The Takeaway
• Waymo’s gross profit margin may be higher than Uber’s
• Waymo’s biggest expenses include lidar sensors
• Our estimate of Waymo’s valuation is around $110 billion
The race to get self-driving taxis on the road is accelerating. Elon Musk’s Tesla plans to reveal its long-awaited prototype of one such vehicle on Oct. 10, while Alphabet-owned Waymo announced last month that its autonomous vehicles soon would be available for Uber customers in Austin, Texas, and Atlanta.
These moves, along with Waymo’s recent success running a robotaxi service in Phoenix, Los Angeles and San Francisco that it says handles over 100,000 paid rides a week, offer concrete evidence that Waymo could become a viable business for the first time since Alphabet began working on the project more than 15 years ago. Now the question becomes—what is Waymo worth?
Our very rough guesstimate is around $110 billion. Because Waymo is building a robotaxi business, we decided to assess valuation by comparing Waymo to Uber, whose market capitalization is now around $160 billion.
To be sure, Uber is more than just a ride-hailing company: Its Uber Eats food-delivery business has become a major rival to DoorDash. But profits from ride hailing account for roughly 70% of Uber’s total, excluding its small and unprofitable freight business. That suggests the ride-hailing operation is worth at least $110 billion. A more aggressive valuation might compare Waymo to Tesla, which is worth $800 billion, but Tesla’s market capitalization today reflects its leading position in electric vehicles rather than its upcoming robotaxi venture.
In the long run, Waymo could be worth much more than Uber because a driverless taxi company should be cheaper to run than one that employs human drivers. That’s why Uber, under the oversight of co-founder Travis Kalanick, spent billions developing its own self-driving tech, which the company jettisoned to save money after CEO Dara Khosrowshahi took over.
Waymo could undercut Uber and its number two rival, Lyft, on price and lure away swaths of riders. And assuming consumers become comfortable with the driverless technology—which already appears to be happening in San Francisco—the potential for Waymo is high.
We’re likely some ways off from a demonstration of that cost advantage, however. Alphabet doesn’t break out Waymo’s financial results, which makes it hard to know either the unit’s revenue or operating expenses like employee salaries and marketing spending. But we do know that while Waymo doesn’t have human drivers, the technology in the cars may be just as pricey as paying a driver.
The cars need sophisticated detection sensors that enable them to drive autonomously, said JMP Securities analyst Andrew Boone. Those sensors are expensive. For many years Waymo has developed its own lidar sensors, for instance, but to give a sense of the cost, Boone estimated in an August report that a single sensor sold by Luminar Technologies costs around $1,000 today—and each car requires several.
Waymo’s cars also need numerous cameras and radar sensors to guide them. Waymo additionally has to buy the cars, whereas Uber and Lyft mostly rely on the drivers to supply their own vehicles. That all adds up, although it’s not hard to envision a world where all that sensor hardware gets progressively cheaper and better.
That would be good news for shareholders in Alphabet. The parent of Google, along with outside investors such as Silver Lake and Canada Pension Plan, has committed a total of at least $13 billion to Waymo over time.
We’re including The Information’s 2019 estimate that Alphabet had invested $3.5 billion into Waymo by that point, along with subsequent $4.8 billion fundraisings with outside investors, as well as Alphabet’s recent statement that it would put $5 billion into Waymo in the next few years.
At some point Alphabet will want to get a return on that investment, either by spinning the company off or by selling it.
Doubling Down on Ride Hailing
Waymo’s robotaxis may already have higher gross profit margins than Uber’s, based on our very rough estimates using a few assumptions. That’s an important signpost about bottom-line profitability. Gross profit margins reflect the direct costs involved in generating revenue but exclude expenses such as sales and marketing, research and development, and administrative costs, all of which a business can cut in the near term without shutting down. But if a company has low gross margins, it’s tough to make it solidly profitable.
Because it doesn’t have human drivers, Waymo doesn’t have to split any of the fare. Uber’s gross margin, in contrast, reflects the drivers’ cut in a few markets such as the U.K., for regulatory reasons. (In the U.S., in contrast, Uber calculates revenue after paying the drivers’ cut, which means it depresses revenue but not gross margin.)
A big cost for both Uber and Waymo is insurance. Uber, for instance, has said that commercial insurance is the largest cost its fare revenue has to cover. It’s a sizable cost for Waymo as well, analysts estimate.
But they differ about Waymo’s long-term insurance costs. Bank of America’s Justin Post estimates that insurance might cost Waymo around $5,000 a year per car, compared with the $14,000 estimated by JMP Securities’ Andrew Boone.
Right now, Waymo’s insurance expense is likely on the high side, given how new the technology is. But over time, it should come down. Waymo regularly publishes data suggesting that its cars are less likely to cause accidents than cars with human drivers. If the statistics continue to support that, insurers could be expected to cut robotaxi operators a better deal than they do traditional ride-share firms.
Even assuming Waymo pays the higher amount for insurance, and after incorporating reasonable estimates compiled by Post for other costs such as fuel and servicing, we estimate Waymo’s gross margin could be near 70%. That’s based on our estimate that each Waymo robotaxi could generate about $105,000 in annual revenue.
We calculated that by assuming Waymo charges passengers $3.50 per mile, which is roughly on par with the price for other ride-hailing services, according to a June report by Bank of America’s Post. Each car might rack up, say, 150,000 miles in total over its life, which is the mileage limit for certain models of cars in some cities where Lyft operates.
Uber’s gross margins lately have been around 40% by comparison.