The automotive industry is starting to look a lot like the Wild West. Companies in the industry -- everyone from Silicon Valley technology companies, original automotive manufacturers such as Ford Motor Company (F 1.99%), and suppliers spinning off a list of business segments to focus on driverless vehicle technology such as Delphi Automotive (DLPH) -- are rushing to get in the race for driverless vehicles.
Monday brought us an intriguing development: Avis Budget Group's (CAR 2.23%) partnership with Alphabet's (GOOGL -0.49%) (GOOG -0.57%) Waymo division has resulted in an unexpected driverless car stock.
What's going on?
Avis kicked off the week by announcing it has signed an agreement with Waymo, Alphabet's driverless car program, to offer fleet support and maintenance services for Waymo's self-driving program through its network of Avis Car Rental and Budget Car Rental locations in the Phoenix area. The move makes sense for both parties, as Waymo gains access to a wide-reaching network of 11,000 physical locations capable of maintenance and services in 25 countries globally, while Avis' credibility for its mobility efforts improves drastically with a link to a major tech company developing driverless-vehicle programs. While the original agreement is likely to remain a small test area in Phoenix, the opportunity for expansion as its driverless program grows is certainly there for Waymo.
"We are excited to partner with Waymo, the self-driving technology leader that is changing the mobility landscape in a profoundly transformative and beneficial manner," said Larry De Shon, president and chief executive officer of Avis Budget Group, in a press release. "Not only does this partnership enable us to leverage our current capabilities and assets, but it also allows us to accelerate our knowledge and hands-on experience in an emerging area as Waymo-enabled self-driving cars become available in the marketplace."
Avis is putting a great deal of effort into transforming itself from a vehicle rental company into a mobility innovator. Remember that only a couple of weeks ago, Avis teamed up with RocketSpace, a technology campus for start-ups and corporate innovators, with the goal of collaborating with young companies working on automated driver-assisted systems (ADAS), on-board vehicle diagnostics, and electric vehicle systems. Avis also owns Zipcar, which is the world's leading car-sharing network, boasting over 1 million members.
The road ahead
For Avis investors, this is a long-term development. But partnerships such as this one with Waymo give credibility that the company can execute on its enhanced-mobility ambitions -- which will be critical to growing its overall business.
Avis is targeting $350 million to $550 million of increased profitability between 2016 and 2021, and its enhanced-mobility business will also be key to growing its margins from 10% to between 13% and 15% over the same time frame. Avis still has much work to do, as it found itself on the wrong side of innovation over the past five years, with Uber and Lyft disrupting the taxi industry, and by extension the automotive sector. That caused its stock to decline 52% over the past three years. However, if management can continue to grow Zipcar, create valuable partnerships with companies pushing toward driverless vehicles, and shore up margins in its core rental business, Avis might just be the driverless car stock we never saw coming.