Last week, General Motors (NYSE: GM) made a surprise announcement that the SoftBank (NASDAQOTH: SFTBY) Vision Fund had agreed to invest $2.25 billion in GM Cruise Holdings, its autonomous vehicle (AV) subsidiary. SoftBank will get a 19.6% stake in GM Cruise, valuing the unit at a hefty $11.5 billion.
This deal with a high-profile technology-sector investment fund has given GM's AV efforts instant credibility in the tech world. SoftBank can also provide expertise and connections that will boost GM Cruise's chances of success. Meanwhile, the SoftBank investment will free up cash for General Motors.
GM stock soared 13% on Thursday, after the SoftBank investment was announced. However, this deal could unlock even more upside for GM stock.
The General has found a partner
The SoftBank Vision Fund is a colossal $100 billion technology investment fund launched last year. It aims to invest in high-growth companies, including many start-ups, adding value by fostering collaboration between its portfolio companies.
Ridesharing is one of the biggest areas of investment for the Vision Fund -- and for SoftBank more broadly. Most notably, the Vision Fund became Uber's largest shareholder earlier this year. GM Cruise complements SoftBank's existing ridesharing investments well.
As my Foolish colleague John Rosevear noted last week, with SoftBank on board as a minority investor, GM Cruise will have a leg up in terms of partnering with the ride-hailing firms that SoftBank has invested in. Additionally, the deal validates GM's technology. Indeed, SoftBank did due diligence on multiple companies in the AV space, and found GM Cruise's expertise and vertical integration to be particularly alluring.
The SoftBank Vision Fund will be locked into its investment for seven years. Thus, it is making a long-term bet on GM Cruise's ability to deploy AVs at scale in a ridesharing network.
This deal frees up capital for GM
General Motors probably agreed to the SoftBank Vision Fund investment primarily for strategic rather than financial reasons. Nevertheless, getting a $2.25 billion minority investment will go a long way toward funding the commercialization of GM Cruise's product.
GM Cruise spent about $600 million last year toward AV development. Management projects that such spending will rise to $1 billion this year . The spending rate will likely continue at that level (or even higher) in 2019, when GM hopes to open an AV ridesharing service to the public.
Under the terms of the SoftBank deal, SoftBank will invest $900 million when the deal closes. At the same time, GM will invest another $1.1 billion to capitalize GM Cruise. When the technology is ready for commercial deployment, SoftBank will invest the other $1.35 billion.
Thus, rather than needing to spend upwards of $2 billion in the 2018-2019 period to get its AV efforts off the ground, GM can rely on funding from SoftBank to cover a substantial part of its near-term AV spending. That will free up some cash that General Motors can use for share buybacks, particularly in 2019. Given how cheap GM stock is, that's an important side benefit of the SoftBank deal.
GM stock is still ridiculously cheap
Prior to the SoftBank deal announcement, GM shares had been struggling for months . However, after soaring at the end of last week, GM stock is back within striking distance of its 52-week high. Even so, based on its Friday closing price of $43.20, the stock trades for less than seven times earnings.
That doesn't fully capture how cheap General Motors' core automotive business is today, though. If GM Cruise will be worth $11.5 billion after the upcoming investment round -- putting GM's stake at more than $9 billion -- then the rest of GM's business is currently valued at just $37 per share.
Furthermore, GM Cruise is spending about $1 billion a year without generating any revenue yet. Thus, General Motors' earnings per share would be significantly higher excluding GM Cruise: perhaps as high as $7 per share.
This means that investors are getting GM's highly lucrative core automotive business -- which could become even more profitable in the near term -- for barely more than five times earnings. While the growth of AVs and ridesharing represents long-term threats to this profit stream, GM's core business is likely to continue producing strong cash flow for many more years. That means GM stock has plenty of room to run even after making big gains on Thursday.
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