Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) self-driving car division, Waymo, made headlines last year when it launched a self-driving taxi service for select customers in the Phoenix metro area. However, its latest move of selling lidar sensors will help it monetize its autonomous technology more quickly. Waymo has decided to sell its Laser Bear Honeycomb lidar, which sits on the bumper of vehicles, to other companies.
There's a big caveat, though: The Alphabet subsidiary won't be selling its custom lidar to competitors in the self-driving car market. Instead, it will offer its hardware to verticals such as robotics, agriculture, and security. This could help address some investors' concerns about Waymo's money-making prospects, as questions have been raised about the feasibility of its self-driving service in real-world applications.
Let's take a closer look at what Waymo's latest move could mean for Alphabet investors.
The revenue opportunity
Demand for lidar sensors is spiking, largely due to the development of self-driving cars, but also thanks to their applications in other industries. Frank Bertini -- head of lidar sales for nonautomotive applications at Velodyne, a Waymo competitor -- expects total industrywide lidar sales to double this year to more than $1 billion, according to Bloomberg. Roughly a tenth of those sales will come from applications other than self-driving cars.
Waymo has restricted its near-term prospects in the commercial lidar market by not selling its technology to competitors developing autonomous vehicles (AVs). Another problem is that the growth of the global lidar market might not be spectacular enough to move the needle for Alphabet.
According to one estimate, global lidar sales are expected to increase at an annual pace of less than 13% through 2023. That's a far cry from the growth rate that Velodyne is forecasting for 2019, but it wouldn't be surprising to see lidar sales losing momentum due to the high cost of the technology. (A typical lidar system for an autonomous vehicle could cost between $60,000 and $80,000.)
Such prohibitively-high costs will make it difficult to roll out self-driving cars commercially, though Waymo has an advantage because it has managed to lower the cost of lidar sensors substantially. A couple of years ago, Waymo CEO John Krafcik revealed that engineers at the Alphabet subsidiary had brought lidar costs down by 90%, compared to the $75,000 price tag of the hardware it originally used.
So there's a good chance that Waymo will be able to sell Laser Bear Honeycomb for significantly less than $10,000, though Waymo hasn't released an official figure. Given that Laser Bear Honeycomb is a short-range sensor meant for object detection and avoidance, it could find its way into robots and drones.
But even then, the revenue opportunity likely won't be very big, because AVs dominate the lidar space. If self-driving cars continue to account for 90% of lidar sales and the lidar market grows to $5 billion over the next five years, Waymo's addressable market would still be just $0.5 billion. For comparison, Waymo parent Alphabet generated nearly $137 billion in revenue last year, so a move into commercial lidar sales won't be a big deal from an investing point of view.
Should investors be excited?
Simon Verghese, who heads the lidar team at Waymo, hasn't ruled out lifting the embargo eventually and selling lidar sensors to automotive companies, according to Bloomberg. But that looks unlikely at present given that the company is busy rolling out its own self-driving taxi service and would want to keep its competitive advantage intact.
But even if Waymo opens up its lidar technology for sale to other companies developing AVs and ends up dominating the market, the needle won't move much for Alphabet given the overall size of the end market. Also, Waymo is entering a crowded market where several start-ups are trying to cut their teeth and Velodyne is trying to push the envelope through its product development moves.
Velodyne recently launched a $4,000 short-range lidar that will compete with Waymo's offering. But the company offers the sensor at half that price when customers purchase large quantities, so it's unclear how Waymo will compete on pricing. Moreover, Velodyne's forecast that it plans to sell over 10,000 lidar units in 2019 provides further evidence of the restricted scope of this market.
It seems that Waymo and Alphabet don't stand to gain much from lidar sales. A driverless ride-hailing service is still the best way for Alphabet to make money from Waymo, given the size of the potential opportunity and the technology lead that it currently enjoys. That's where the company should be focusing its efforts, instead of looking to gather small change from hardware sales.