At its most basic level, the question of ‘What is Waymo worth to Alphabet investors?’ revolves around two key questions:

1. How profitable will Waymo be by the end of the decade?
2. How much of Waymo will Alphabet own when the business is eventually spun out?

The majority of this note is focused on the profitability topic. That analysis looks at the broader ridesharing market, Waymo’s earnings potential, and 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 $10 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.

Today, most Alphabet investors likely don’t pay close attention to Waymo. I believe if Alphabet shut down the business today, shares of GOOG would be unchanged on the news because there is little to no value of Waymo currently priced in. The reason is that Waymo is part of Alphabet’s ‘Other Bets’ reporting segment, which encompasses Alphabet’s non-Google businesses and is described as “a combination of multiple operating segments that are not individually material.” In 2024, Other Bets will account for about 0.5% of total revenue, or $2B, and have an operating loss of over $4B (source: FactSet).

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.

Message to the media:

The Wall Street Journal’s recent article, “How San Francisco Learned to Love Self-Driving Cars,” giving us a better look under the hood and rare comments from Waymo’s c0-CEO, Tekedra Mawakana. This development coincides with Tesla’s escalating ambitions in the ridesharing sector, as detailed in my note, “The FSD Waiting Game Is Worth the Wait”.

Message to investors:

On Alphabet’s Sep-24 earnings call, CEO Sundar Pichai highlighted Waymo as the “biggest part of the [Other Bets] portfolio,” marking a shift from previous disclosures. Historically, Alphabet’s 2023 10-K and September 2024 10-Q reported Other Bets’ revenue as being “generated primarily from the sale of healthcare-related services and internet services.”

Traditionally, Alphabet’s management has provided limited details about the Other Bets segment. Over the past ten earnings calls, prior to the Sep-24 quarter, Waymo was mentioned, on average, once per call during prepared remarks, with analysts typically refraining from inquiring further.

However, during the Sep-24 earnings call, management offered a more detailed update on Waymo’s progress, leading to the first analyst question on the topic in over two years. This increased focus may indicate that Alphabet is preparing for a potential Waymo spinout in the near future.

In October, Waymo raised outside capital for the first time in three years, securing $5.6B in a Series D funding round, which valued the business at about $45B. 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 $2.3B in March 2020 and $2.5B in June 2021, respectively. As mentioned, I estimate today Alphabet owns 70% of the business.

Venture investing 101 emphasizes an eye on liquidity. These leading funds understand the game and are likely investing in the company with assurances from Alphabet’s management that there is a path for them to cash out.

It’s uncommon for mega-cap companies to seek external funding for internal projects. For instance, a decade ago, AWS and Azure were considered “other bets,” yet their parent companies funded their growth internally to maintain control. In 2024, Alphabet is projected to generate approximately $111 billion in operating income, sufficient to support Waymo’s multi-billion-dollar investments.

Alphabet’s decision to secure external capital for Waymo’s expansion likely stems from two factors. First, from an R&D perspective, while there is some overlap between Waymo’s computer vision teams and Google’s Astra initiatives, the connection between Alphabet’s core operations and Waymo is minimal.  Second, developing an autonomous ridesharing platform involves complex technical challenges, regulatory hurdles, and talent acquisition needs. Engaging external investors can provide strategic partnerships and resources to navigate these complexities effectively. This approach aligns with Alphabet’s strategy to leverage external expertise and capital to accelerate Waymo’s growth in the competitive autonomous vehicle industry.

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 October 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 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.

Model Basics:

Upfront cost, expenses and savings:

• Vehicles: 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 $200k per vehicle. In comparison, Tesla’s Model 3 costs under $40k, with the anticipated Cybercabs eventually costing below $30k. Waymo’s vehicle cost must decrease from the current $200k to around $100k to make the model’s long-term economics attractive. I estimate that servicing 30-70% of the U.S. ridesharing market by 2030 would require a fleet of approximately 200k to 460k vehicles, resulting in an annual new vehicle cost of about $4.5B to $10B. Finally, a notable data point from the WSJ story indicates that nearly 40% of miles driven by Waymo vehicles are without a passenger, yet still incur expenses.
• Maintenance: 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. We’ve modeled this expense to increase by about 7% per year through 2030.
• Human Drivers: 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. Our base model projects that the average Waymo vehicle will ‘work’ 4,100 hours per year (12 hours a day, 341 days in use per year with 24 days for maintenance downtime), roughly double the hours an average person logs in a year. Conservatively, I estimate that removing the human will save about $20 an hour in labor costs, translating to an annual savings of $82k. In other words, if Waymo can reduce the vehicle build cost to $100k, it can recoup that upfront investment through labor 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.

Revenue:

• In terms of revenue, there have been about 4B rideshare rides in the U.S. over the past 12 months. The “rides” growth rate for Uber and Lyft in 2024 is around 25%, and it is expected to decline to about 12% in 2025. We believe a reasonable average annual rides growth rate through the end of the decade is 5%.
• That means that by 2030 there will be about 5.5B rides per year in the US. Our sense is this is a conservative number given as autonomy drives down the average cost per ride, we should see the growth in the number of rides accelerating.
• In a market where price is the key differentiator, I expect Waymo to become the low-cost provider to gain share. I think a 25% discount to the current average price per ride would be compelling to riders, going from today’s $22/ride to $16.50/ride. The model still works at this price given the human driver expense is removed. The combination of increased rides and lowered price per ride results in the addressable market growing from $88B today to $90B in 2030.

Sensitivity:

Putting these factors together, the model is more attractive than I anticipated. Going into the modeling exercise, I expected the high upfront vehicle cost to eliminate the potential for long-term healthy margins. What I underestimated was the high cost of human labor, along with the high probability that, in the long term, Waymo will retain all of the revenue. The sensitivity is based on the following baseline assumptions:

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 $14B.
3. 70% market share. If Waymo were to achieve 70% of the ridesharing market in 2030, I estimate operating income could reach about $36B.

I believe Alphabet investors should favor a spinout as the new structure would likely unlock value. Currently shares of GOOG 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 $45B. 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.

Regarding valuation, I believe there are three potential earnings outcomes based on Waymo’s 2030 market share, applying a 30x multiple to 2030 earnings. This multiple is based on the average for high-growth companies over the past 14 years.

1. 0% Share: There is a low probability the company fails to solve for autonomy and folds.
   • Earnings: $0B (operating income minus 21% tax rate).
   • Valuation $0B (applying a 30x multiple)
2. 30% Share: Tesla beats Waymo to the market and the company becomes the “Lyft” of autonomous ridesharing.
   • Earnings: $11B.
   • Valuation $337B
3. 70% Share: Waymo beats Tesla to the market and the company becomes the “Uber” of autonomous ridesharing.
   • Earnings: $28B.
   • Valuation $850B

Disclaimer