As Waymo becomes part of the Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) family of companies, most analysts are asking when or whether it will contribute to GOOG stock’s bottom line.
The launch event on Dec. 13 featured a blind man given a ride around Austin, Texas in a car without a steering wheel, and vague discussion of how the project’s 2 million miles of self-driving experience could be put to work in ride sharing, trucking or public transport.
While previous GOOG projects like Nest, the automated home company, and Google Fiber, the phone company competitor, quickly floundered as their teams tried to change the world, the car company Waymo seems interested in getting paid for helping others change the world.
It’s an important distinction. Google X, the unit into which CFO Ruth Porat put CEO Larry Page’s “moonshots” in technology unrelated to the search engine, is now expected to turn into a real company or go away.
A Real Market for GOOG
The new Waymo is being run by a car guy, former Hyundai USA President John Krafcik, leaving the experimental team under Chris Urmson by the side of the road. Urmson is launching his own startup.
Krafcik is building a team of experienced auto executives, and representing the company in the press, dealing with the fallout from a Tesla Motors Inc (NASDAQ:TSLA) driver dying with the car in a self-driving mode, the opening of a Waymo design office in Detroit and initial questions of government regulation.
These are practical questions previous Alphabet launches tended to ignore. They also tended to ignore whether the opportunity before them was real or in their heads.
In the case of Waymo, it’s clear there is a real market. Boston Consulting Group estimates it at $42 billion in software and services within 10 years, others say $560 billion in sales within 20.
This has attracted real competition, not just from Tesla but from Uber, General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and start-ups like nuTonomy.
The question for Krafcik is not whether Waymo can knock off these other companies, but where Waymo’s experience, software and hardware packages can fit into their plans.
Deliberately Undefined
Krafcik is leaving that deliberately undefined. The company has sold Fiat Chrysler Automobiles NV (NYSE:FCAU) on a package that will make 100 of its minivans self-driving members of the Waymo fleet.
But there are other assets Krafcik can capitalize on, and technical hurdles to be overcome along the way. The lidar “bucket” on top of current Google cars costs too much, for instance. The problems of scaling the solution are real ones. Getting the public, politicians and the insurance industry to accept self-driving as a concept is going to be a huge job for the company.
Waymo needs to bring in enough cash from what it has already done to fund research into these more specialized areas.
For now, Krafcik plans to make Waymo an enabling technology, leaving the heavy capital lifting to others, and making his own efforts self-sustaining.
The Bottom Line on GOOG Stock
This modest approach will free corporate assets to keep investing in software, in cloud data centers, and in device hardware, which is where CFO Ruth Porat wants the company to be.
It should also satisfy shareholders. If Waymo can break even going forward, it will leave GOOG stock’s 29.3 price-to-earnings multiple and $554 billion in market cap alone.
Since Porat became CFO for what is now Alphabet in June, 2015, GOOG stock is up 49%, the bottom line growing 20% while the top line has grown 10%; it has kept its operating margins at about 25%, and the company will announce revenues of well over $80 billion for the year when it reports 2016 on Jan. 26.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in GOOGL.
