Waymo's Too Small For Investors Today, But Could Be Valued At USD850B By 2030

Gene Munster of Deepwater Asset Management thinks that Waymo alone is too small for Alphabet investors to care about today. However, the management team is sharing more about their rapid progress, plans to expand operations, and has raised additional outside capital. Gene has modeled the business and found it to be surprisingly attractive. I believes Alphabet will spin out Waymo in the next 2-4 years, with a potential valuation of USD350B to USD850B by 2030, which could add between 12-28% to Alphabet's current market cap, depending on Alphabet's ownership percentage.

The multiple investors will likely pay for the business. Importantly, Alphabet investors should focus on the standalone value of the Waymo business (rather than its impact on Alphabet's operating income), as unlocking Waymo's value will likely come in the form of a stock dividend.

The question of Alphabet's percentage ownership is crucial, yet unfortunately, we lack a clear answer, as the company does not disclose the segment's cap table. This lack of transparency is unique to the Waymo discussion, given that Alphabet has raised over USD10 billion in outside capital over the past four years. Based on the capital raised to date, and assuming an average 30% markup for those external investors, I estimate that Alphabet owns approximately 70% of Waymo.

Recently, Alphabet has been ramping up its efforts to talk about Waymo as the autonomous driving company begins to show progress. As the nascent robotaxi (autonomous ridesharing) market begins to take shape, Alphabet is increasingly putting Waymo in the media, and in front of investors and analysts.

This increased focus may indicate that Alphabet is preparing for a potential Waymo spinout in the near future.

In Oct, Waymo raised outside capital for the first time in three years, securing USD5.6B in a Series D funding round, which valued the business at about USD45B. The round was led by Alphabet, with additional investors including Andreessen Horowitz, Fidelity, Perry Creek, Silver Lake, Tiger Global, and T. Rowe Price. Many of these investors also participated in Waymo's Series B and C rounds, raising USD2.3B in Mar 2020 and USD2.5B in Jun 2021, respectively. As mentioned, I estimate today Alphabet owns 70% of the business.

As for timing, I believe a Waymo IPO is 2-4 years away, aligning with when the business should reach escape velocity and when the VCs will likely seek liquidity. By then, the initial VC funds that invested in 2020 will be at least 8 years old, approaching the typical 10-year fund life. While fund extensions are common in the venture world, exiting within a decade is generally considered good housekeeping.

Waymo began offering fully autonomous rides to consumers in Phoenix, Arizona, in Oct 2020. This marked the first time a company launched a commercial, fully driverless ridesharing service. Today, Waymo is operational in Phoenix, San Francisco, Los Angeles, and is expanding to Austin later this year. The service is accessible through the Waymo One app in these cities. Additionally, Waymo has partnered with Uber, allowing users in select cities to request Waymo rides through the Uber app.

According to the October WSJ story, Waymo has 700 vehicles in their fleet across these cities. The number of rides per week is also accelerating as they expand into new cities, such as Los Angeles in June 2023, now reaching over 150k per week. Although the Journal states Waymo is growing faster than Uber or Lyft in this metric, it's important to note that Waymo's growth numbers benefit from starting with smaller figures. Waymo's 150k weekly rides compare to Uber's approximately 55m rides per week in the US.

While the base is still small, the tech has made measurable improvements over the past two years while other autonomous systems have struggled (e.g., Argo, Cruise, Apple).

In my view, Waymo's biggest and most difficult hurdle to success is solving for nationwide (L5) autonomy. Without it, the business cannot be profitable. However, if they do solve autonomy, the company's vertically integrated ridesharing network, despite its large upfront costs, could pay off handsomely.

Much of Waymo's costs stem from the high expense of its vehicles. Currently, each Waymo vehicle, initially purchased from an OEM, is outfitted with cameras, LIDAR, and radar, bringing the total cost to about USD200k per vehicle. Waymo's vehicle cost must decrease from the current USD200k to around USD100k to make the model's long-term economics attractive.

Another major cost associated with the Waymo model, compared to the Tesla model, is Waymo's higher operating expenses. As the fleet grows, so does the need for fleet management, primarily including the costs of charging, repair, and maintenance.

The biggest cost-saving lever in the model is removing the human driver, which is the goal of autonomy. It turns out people are expensive. if Waymo can reduce the vehicle build cost to USD100k, it can recoup that upfront investment through labour savings in just 15 months. This means the vehicle would effectively be generating profit for the remaining 33 months of what I estimate to be its 4-year life.

I mentioned this is a winner-take-most market, which suggests there are three most likely outcomes.

1. It goes to zero. Any number of events can spell the end of Waymo. The company fails to achieve national autonomy, Uber or Lyft crack the autonomy code, Tesla runs the table, or a black swan competitor emerges.

2. 30% market share. If Waymo were to achieve 30% of the ridesharing market in 2030, I estimate operating income could reach about USD14B.

3. 70% market share. If Waymo were to achieve 70% of the ridesharing market in 2030, I estimate operating income could reach about USD36B.

I believe Alphabet investors should favor a spinout as the new structure would likely unlock value. Currently shares of Alphabet trade around 22x next years earnings. I believe a standalone Waymo would trade at 30x or better. In other words, I believe Waymo's valuation is more important than Waymo's contribution to Alphabet's operating income.

As mentioned, the most recent Series D round valued Waymo at USD45B. Looking ahead, the future valuation conversation is centered on a market share assumption. Currently, Uber holds about 70% of the U.S. market, followed by Lyft at 30%. Six years from now, I believe Uber and Lyft will be much smaller businesses, given their current approach to autonomy relies on third parties. I expect the future market will largely be split between Waymo and Tesla, with the first to achieve autonomy at scale capturing the majority share.

If Waymo gets 70% market share: Waymo beats Tesla to the market and the company becomes the "Uber" of autonomous ridesharing.

- Earnings: USD28B. 2030 Valuation: USD850.