People talk a lot about how Uber and its rivals are disrupting transportation. Arguably, however, ride-hailing upstarts have had an even greater impact on how investors value the business of transporting humans and their stuff on the road.
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You see, there was a time when the most valuable players in automotive transport were actually companies that made lots of automobiles.
No more. Today, established automakers trade at among the lowest price-to-earnings multiples of any industry. Only a handful of the largest global brands are valued higher than Uber, a company with supercharged growth that also loses hundreds of millions of dollars per quarter.
That valuation disconnect hasn’t stopped automakers from plunging money into transportation startups and unicorns. Perhaps it’s even served as a motivating factor, judging by the record number of carmaker-backed funding rounds so far this year.
So what happens when investors value the apps and software used to summon and operate automobiles more than the makers of those cars?
In an effort to shed some light on valuation trends, Crunchbase News put together a comparison of established automakers and heavily funded transportation newcomers. We then took a look at which established automakers are most willing to continue betting big sums on startups and unicorns.
Upstarts Vs. Automakers: How Valuations Compare
Silicon Valley, famed for affixing sky-high values to profitless startups, has long been worlds away from Big Auto on the valuation front.
On a price-to-earnings basis, automakers haven’t been among the most heavily valued for decades. It makes sense. Their businesses are highly cyclical, competitive, growth-constrained, and capital intensive. That said, they managed to run up big market caps due to massive sales and hefty margins on their most profitable models.
But late into the current bull market, automakers have been falling behind the broader indexes. Most have price-earnings ratios in the single digits. (The average for the tech-heavy Nasdaq 100, by contrast, is 26, and it’s not uncommon to see ratios above 100 for those with quick growth.)
When you look at ride-hailing versus automaker valuations, the disparities get more extreme.
On the one hand, you have a company like Mazda Motor Corp, valued around $7 billion, selling $32 billion worth of cars a year, with a profit of nearly a billion dollars. On the other, you have a company like Uber, valued around $70 billion, with about $10 billion in trailing revenue and a couple billion in losses.
Even among automakers, it seems like the less experience you have, the greater the market multiple. Take NIO, a China-based electric carmaker that went public this month. Though the company has, as of two months ago, delivered fewer than 500 cars, it’s still worth more than Mazda. And Tesla, even after its Elon Musk tweet-driven stock drop, still has a market cap roughly equal to GM.
Active Investors
Valuation disparities haven’t driven automakers away from startup investment. In fact, they’ve accelerated the pace of dealmaking.
Since publishing a piece last week about the rising number of automaker-backed venture rounds in 2018, we’ve seen two more large Big Auto-led deals. Proterra, a maker of electric buses, just raised $155 million in a round co-led by Daimler. And WayRay, a developer of holographic AR displays for cars, raised $80 million in a round led by Porsche.
In the table below, we rank most active automaker investors by the number of known venture and seed rounds they’ve participated in so far this year.
The round tallies indicate a correlation between automaker size and startup investment. Toyota, Daimler, and Volkswagen, three of the most highly valued public automakers, are also the most prolific venture investors.
We also found that not all automakers are getting involved in the venture space. Fiat Chrysler, for one, has stayed out of startup rounds, preferring to get its Silicon Valley exposure through an autonomous car partnership with Alphabet’s Waymo. Honda is also not big on venture investing, although it does work with a lot of startups through Xcelerator program.
Driving Away With The Proceeds
At risk of sounding overly reductive, the big picture seems to be that automakers are contending with the same Silicon Valley playbook that has wreaked havoc on other established industries. Upstarts are granted license to lose money and are rewarded handsomely as they grow. Established, slower-growth companies tied to investor expectations for cash flow and profits struggle to keep pace.
It’ll take a while for valuations to sort themselves out in a more sustainable manner, and only then will we see whether automakers or apps come out on top. For now, automakers are still driving hard to stay in the race.
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