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Why Alphabet Inc’s (GOOGL) Waymo Is Far Overvalued

It's improbable that anyone today would be willing to pay $44 billion, let alone $70 billion, for Waymo

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The latest tech selloff has been rough on FANG stocks, biting off a sizable chunk of their impressive year-to-date gains. The pullback has particularly left Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) investors with a bitter taste in their mouths after a brief stay in the rarefied world of the $1,000 club. GOOGL stock is now nearly 10% off its June 5 all-time high-water mark of $1007.40.

Why Alphabet Inc's (GOOGL) Waymo Is Far Overvalued
Source: Shutterstock

But just as well, because we now have a chance to sit back and take a sober look at whether these high-fliers deserve the stratospheric valuations that the market has been dishing out so freely.

Case in point: the mad rally by GOOGL stock after Morgan Stanley theorized that Waymo, the company’s driverless car unit, could be worth north of $70 billion in a spinoff scenario. That’s a good 20% or so of the current market cap of Alphabet.

GOOGL Stock: Blue-Sky Thinking by Morgan Stanley?

Morgan Stanley’s bold claim helped to add another $44 billion to Alphabet’s market in just two weeks before the latest pullback hit. The firm based its estimate off Waymo accounting for 1% of total global driven miles by 2030, and bringing in $1.25 in revenue per mile for GOOGL. But that’s not all:

“More miles/year and revenue/mile could lead to an enterprise value of~$140B,” gushed MS.

Morgan Stanley also estimates that Waymo could generate an operating margin of 8% when operating at scale, about one-third Alphabet’s corporate operating margin. Morgan Stanley’s commentary came hot on the heels of another big milestone in Alphabet’s self-driving roadmap — the announcement that Waymo will now partner with Lyft to bring autonomous cars to the mainstream.

The ride-sharing company recorded 18.7 million total rides by December 2016, good for 33.5% growth, the fastest in the industry. General Motors Company (NYSE:GM) took a stake in Lyft last year, so that sort of gives Waymo exposure to GM’s leadership in EV technology.

Now that valuation looks like a stretch for a couple of reasons.

First off, Waymo only develops self-driving technology but does not manufacture autonomous vehicles the way companies like Tesla Inc (NASDAQ:TSLA) and GM do; at least not en masse. Yet, both currently sport a market cap of ”only” $59 billion and $52.3 billion, respectively. Currently it’s quite hard to put a value on fully autonomous vehicles because their use across the globe is still very limited. Industry experts though are almost unanimous that EVs will dominate the self-driving industry.

Tesla is of course the leading EV manufacturer in the U.S., boasting a market share of 30%. The company expects its vehicles to reach Level 5 full autonomy (the most advanced level) in 2019.

Tesla Leads in the Charge to Self-Driving

It’s very likely that the company that can most easily combine leadership in EV technology with self-driving technology will remain the market leader in the autonomous car industry for years to come. Right now, that company looks like Tesla.

Although Tesla’s self-driving tech was ranked behind Waymo’s and GM’s in this report, not even GM with its $30K-a-pop Chevy Bolt has been able to provide credible competition for the company in the EV battle.

GM has sold just under 6,000 Chevy Bolts in the year-to-date, or just 8% of total EV sales in the country. Tesla expects to start selling 500K EVs as early as 2018, which will take its EV market share to 60%+ while Bolt’s share will drop to around 2.4% assuming 30% unit sales growth between now and then.

Current estimates call for EVs to take 10% share of new vehicle sales by 2030. It will probably take something earth-shattering for GM to hit 10% EV market share by 2030, roughly comparable to 1% of  global driven miles.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/06/alphabet-incs-googl-waymo-far-overvalued/.

©2017 InvestorPlace Media, LLC