Ever feel like you left something valuable in your garage, but aren’t sure what it is? Then you know what it’s like to be an Alphabet (GOOGL) executive.
That’s because Waymo — the autonomous vehicle unit hiding inside this search and advertising giant — could be worth $175 billion.
That’s according to Adam Jonas, a respected analyst at Morgan Stanley. One year after he argued that Waymo might be worth $75 billion, he is raising his estimate by $100 billion.
This means other investors are underestimating Alphabet. They don’t understand it. They only see Google, and its dominant digital advertising platform.
Alphabet is a machine-learning company. It finds ways to collect vast amounts of data. And then, using data science and its massive distributed cloud-computing platform, it cleverly builds algorithms to make sense of that information.
This is problem-solving in its purest sense. And it can be applied throughout the economy.
The company began fiddling with self-driving cars in 2009. By 2012, Google co-founder Sergey Brin was being widely derided for wasting company money on an outlandish science project.
In reality, Brin was using Google’s computational might and army of software engineers to solve mobility.
It turns out, we humans are terrible drivers. In 2017, the National Safety Council estimated that 40,000 people were killed in U.S. traffic accidents. Almost all of these were the result of driver error. Autonomous vehicles could help solve this problem.
Jonas believes application, and logistics, is a much-larger business than most investors realize.
In December 2016, Alphabet hired John Krafcik as chief executive officer for Waymo. The Stanford graduate was previously the CEO of Hyundai Motor America.
He immediately went to work, building out four distinct revenue streams:
• Last-mile transportation
• Licensing its proprietary technology to automakers, and
Here’s what his progress looks like so far …
In May, Waymo announced its Phoenix ride-hailing program, currently operating in beta, would go live by year-end. Earlier it committed to 20,000 electric Jaguar SUVs and 62,000 Chrysler Pacifica Hybrid minivans to operate as robo-taxis. This fleet will help Waymo ferry passengers to and from buses and trains.
In July, the company signed an agreement with Valley Metro, Phoenix’s public transportation authority, to provide last-mile services for transit riders.
In April, Bloomberg reported Waymo had licensed its technology to Honda (HMC). Together, the companies are building a small delivery truck that could come without a steering wheel or brake pedals.
On the other end of the spectrum, Waymo has a pilot program for Class-8 semi trucks. Giant modified Peterbilts, decked out with next-generation sensors and cameras, are now roaming public roads in Atlanta. One day, they will operate autonomously — stopping only for fuel maintenance and payload deliveries.
According to Jonas’ math, the potential to crack the $3.1 trillion logistics market makes that portion of Waymo worth $90 billion.
Ride-hailing will only get more competitive. General Motors (GM), Baidu (BIDU), Tesla (TSLA), Uber and a host of startups are also players. But the Morgan Stanley analyst sees a Waymo advantage.
Just as Google paid other search engines to use its technology in the early days of the internet, it might be able to foster relationships with automakers that have underestimated the ascent of autonomous business models. Jonas thinks Waymo’s ride-hailing business is worth $80 billion.
Morgan Stanley boosted its price target for Alphabet from $1,400 to $1,550 based on the outlook for Waymo. However, Alphabet’s problem-solving skills can be applied to many sectors, creating numerous new business models.
We are up 77% in Alphabet since recommending it in 2016. Use any substantial weakness ahead to add to your position. The company is still being underestimated.
Jon D. Markman