at a whopping $14.6 billion. Some may see this action and scream "bubble! Overvalued!"

But in reality, look at the companies making these investment. Honda is no slouch in the business world, nor is SoftBank, which debatably has one of the most impressive collection of mobility and autonomous investments in the world.

It has investments in Cruise, Nvidia (NVDA) , and outright acquired Arm Holdings for more than $30 billion. It has a $10 billion stake in Uber, as well as stakes in Ola, Grab and Didi Chuxing, among others. Aside from a few of these well-known names are dozens of private companies in the space that have taken significant investments from SoftBank as well.

Cruising Into the Future

To industry observers, it's clear that General Motors has a gem on its hands here. Where does it stack up against the competition though?

Pretty close to the top.

While Alphabet's (GOOGL) (GOOG) Waymo is the current leader, there will be plenty of room for more than one company. Waymo's strength is obvious in that it is a pioneer in the autonomous driving space and is a leader in technology. While Alphabet has the funds to purchase tens of thousands of vehicles -- which it is doing with Fiat Chrysler (FCAU)  and Jaguar -- Waymo's weakness is not having easy access to vehicles.

That's the exact opposite for GM, whose strength is auto production. By snapping up Cruise Automation at what now appears to be a dirt-cheap valuation, GM has quickly propelled itself toward the top.

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Daimler (DDAIF) and Bosch using Nvidia to get into the mobility-as-a-service (MaaS) game will add another player too, but not for several more years.

This leaves plenty of time for Cruise to get to market, something that appears likely in 2019. A few months ago, analysts at RBC assigned an enterprise value of $43 billion to GM's Cruise unit, provided that it can get 800,000 vehicles in its fleet by 2030.

While it's a long-term target, consider that General Motors' market cap is barely above that mark right now. Further, the amount of revenue the company can generate should increase considerably in a MaaS business model.

General Motors set a third-quarter record when average transaction prices reached $35,974. Under its current model though, that's where the revenue starts and stops for GM. For the most part, each sale is a one-time revenue generator.

Under the MaaS model though, each vehicle in the fleet continues to generate revenue eaver time a user hails a ride. These nickel-and-dime transactions add up over time and while Cruise will have to account for maintenance on the vehicles, it presents a big opportunity.

Previously, management had said these vehicles could generate revenue in the hundreds of thousands of dollars. Even generating revenue of "just" $108,000 would be triple the average transaction price from last quarter, which as a reminder, was a new record.

If GM and Cruise can execute, this could be a huge driver in the not-too-distant future. 

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This article is commentary by an independent contributor. At the time of publication, the author had no positions in the stocks mentioned.

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