Originally published on Seeking Alpha, by Michael E. McGrath
Summary
Recent events have shed some light on the valuations of businesses expected to offer autonomous ride services.
The autonomous ride services market is ridesharing without a driver.
Collectively, these businesses are valued at more than $75 billion, and increasing.
Continuing investments by experienced investors at increasing valuations validates this market opportunity.
And importantly, most of these businesses are subsidiaries of larger public companies that are being restructured to be spun-off in the next few years.
As I've written previously in Seeking Alpha, autonomous ride services (NYSE:ARS) is expected to be the first market for autonomous vehicles, and it is expected to be a very large market opportunity. I've described autonomous ride services, expected competitors, and forecasts in previous articles. Here I want to summarize the current valuations of the leading businesses. These business valuations prove that the market is real, that sophisticated investors are making strategic investments, and that the opportunity is visible on the horizon. Also of note, these businesses are being prepared to be spun-off. First let's summarize the valuations, starting with the two leaders.
Waymo ($30 Billion)
Waymo (GOOG) is the leader in autonomous ride services (See: Waymo Has A First-To-Market Advantage In Autonomous Ride Services). It is already providing autonomous rides to paying passengers in the Phoenix area, albeit in low-volume controlled conditions. I expect that Waymo will roll-out its autonomous ride service, Waymo One, later this year or early next year.
Waymo (GOOG) announced earlier this year that it raised $2.25 billion in outside funding. The investors included Silver Lake Partners, Andreessen Horowitz, Canada Pension Plan Investment Board, Mubadala Investment, Magna International, AutoNation, and Waymo's parent company, Alphabet. The valuation was not disclosed, but the Financial Times estimated that it was about $30 billion. Waymo has an estimated 1,500 employees.
Most certainly, these new investors, particularly the private equity firms, did substantial due diligence before investing several billion dollars. In that process, they would have been given access to all of Waymo's testing, technical data, and business forecasts.
Some analysts had much higher valuation estimates prior to this investment and some thought this was a sign of failure. I see this as a signal of validation that Waymo is getting ready to launch.
Cruise Automation ($19 Billion)
GM (GM) created Cruise Automation in 2018 as an autonomous ride services company with an investment of $2.25 billion by SoftBank. By the end of 2019, Cruise had received $7 billion in investments, including from T. Rowe Price and Honda. These investments valued Cruise at $19 billion. Cruise disclosed that it had $2.3 billion in cash at the end of 2019 and that it spends about $1 billion per year with 1,750 employees.
GM (GM) originally acquired Cruise Automation for more than $1 billion in May 2016. Since then, it built its autonomous vehicle efforts around Cruise. Cruise originally intended to release its new autonomous ride service, Cruise Anywhere, in San Francisco by late 2019, but it delayed that introduction. Most likely the service will be released sometime next year in 2021.
Argo ($7.5 Billion)
Ford (F) originally invested $1 billion to acquire a majority share of Argo. In its second-quarter financial results, Ford announced that it recorded a gain of $3.5 billion from selling part of its ownership in Argo to the VW Group. With this sale, Ford and VW each own 40% of Argo, and it is valued at $7.5 billion.
Argo delayed its original plans for launching its autonomous ride service from 2021 to 2022. It has more than 750 employees.
Motional ($4 Billion)
Motional is the new name for the Aptiv (APTV) and Hyundai joint venture. Aptiv, Delphi at the time, originally purchased NuTonomy in October 2017 for $450 million. Last September Hyundai invested $2 billion to create this 50/50 joint venture. This values Motional at $4 billion. Motional currently has approximately 1,000 employees.
Hyundai has deep pockets for developing autonomous technology because it receives financial support from the government of South Korea to develop autonomous technology. South Korea reportedly plans to spend 1.7 trillion won ($1.4 trillion) between 2021 and 2027 on autonomous driving technology. As a condition of receiving government backing, Hyundai agreed to launch a fully autonomous fleet of vehicles for customers by 2024 and for the general public by 2027.
So far Motional's strategy appears to be providing the autonomous fleet for use by others, although that may change in the future. It works jointly with Lyft (LYFT) to provide autonomous ride services in Las Vegas. By February 2020, it had provided more than 100,000 autonomous rides (with a safety driver) to 3,400 destinations. It plans to make its technology available for fleet operators by 2022. A merger between Lyft and Motional is not out of the question.
Uber Advanced Technology Group ($7.25 Billion)
A year ago just prior to going public, Uber (UBER) created a separate group, Advanced Technology Group, to develop its autonomous ride services technology. SoftBank, Toyota, and the Japanese automaker Denso invested $1 billion in this group. Toyota and Denso’s investment totaled $667 million, while SoftBank’s was $333 million. The deal valued this business at $7.25 billion, according to Uber.
The Autonomous Technology Group was restructured as part of the deal, allowing investors to target investments into autonomous driving technology, rather than a broad investment in Uber. The group answers to its own corporate board, made up of representatives from Uber, SoftBank, and Toyota, with Uber maintaining majority control.
Aurora ($2.5 Billion)
Although Aurora is primarily developing autonomous driving technology and hasn't committed solely to autonomous ride services, it's most likely that this will be its first market. Based on its latest round of investment from multiple venture capital firms, Aurora's valuation is estimated at $2.5 billion. In total, it has raised $690 million.
Aurora has approximately 500 employees and is beginning to test its autonomous driving vehicles in Dallas Fort Worth. It's not clear yet when and how it will launch its technology.
Zoox/Amazon ($1.2+ Billion)
As I recently wrote (Amazon Enters The Competition For Autonomous Ride Services), Amazon (AMZN) acquired Zoox for $1.2 billion with the announced intention of continuing to develop its autonomous ride services vehicle. Amazon has very deep pockets and will need to invest a couple of billion dollars more to bring this vehicle to market. So, the expected investment is much greater. Zoox had almost 1,000 employees prior to being acquired.
Zoox is developing a unique autonomous ride services vehicle, which I refer to in my books as a second-generation vehicle, without any driver controls and the capability to drive multi-directionally. This is expected to be an excellent autonomous ride services vehicle, but it may take another three years to develop, so I don't see this business as a competitor in the market until 2025.
Apple ($ Billions)
Apple (OTC:APPL) has been secretive about its plans for autonomous vehicles, but it has been clear from several observations that it has been investing billions of dollars in autonomous technology, and autonomous ride services are the only opportunity that makes sense.
It has been developing autonomous driving technology (Project Titan) for many years. Although it hasn't disclosed its intentions (and it never does), legal filings indicated that it has 2,700 core employees involved in this project. It has also disclosed testing in California and filed for more than 100 patents on autonomous driving. Most likely it has invested more than a couple of billion dollars in this technology. I previously wrote about my expectations for Apple in Seeking Alpha (Deciphering Apple's Autonomous Vehicle Strategy) and in my books.
Others ($ Billions)
There are other smaller companies developing autonomous driving technology that could be used for autonomous ride services. Additionally, some companies are focusing initially on other markets such as autonomous home delivery, autonomous trucking, or autonomous shuttles.
Anticipating that someone will say that I neglected the Tesla Network, let me say that I don't see it as being a major competitor in autonomous ride services for two major reasons. First, its technology may not be sufficiently autonomous for ARS. Second, ARS will be a fleet-based market, not a swarm of Tesla owners sending their cars out for passengers. Tesla makes excellent semi-autonomous cars. I own one and love it, but it won't be an autonomous ride services vehicle. If one wants to though, you can allocate any portion of Tesla's valuation to this market.
These companies are just those focusing on the autonomous ride services market in the United States. There are many other companies investing billions in developing these technologies for foreign markets. For example, in China, Baidu Inc., Pony.AI, Tencent, and Didi Chuxing have autonomous ride services businesses probably valued at tens of billions of dollars.
Investments Prove Value of The ARS Opportunity
You can come to two different conclusions about the continuing investments and increasing valuations of these autonomous ride services businesses. The first is that there are dozens of sophisticated private equity and corporate investors who are stupid. And I'm sure some people will make that conclusion.
Most likely though, these investors have tested the technology, studied the business models, and validated the market projections. The autonomous ride services market is an enormous opportunity, one that is already valued at more than $75 billion for the US market alone, before it is even launched. These investments validate some of my projections in my previous articles and books.
And this is just the valuation of companies initially focusing on the autonomous ride services market in the US. Other companies focusing on autonomous shuttles, autonomous home delivery, autonomous trucking, and eventually autonomous vehicles sold at retail, also have attracted significant investments and have high valuations. There are also billions of dollars invested in autonomous driving components by companies like Nvidia (NVDA) and Intel (INTC).
These autonomous ride services companies currently have almost 10,000 employees working on autonomous driving. That means almost 10,000 person-years of progress every year.
Many of These Businesses Are getting Ready to Be Spun-Off
Waymo, Cruise, Argo, Motional, and Uber Technology Group have all created independent subsidiaries for autonomous ride services. There are some valid reasons for them to spin these off:
Autonomous ride services are fleet-based businesses that will require enormous capital. The investment in building a national network for autonomous ride services fleets will require a couple of hundred billion in capital investment. Alphabet, GM, Ford, and Aptiv have done these projections and know this. As independent companies, they can raise the capital needed through equity and debt more easily.
Autonomous ride services are a very different business model from Google or auto companies. In general, a company wants to avoid being in very different businesses, especially at this scale. If successful over the next ten years, these could be as large as the companies that created them.
Autonomous ride services have a different risk profile. While the opportunity for autonomous ride services is big, there are also much higher risks: the risk of high capital requirements, the risk of technology delay and failure, and the legal risks. Most likely, these parent companies are willing to trade off some of the potential future gains in order to diversify risk.
By creating separate businesses, they are preparing them to be independent companies. These businesses now have responsibility for funding their own budgets and determining their own strategies. Most importantly, they have all created independent governance structures with their own board of directors.
I wouldn't expect these spin-offs to be imminent. It takes some time to put in place an independent company governance structure and operating processes. They also want to prove the success of the technology, market acceptance, and business model before going public. To me, this suggests that it is two to three years away, possibly more. In the meantime, these companies will most likely continue to raise more capital ay increasing valuations.
Disclosure: I am/we are long GOOG, AAPL, AMZN, APTV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.