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Better Robotaxi Stock: Alphabet or Tesla?

By Harsh Chauhan - Aug 25, 2019 at 9:04AM

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Both are among the leaders in self-driving cars, but they are taking entirely different routes to their destinations.

It looks like Alphabet (GOOG 1.91%) (GOOGL 1.65%) subsidiary Waymo's self-driving-car development is gaining ground at an impressive pace this year. Concerns were raised last year about how well its autonomous vehicles would fare under real-world conditions, but the company has eased doubters' fears with its progress toward commercialization.

Meanwhile, Tesla (TSLA 5.43%) CEO Elon Musk has promised that his company will change the game in self-driving cars. According to Musk, Teslas are already being built with all the hardware necessary for them to become fully autonomous, once the software catches up. He has said he foresees the day coming soon when Tesla owners will be able to turn their personal vehicles into robotaxis, and earn as much as $30,000 a year by letting the cars drive themselves to ferry other passengers around.

That, of course, has yet to happen. And while Waymo has been making some concrete progress, its self-driving taxi service has only had a limited rollout so far. But for investors looking to profit from the potential of this trend, the question may be: Is Alphabet a better self-driving car bet than Tesla? Or will Musk's ambition supercharge his company's stock in the long run?

Person reading a book inside a self-driving car.

Image Source: Getty Images.

Waymo is taking it one step at a time

After commercially launching its self-driving service in the Phoenix metro area late last year, Waymo has gone one step further in 2019 by partnering with Lyft. The ridesharing specialist will be adding 10 Waymo cars to its fleet in Phoenix.

Though this is a very small pilot project, the partnership offers a glimpse into a potential self-driving future. Ridesharing companies such as Lyft and Uber are embracing autonomous driving tech in hopes that it will offer them a path to profitability, and Waymo can show them the way.

After all, the Alphabet subsidiary's vehicles have logged over 10 million autonomous miles on actual roads, and more than 10 billion miles in simulation. With all that experience, Waymo is now set to take part in California's self-driving-vehicle passenger service pilot program. Though the Alphabet subsidiary won't be able to charge customers (who will primarily be Waymo's employees and their guests, traveling within a limited area in South Bay), the company sees it as another step toward expanding the Waymo One taxi service.

For now, there will still be safety drivers behind the wheel of Waymo's autonomous vehicles, but this is how the company is operating. The cautious approach is meant to ensure that those cars aren't involved in any fatal accidents, a few of which have occurred with other companies' self-driving vehicles.

Last year, Waymo became the first company in California to operate fully autonomous cars without backup drivers. So it might not be long before it starts operating a commercial autonomous taxi service there.

Tesla keeps making big promises, despite stutters

Tesla's approach to autonomous driving tech differs significantly from Waymo's. CEO Musk has been trumpeting how self-driving tech will make Teslas more desirable to buy, as their owners will be able to passively make money by allowing them to operate as robotaxis.

Musk recently said on Twitter that the price of Teslas would increase significantly once its cars are upgraded to have a full autonomy mode. Moreover, Musk has predicted that there could be a million Tesla robotaxis on the road sometime in 2020, though that seems like an optimistic prediction.

While all that sounds really good on paper,  investors shouldn't forget that Tesla has a brash attitude toward autonomous driving, and it seems to be making promises before it has ironed the kinks out of its tech. Failures of its driver-assist Autopilot system have been blamed for causing fatal crashes, including one earlier this year.

While Autopilot is a level 2 autonomous system, meaning the human driver is supposed to constantly supervise it -- you're driving, not the car -- not all Tesla owners are so careful. Still, the gaps in Autopilot's ability to detect certain types of obstacles serve as a reminder that this technology isn't fully cooked, and it would be unethical for Tesla to deploy true self-driving vehicles without testing them extensively.

Also, Tesla seems to be grappling with liquidity issues. Musk in May called on employees to reduce costs as the company was burning through cash at the rate of $200 million a month. At that rate, Tesla was at risk, as it had only a few months of cash left after raising $2.4 billion from investors. It remains to be seen how much Tesla will be able to invest in self-driving development while also maintaining sufficient liquidity.

Of course, Musk has also advertised that Tesla cars can be given improved self-driving abilities via over-the-air software updates. But there's some doubt those will be allowed to go online without intensive testing given Tesla's safety record. This is where Alphabet's Waymo enjoys the upper hand. After millions of miles of testing on public roads and billions of miles in simulation, it has already started taking baby steps toward the commercialization of its autonomous taxi service.

This gives Waymo the first-mover advantage in a robotaxi industry that's expected to boom. According to B2B research firm MarketsandMarkets, the global robotaxi market is expected to grow from just over 2,000 cars in 2020 to more than 3.8 million cars in 2030. Investment bank UBS predicts Waymo will capture 60% of the self-driving market in just over a decade, and it isn't difficult to see why.

So if you're looking to invest in a self-driving car stock and weighing Tesla vs. Alphabet, it's clear which one is in the driver's seat right now.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$2,151.00 (1.65%) $34.90
Tesla, Inc. Stock Quote
Tesla, Inc.
$694.56 (5.43%) $35.76
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,157.13 (1.91%) $40.34

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