Assigning a valuation to Alphabet's (GOOGL) Waymo autonomous driving unit is very much a guessing game. Particularly since much remains unknown about how Waymo ends up monetizing its technology.
However, given the technology lead that Waymo has built up and Google's apparent willingness to spend what it takes to maximize Waymo's opportunity, a good argument can be made that Waymo's value, like YouTube's, isn't fully priced into Alphabet's stock at current earnings multiples -- multiples, it should be noted, that are inflated some by the losses racked up by Waymo and other businesses with Alphabet's "Other Bets" segment.
The Fiat Deal
Waymo's latest announcement with Fiat Chrysler (FCAU) (a partner since 2016) makes it clear just how ambitiously it's thinking. Four months after saying it plans to buy and retrofit "thousands" of Fiat's Chrysler Pacifica minivans for its fleet, Waymo says it plans to buy up to 62,000 of them, with vehicle delivery starting in late 2018. To put that number into context, Tesla (TSLA) only delivered about 60,000 cars during its last two reported quarters.
Interestingly, Waymo and Fiat also say they've begun talks regarding a deal to put Waymo's technology (possibly via licensing) inside of cars that Fiat would sell to consumers. However, no firm commitments have been announced.
Acquiring 62,000 Pacificas wouldn't be cheap. Though one has to assume Waymo got a volume discount, the Pacifica features a starting MSRP of $26,995. And the self-driving systems that Waymo will be adding to the cars -- they include lidar sensor arrays, cameras and radar, as well as a lot of silicon supplied by Intel -- likely add tens of thousands of dollars more to the final bill.
In late 2017, the CEO of Delphi (now known as Aptiv) suggested the total cost of a self-driving hardware/software system is currently over $50,000 (his firm wants to bring the cost down to $5,000 by 2025). Waymo's per-unit cost might be less than that, both due to its unit volumes and because of its development of proprietary lidar arrays that are declared to be much cheaper than third-party arrays. However, even if Waymo's all-in cost for a retrofitted Pacifica is around $50,000, that would spell a total cost of $3.1 billion for 62,000 cars.
The potential size of Waymo's order suggests it has big plans for the driverless taxi service that it plans to launch in the U.S. later this year, and which is currently being tested out through its Early Rider program, which operates on select roads in the Phoenix area (a Waymo staffer is present inside cars, but isn't in the driver's seat). Waymo, whose cars have racked up over 6 million test miles, hasn't yet announced which other cities it wants to initially launch in, or what its pricing will look like.
However, there's no other company right now that has progressed this far -- certainly not Apple (AAPL) , whose self-driving test fleet features a modest 62 cars, or Uber, which is still dealing with the fallout from a fatal Arizona crash and recently said it's in talks with Waymo about adding Waymo's cars to its network. General Motors (GM) has said it plans to launch a driverless taxi service in U.S. cities at some point next year; however, its test fleet featured a relatively modest 180 cars as of last November and GM hasn't yet announced anything similar to the Early Rider program.
If Waymo was to launch a safe and affordable driverless taxi service on a large scale in the U.S. and elsewhere, that could be a business worth tens of billions of dollars on its own. Especially since a lack of human drivers would allow Waymo to lower its costs, undercut the likes of Uber and Lyft and (minus payment-processing fees) keep 100% of the revenue it gets from rides. And if the company was to ink deals with several or more top automakers to get its self-driving systems inside of high-volume cars, that business could be worth many tens of billions more.
Even for a company like Alphabet, which sported a $754 billion market cap as of Thursday's close, that counts for something.
Risks and Rewards
Of course, neither of these scenarios are set in stone, specially the one involving systems deals with third-party automakers. To date, in spite of Waymo's enormous progress since launching in 2009, big-name automakers have been hesitant to strike deals involving the use of Waymo's tech within their own commercially-sold cars, likely out of a fear of surrendering control of the user experience (Apple's self-driving project has reportedly been dealing with a similar issue).
The latest Fiat announcement is an encouraging sign that at least one top-tier automaker is open to putting such concerns aside. But as noted earlier, nothing is official yet. In the meantime, Intel (INTC) and Nvidia (NVDA) can each claim a slew of partnerships with top automakers and auto parts firms involving the development of self-driving platforms that (if commercialized) the automakers would be able to put their imprints on.
Still, even if one applies a healthy discount to Waymo's valuation due to such unknowns, the argument for valuing Waymo somewhere in the tens of billions looks stronger with each passing month of progress. And if Waymo successfully rolls out a driverless taxi service on a large scale over the next 12 to 18 months, more investors are bound to feel the same way.