GM's self-driving car unit could be worth $43 billion — nearly 4 times the valuation it received 6 weeks ago, RBC says (GM)

General Motors' self-driving unit, Cruise, could be worth $43 billion, RBC Capital Markets estimates.
The autonomous arm received a valuation of $11.5 billion from Japan's SoftBank in May.
GM is reportedly eyeing a spin-off or tracking stock for Cruise, Bloomberg reported last month.
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Cruise, the self-driving car company bought by General Motors in 2016, could be worth a whopping $43 billion, RBC Capital Markets estimates.

That new valuation is nearly four times the figure eyed by Japan’s SoftBank when it invested $2.25 billion in the autonomous driving unit in May. Since then, Bloomberg reported that GM was eyeing a possible spin-off or tracking stock for Cruise.

"We doubt SoftBank would have invested if they didn’t see a much larger opportunity," Joseph Spak, RBC’s autos analyst, said in a note to clients Tuesday.

"For now, it appears GM’s plans are to run its own transportation network company (TNC). If they can get the technology right and execute on this plan, then when we run this scenario, we see them having a fleet of ~800,000 vehicles by 2030 driving ~58 billion miles that year. At $0.55/mile and 29% EBIT margins, we see ~$17 billion of EBITDA. In our DCF (11x exit multiple) this values Cruise at $43 billion."

Cruise has been growing at a quick pace ever since GM acquired the San Francisco-based startup and its 50 employees for $581 million. GM hopes to increase Cruise's headcount to 1,648 in California by 2021 thanks to a tax-credit package worth $8 million approved by state officials last year.

RBC says the value add from GM's 80% stake in Cruise is currently worth about $7 a share, which the bank factors into its new $53 price target for the US's largest automaker — 33% above where the stock was set to open Tuesday.

When it comes to the operating a fleet of autonomous taxis, miles driven is a key figure. Cruise's market share of total self-driving miles logged is small, only about half a percent of the global total currently, but RBC says that total is growing exponentially.

"Autonomous driving will rely on machine learning algorithms and deep neural networks (deep learning) to take all the sensor inputs (cameras, lidar, radar, maps, and other sensors) to drive, make decisions and understand location/perception," RBC says. "The more miles the AI takes in, the more it learns. Thus, miles = knowledge."

At the same time, disengagements, or instances where a human driver has to override the car's computer system, have decreased drastically — a good sign for a future commercial rollout.

"Judging how close GM is to a commercial launch is hard, as the company has remained purposefully vague," RBC warned. "Executives have stated that GM’s fleet will be available in 2019 and continue to say that we are a matter of quarters away from launch, not years."

GM shares are down 4.8% this year.

GM Cruise stock price