Will Waymo Be Alphabet’s First “Other Bets” Spinoff?

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When Alphabet first got into autonomous driving years ago while it was still called Google, the self-driving car it developed was seen as little more than a toy that maybe one day could become a marketable product. Fast-forward to now, and Alphabet’s autonomous driving efforts have become advanced enough to earn a business name: Waymo.

Indeed, autonomous driving is a hot topic now as companies such as Tesla, Uber, Lyft and maybe even Apple race to the finish line as traditional automakers lag behind the more technology-oriented firms. As a result, there’s never been a better time for Alphabet to attach a name to its autonomous driving business, and one of these years, Waymo may even be set adrift on its own, or at least, that’s what one analyst is proposing. Before then, of course Waymo is expected to bank some big bucks for Alphabet.

Waymo partners with Lyft

Morgan Stanley analysts have released a pair of reports on Waymo’s recently-announced partnership with Lyft. The note that’s dated today suggests that one day, the company could be worth more than $70 billion, boosting Alphabet’s current enterprise value by at least 12%.

The May 16 report by a Morgan Stanley team headed by Tesla perma-bull Adam Jonas focuses on the deal itself and what Waymo and Lyft bring to the table. He sees the two firms as “a complementary fit.” Morgan Stanley estimates that Alphabet’s autonomous vehicle fleet covers “several thousand miles per day” and Lyft’s fleet covers “several million vehicle miles per day.”

Jonas noted that in order to speed up “the machine learning development of autonomous driving,” both “quantity and quality” of miles are needed, and he sees Waymo bringing quality and Lyft bringing quantity.

How Waymo gets to a $70 billion enterprise value

Morgan Stanley analyst Brian Nowak led the team that published the May 23 note on Waymo’s valuation, and they make the case for Alphabet’s autonomous driving arm to reach an enterprise value of $70 billion. To get there, Waymo will have to grow to 1% of the miles driven around the globe by 2030 based on about 3 million cars traveling about 65,000 miles per year. The company will also have to generate an average of $1.25 per mile in revenue, which then carries it to a $70 billion valuation.

Nowak adds that Waymo could reach a $140 billion enterprise value simply by logging more miles and higher per-mile revenues. But before that, he expects the company to turn an operating profit for the first time in 2022 and then hit an 8% operating margin by 2030. He adds that “mature” rental car firms typically have margins in the high-single digits.

Further, he expects Waymo to follow the current trend of tech firms by investing aggressively in future growth, which could slow the pace of margin expansion.

Waymo could be spun off from Alphabet

Nowak sees Alphabet’s autonomous driving arm as the most likely business under the company’s “Other Bets” division to be spun off from the Google parent. He notes that Waymo has already “graduated” from Google X to become its own standalone group under Other Bets. Additionally, he feels that Alphabet may not want to be exposed to the regulatory and potentially legal risks associated with autonomous driving, and it could avoid this by spinning off the business.

He explains that in the U.S., there’s about one death per 80 million miles in a world where human drivers are the norm. As a result, the company’s fleet could be involved in as many as 50 driving-related deaths every week, including both at fault and no fault scenarios. And even if the company’s autonomous cars are in 90% fewer accidents than the car driven by the average human, it would still be five deaths per year or one every ten weeks.

Tesla has been dealing with issues like this for some time as it continues to push forward its Autopilot autonomous driving system, so it seems likely that Waymo will begin experiencing similar issues at some point.

Shares of Alphabet ticked higher by as much as 0.71% to $970.94 during regular trading hours on Tuesday.

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