Something is revving up at General Motors (GM) . While Wall Street focuses on baking in a prolonged United Auto Workers' strike, investors may fail to notice that GM is advancing a potential "Amazon AWS" (AMZN) in Cruise.
The CEO of Cruise, Kyle Vogt, made a compelling presentation at Goldman's Communicopia & Tech Conference last week about the future of the autonomous driving company. Considering Cruise's technological prowess, customer stickiness and retention, and the trillion-dollar opportunity, Cruise is perhaps the greatest story never told on Wall Street.
When the potential value is recognized, shares of Cruise's majority owner, General Motors, will seem remarkably undervalued. GM's upcoming investor day in November will be a highlight for investor awareness and a likely catalyst for the stock. Since the shares have dropped 20% in recent weeks on strike fears, any good news could spark a sizable rally. This makes GM my top pick into year-end.
Vogt laid out Cruise's path to its industry lead in robotaxis. Cruise's self-driving cars are currently operating in five cities and testing with drivers in 10 others, two internationally. Additional cities are reaching out for Cruise to roll out the service, according to the company. When Cruise introduces Origin, the purpose-built self-driving vehicle without a steering wheel, engineered to travel a million miles, Vogt envisions a game-changer for customers, coupled with vastly improved economics. Custom silicon planned for 2025 will also improve costs and performance.
Cruise and Waymo (the self-driving car company owned by Alphabet (GOOGL) recently received regulatory permission to charge fares and operate at all times throughout San Francisco. Interestingly, according to Vogt, what took three years to gain regulatory approval in California took mere days in Texas, so the path forward could be less bureaucratic. Public perception is perhaps the bigger risk, with every self-driving misadventure making headlines, while society has become inured to the tens of thousands of auto-related annual deaths.
Cruise vehicles have driven autonomously for over five million miles, currently accruing at over a million miles per month. At the expansion rate, with a laser focus on customer satisfaction and safety, Vogt believes the company is on track to produce $1 billion in revenue in 2025. In addition, he teased the introduction of a new service that has been under development for years, which he will present at GM's investor day in November.
The 20% of Cruise not owned by GM is split between strategic partners Honda Motors, Walmart (WMT) , and Microsoft (MSFT) . These partners contribute expertise and business opportunities, including Walmart's fledgling autonomous delivery service in Arizona using Cruise's Chevy Bolts. The Origin design has far more advanced autonomous delivery capabilities.
With GM's 80% stake in Cruise, buying GM is the only way for investors to participate in Cruise's leading industry potential. The good news for investors is GM's stock has no attributed value for their Cruise ownership. Arguably, there's negative value attributed to their Cruise stake since they currently lose over $2 billion annually, hitting GM's bottom line.
Shares of GM now trade flat to its 2010 post-bankruptcy initial public offering at $33. Thus, dismissing the shares as dead money or a value trap is easy. In fact, Berkshire Hathaway (BRK.B) (BRK.A) is even giving up; Berkshire has been aggressively liquidating its 50 million stake over the past year. If Warren Buffett doesn't see value in a stock with a price-to-earnings under five, why should other investors? Perhaps he believes his stake in BYD Company, the Chinese battery and auto maker, is enough auto exposure. At a minimum, it's another excuse for investors to dismiss buying GM shares. Indeed, GM is in a bind when the most famous value investor is dumping the stock and most Wall Street players wouldn't touch the shares unless they start working -- then they wouldn't mind paying up. Nonetheless, advancements at Cruise are too compelling to ignore.
Yet, amid the unique investment opportunity story, there's a likely near-term setback from the impending UAW strike. While the UAW seeks a bigger share of GM's copious cash flow and fat reported earnings, shareholders haven't benefited from these profits, either (other than a small dividend and a share buyback), as most profits have been reinvested in GM's transition to electric and autonomous vehicles, battery technology, software development, and securing mineral supplies. It's unknown how long and costly a stalemate with the UAW may become, with workers demanding a chunk of GM's future potential profits, profits that could have been reinvested into research and growth, profits that may disappear in a recession. Still, Wall Street has baked in much of this uncertainty.
Cruise is undoubtedly a moonshot with a reasonable chance to fizzle or encounter serious setbacks and competition. Tesla (TSLA) is reportedly in the early stage of working on a dedicated robotaxi similar to the Cruise Origin. At least buying GM at $33 with a sub-5 P/E and a $45 billion market cap doesn't ascribe any value to be lost from a failed effort. While GM shares languish as Cruise rolls out its robotaxi ride-hail service in city after city, investors in TSLA are paying an incomprehensible premium upfront -- a 75 P/E and $875 billion market cap -- on the expectation of autonomous success at some future point. Clearly, this columnist is not a believer in the efficient market hypothesis.
Wall Street will eventually take note of the Cruise story as it becomes too compelling to ignore. A labor contract resolution and November's investor day are likely catalysts for the shares of GM into year-end.