Waymo, and Way More Info on Self-Driving Cars

December has been a busy month for self-driving car news. In this week's episode of Industry Focus: Tech, Dylan Lewis and Motley Fool senior tech specialist, Daniel Sparks, give listeners an update on the state of autonomous car research and production today.

First, a look at Alphabet's (GOOGL -3.07%) (GOOG -3.15%) new offshoot company, Waymo, which is entirely focusing on self-driving tech -- what we know about the company so far, how it fits into Alphabet's strategy, and how long it might take before we start seeing results. The hosts also look at how Apple (AAPL -0.25%), Uber, Tesla (TSLA 1.80%), and GM (NYSE: GM) are progressing in the race, and how investors need to look at the space as of today.

A full transcript follows the video.

This podcast was recorded on Dec. 16, 2016.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, December 16th, and we're doing a roundup of self-driving car updates. I'm your host, Dylan Lewis, and I'm joined on Skype by fool.com senior tech specialist, Daniel Sparks. Daniel, how's it going?

Daniel Sparks: Good, Dylan, thanks for having me on the show.

Lewis: A little blustery over there in Colorado, huh?

Sparks: Yeah, high wind warnings this morning. It's pretty crazy. Glad you can't hear it through the microphone.

Lewis: Yeah, it seems like the kind of weather you might want some driving assistance, huh?

Sparks: I guess so. (laughs)

Lewis: So, Daniel, there's been a ton of news regarding self-driving cars in the past month or so. It seems like pretty much every major player in the space has come out with an announcement of some sort. It seems like on our end, we were probably due to do a little check-in and see what's going on. How's that sound?

Sparks: Sounds good.

Lewis: The first news that I really noticed -- I mean, there were other ones that came up in the past couple weeks, but one that really caught my attention -- was Alphabet's self-driving car project doesn't seem to be just a project anymore. It seems like they're emphasizing this within the Alphabet holding structure.

Sparks: Yeah, we saw that blog post, Waymo is what they're calling it. It'll be interesting to see where they're taking this, for sure.

Lewis: In that blog post, they said "Waymo stands for a new way forward in mobility. We're a self-driving technology company with a mission to make it safe and easy for people and things to move around." The TLDR here, the very simple explanation of what's going on is, they are taking the self-driving car project under Google X and turning it into an identifiable business under Alphabet. This is awesome, I think, if you're an Alphabet shareholder, because it shows that they're going to put a little bit more emphasis on moving things along and not having these fun projects be just that, that there's going to be a commercialization element to it, and a path to that. But to me, more than anything else, this highlights the benefits of the Alphabet holding company structure, and how under CFO Ruth Porat, they've decided to take a more Wall Street-friendly look at some of the things that are going on there at Google.

Sparks: Yeah, it definitely highlights the Alphabet structure that they have set up, and the benefits of it. Investors should realize that this isn't just some new project that they're doing. This is the graduation of the self-driving car project to an actual company. This is really one of the first instances where we've seen this under the Alphabet structure, where we can see, where they take this from their Google X area, which is more just moonshots in development, is kind of how they're making it look, and we're really seeing that with this particular instance, and then graduating over to an actual company and, like you said, putting some pressure on it so they can start turning it into a business.

Lewis: Yeah, and this is, like you said, not something that happened overnight. The self-driving car project has been in the works, I believe, for over eight years at this point. My read on this -- and you can correct me if I'm wrong here, Daniel -- is, we're not really going to be seeing actual financials on Waymo broken out when Alphabet gives its quarterly numbers, at least not anytime soon. It seems like they will probably continue to be lumped into other bets reporting for the foreseeable future.

Sparks: Yeah, I definitely think they're going to keep it in other bets, because with Google's revenue at the $22.2 billion and the other bets revenue at about $200 million, virtually all of the company's profits coming from the core Google segments, and nearly a $1 billion loss coming from other bets -- I don't think Alphabet is ready, just because Waymo is turning into a company, to start segmenting out this information on its own. Not only would it probably draw attention to simply a losing segment, since they haven't really monetized this service yet, and like we said, that's kind of the purpose of it. And, also, it could potentially give competitors an edge that they don't really need to let competitors have, by looking into their business. This is very small to their business, they don't have to report it to investors. It's not material at all, so they might as well keep it under wraps as long as they can.

Lewis: Yeah. So, while we won't have a ton of financial insights, it seems, what I think this does open the door to is some questions and maybe a little bit more pointed commentary from management in some of those quarterly calls and maybe some of those press releases on specifically what's going on with the self-driving car project. Again, probably not something we're going to get a ton of insight into immediately, but something that in the coming quarters and years, we should definitely expect to hear more from.

Sparks: Definitely.

Lewis: One of the other things we got some color on regarding Google's self-driving car project, I guess I should be calling it Waymo now, is exactly how they plan to monetize self-driving car technology. This is something that's been kind of up in the air for a while. At times, they've talked about not wanting to be a car manufacturer, but it's hard to take them at face value there, because they're looking to obscure this as much as possible. You want to talk a little bit about what we got in terms of commentary there?

Sparks: Yeah, that was one of the big takeaways when they were coming out with this Waymo announcement. There was some speculation that Alphabet could be working on its own Google-branded car. While they might not actually have thought of planning of manufacturing it, as they do with their hardware products, they often outsource the manufacturing and then slap that brand on, similar to the way Apple does with Foxconn, but, there was some speculation that they could try to be working on some Google-branded car, and we have seen their cars with no steering wheel, their ambitious vision of a totally autonomous driving experience. There has been some speculation in the past that they would be planning to bring a larger fleet of those to the market. But the CEO of Waymo, John Krafcik -- I think that's how you pronounce it?

Lewis: I think it's pronounced another way, but I'm not sure. I've only seen it and writing, I have not heard it said. I understand how neither of us are totally sure.

Sparks: OK, that sounds better, we'll go with that. We'll just call him John today. John, he emphasized that they're not trying to turn into a car business, but rather wanting to focus on the technology behind the cars, and basically, Waymo's mission to make driving autonomous, to make it safer, and, as in their name, really focus on the mobility. I think this is a good move. This is something that Alphabet has succeeded at in the past by really focusing on software and gathering data -- because, essentially, that's the company's core mission, to organize data. So, by doing this, I'm actually more bullish on the segment by seeing that they're really going to focus on their core competencies with it. And maybe similar to the way Alphabet tries to add in Google-branded hardware later on with Android, maybe they'll do a similar things with cars by trying to bring in Google-branded cars later on after they've really developed and honed in on their expertise and the autonomous area of the technology.

Lewis: Yeah, the quote from John, as we'll refer to him, "We're in the business of making better drivers. We're a self-driving car company, not a car company." I think, if you look back at some of the things that have happened in the last month or so, you see that Apple seems to be taking kind of a similar route with their autonomous driving ambitions.

Sparks: Right. We see these big tech companies, and then you look at the giant automobile segments, where companies like Alphabet and Apple don't have any significant revenue, and in theory, it looks like this awesome opportunity for Alphabet and Apple to start making these cars. Maybe that's why a lot of the speculation received so much attention, thinking about a Google-branded or Apple-branded car is a really powerful idea, it could open up the companies to huge new revenue opportunities. But, when you actually get down to think about it, especially in Alphabet's case, it would really be out of their core competency to start making cars. Even Apple, by outsourcing their manufacturing and building Apple-branded hardware products, along with their software, cars is just a whole 'nother breed. It's a really capital-intensive business. By Alphabet doing this, and now, like we're going to talk about, Apple focusing on the software part of the business, it really de-risks these new segments, but on the other hand, may decrease some of the potential upside if things do go well.

Lewis: Yeah, you look at the margin profile for the car business and the smartphone business, and they are dramatically different. It would be very tough to achieve high-30% margins in cars. For as much as I know about the industrials business, I know that. So, you can understand why these huge tech companies are instead choosing to focus on something that's super scalable and can be easily brought into millions of cars without actually having to manufacture them themselves.

Sparks: Right.

Lewis: And if you had any doubts about Apple's interest in making self-driving cars, I think Tim Cook has been pretty coy in some public interviews about not really letting in on a lot of details, being a little cagey, the company sent a letter to the National Highway Traffic Safety Administration regarding Federal Automated Vehicle Policy earlier this month. And it made it pretty clear they have something cooking there. The NHTSA can grant exemptions to certain compliance standards if that organization decides that it's important for research and investigations. Apple's letter was essentially urging the administration to expedite the exemption requests that are coming in from some new entrants, so, some people that maybe haven't been quite as ambitious as the early entrants into autonomous driving. That, I think, says all you need to hear about their interest in this space, and the fact that it's something that they're obviously putting a decent number of resources into.

Sparks: Yeah, I think that Apple is definitely working on a car, as far as we can tell. Recent reports suggest that the company has hundreds of employees working on it. The transition, initially, it was referred to as Project Titan, and it initially transitioned away from building a car -- this is all speculation, keep in mind -- to really focusing on the technology, similar to Alphabet. The rumor is, now, it's going to be deeply integrated into iOS, and the company is looking for a 2017 deadline of proof of concept of something that can work. So, Alphabet and Apple, these are still really speculative things. But, at least with Alphabet, we're starting to see a direction, an actual company, and an effort to monetize the business, which is encouraging. 

Lewis: And for both of those companies, these are things that are exciting. They're very attractive, they're fun to speculate on because they are nascent tech. But they are not going to be meaningful to the top line or bottom line for quite some time. That's something to keep in mind there. Of course, flipping over to the private side of things, not a public company, but Uber also made headlines this week, of course, not to be outdone by some of the larger tech names. After the company had deployed some self-driving vehicles in Pittsburgh in September earlier this year, they now have deployed about five or so autonomous Volvo XC90 SUVs in San Francisco. The aim there was to have them not only be out on the roads, but out on the roads picking up customers, right?

Sparks: Right. They kind of jumped the gun on this one, and put them out on the California roads without a permit, which California requires for auto manufacturers testing autonomous vehicles. What Uber did was kind of make an assumption with wordplay. Apparently the rule was that manufacturers testing autonomous vehicles that don't require human drivers to get a permit, and to make sure that someone is there, ready to grab the wheel and take over. That wordplay was that the vehicle was autonomous, that's when they would need a permit. So, Uber argued, "Well, these cars aren't technically autonomous, because we have drivers there ready to take over when something goes wrong." Of course, in their blog post, they did say they're deploying "self-driving" cars, they used that wording. So, it's really interesting to see them going this route with it. It caused a lot of debate as to whether this is right. It brought Uber back to a problem they had early and were scaling back on, which was being a rebel when it comes to regulations. Kind of putting them back in that spot right now.

Lewis: Yeah, that certainly doesn't help their case in trying to improve their reputation. I know that's something that has plagued them for quite some time. It'll be interesting to see how that plays out with regulators in California, and whether it's something they push forward on. In preparing for the show, we talked about how there's kind of a huge difference between how a public company and a private company might handle something like this, just because the liability on Alphabet or Apple's side, with doing something without express written consent from the regulatory body, could be devastating to them as a business and to shareholders. And, I'm sure there are a lot of controls in place for people that have private placements with Uber. But, you can afford to be a little bit more brash when you don't have public investors, I guess.

Sparks: Right. And it's worth noting that, according to Bloomberg, the California DMV is saying it's going to try to pursue legal action on Uber. I don't think it's clear yet that Uber has stopped. But there was an interesting scenario when, on the first day of this program, one of the Volvos with the self-driving hardware ran a red light when a pedestrian was trying to cross the sidewalk. Uber said in an update that it wasn't actually in self-driving mode when this happened. They emphasized, "So, this is why we need to be pushing so hard for a self-driving future to help with safety." Kind of a funny instance.

Lewis: Maybe more wordplay there, too, it seems. (laughs) And, last but not least, I know that you wanted to touch on Tesla, and how they are going about self-driving a little bit differently, just because they are not, by nature, a platform company, they are a manufacturer first, and that gives them some advantages when it comes to integrating their solutions, and maybe on the data side, as well.

Sparks: Yeah. So, you have companies like Tesla, GM, in some ways, who are trying to work on the self-driving software, but also on the manufacturing. You look at Uber, when they're solely focused on the software for now, for self-driving, it does present some challenges, as far as testing these autonomous vehicles and getting them ready for the public roads works, because a company like Uber can't really give its sensors away to manufacturers. They would actually have to sell those sensors. And that's where the challenge is. How are they going to get these sensors over to all these manufacturers, and how are they going to get all this data about how these sensors are operating on the roads, unless they're actually getting the sensors into the cars? So, then you have companies like Tesla, who are already delivering vehicles with the self-driving sensors in them, they could run these sensors in shadow mode while people are driving in their normal daily routes, even while they're holding the wheel, and they could collect information and really start getting the data, because they're also a manufacturer. Of course, they're still making money on their sensors, because they're selling the car itself.

Then, you have General Motors, similarly, they are a manufacturer, but they're also working, at least in part, with Lyft. And they've made some of their own acquisitions on developing a self-driving software. So, they can sell their cars, make money on their cars, and have a revenue stream with a business model already as they're putting these sensors in vehicles, and start collecting data. Of course, they are not to the point yet where they are already delivering cars with self-driving hardware like Tesla is, but I imagine that they could do that in the future as well, and run it in shadow mode. That's just an interesting point.

Lewis: Yeah. There are a lot of things that are unclear about the self-driving car market. The one thing that is clear is that there are a bunch of different companies with a lot of money at their disposal trying to crack that nut a couple of different ways.

Sparks: Right, yeah. It's a really uncertain space right now. I think that's the biggest takeaway from this. It's exciting, it's interesting, but these are all small portions of businesses. Even at a company like Tesla, there are no cars actually driving themselves on the road right now. All of these, investors should put it into perspective, I think.

Lewis: Yeah. Well, listeners, that does it for this episode of Industry Focus. A couple of notes before we sign off. I wanted to let our listeners know about our Holiday Philanthropy Drive. This year, we've partnered with Growing Power to bring sustainable food and employment to at-risk communities around the United States. One in seven Americans are food insecure. Your donation can make a difference to a community in need. To learn more about Growing Power's mission and to donate, visit give.fool.com. 

Also, the cast of Industry Focus wants to know what your favorite investing book is. Monday's Financials host Gaby Lapera is putting together a show highlighting some of the best reads to better understand the market. We want to know what you think. Shoot us an email at [email protected] with your recommendation, and we'll be sure to get you our final list. You might even get a shout-out on the show.

Of course, if you like the show, and you're looking for more of our stuff, subscribe on iTunes, or check out The Fool's family of shows at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Daniel Sparks, I'm Dylan Lewis, thanks for listening and Fool on!