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.
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.
Mobileye Is a Better Comparison for Waymo
Lyft itself is worth only a fraction of the $44 billion the market had dished out to GOOGL stock after MS’ comments. Lyft partnered with GM last year with GM taking a 9% stake in the company for $500 million. That valued Lyft at just $5.5 billion. Assuming Lyft’s valuation has grown in tandem with its growth, that would give the ride-hailing company a value of just $7.3 billion. Let’s not forget that Waymo has simply partnered with Lyft, and we have to wait and see how that helps to bring its self-driving technology to the mainstream.
Perhaps a better comparison for Waymo would be Mobileye NV (NYSE:MBLY), which Intel Corporation (NASDAQ:INTC) plans to acquire soon. Mobileye is currently valued at $14 billion and it is nicely profitable, but with expected 2017 revenue of $500 million and earnings-per-share of $1, MobilEye has been struggling to justify its really steep 28x sales valuation.
Verdict: Waymo Is Grossly Overvalued
Waymo is certainly one of the more promising members of Other Bets by Alphabet, but the division brought in revenue of $240 million (less than 1% of its topline) and a huge operating loss of $855 million during the last quarter. And the lion’s chunk of those revenues come from Nest not Waymo.
Throwing around prognostications for an infantile industry like self-driving is never easy. It appears highly implausible that anyone today would be willing to pay $44 billion, let alone $70 billion, for Waymo in a spinoff situation. Ten years from now though the company could grow into a huge gem for GOOGL stock.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.