The world's most valuable car company doesn't make cars

Autonomous transport still seems like science fiction: we know it is bound to come eventually, yet it is difficult to imagine in our daily lives. But self-driving cars are becoming a reality rapidly and this month Alphabet (Google) took us a step closer to that future. Waymo, Alphabet's autonomous car division, launched a fully self-driving car service in Phoenix, Arizona. For about the same price as an Uber, you can log-on to the Waymo One app and get picked up by a self-driving Chrysler Pacifica Hybrid minivan.

Waymo has a substantial lead in autonomous driving. It focused on full autonomy from the beginning, more than five years ahead of the auto industry. Waymo has driven over 10 million miles on public roads - the equivalent of about 10 lifetimes of human driving experience - and 7 billion miles in simulation. General Motors, the owner of Cruise, has logged far fewer miles but is the nearest competitor with plans to launch a commercial service in 2019. No one else is planning a launch until the early 2020s. Uber has fallen further behind after a fatal accident in March forced it to suspend public testing, and there are question marks over Tesla's camera-centric (vs laser scanner) technology.

There are multiple ways for Waymo to monetise its technical lead. Ride sharing is the most obvious business model with autonomous vehicles estimated to be, at most, half the cost per mile of a human operated vehicle. When autonomous safety is proven and regulation catches up there will be no job for an Uber driver - and perhaps no reason to even own a car. Alphabet is also in the enviable position to find customers cheaply through its ownership of Google Maps and the Android phone operating system. This ride sharing opportunity alone is estimated to be worth $80 billion which isn't much of a stretch compared to Uber's upcoming IPO value targeted at $120 billion.

Waymo's second opportunity is logistics: autonomous trucking will become the default, and many last mile deliveries will also be autonomous. Freight transportation is a $3 trillion market globally, and this opportunity could be even more valuable than ride sharing. Third is licensing the autonomous technology to car manufacturers, a smaller but high margin opportunity. And finally, Alphabet is in the prime position to control our entertainment and advertising for those extra ‘driverless’ hours.

Click the picture below to see Waymo in action (this is a 360 degree video which allows you to look in any direction)

Waymo could be worth $200 billion or more - close to the value of Toyota and multiple times any other car manufacturer - potentially making it the world's most valuable car company. Just like the personal computer industry, the future value of the car industry will be in the software not the metal. Waymo is one of several earnings drivers for Alphabet that we believe is under-appreciated by the market.