Russian tech giant Yandex (YNDX) recently announced that its driverless cars had been tested on a million miles of public roads, up from 500,000 miles in August and 100,000 miles in April. That figure still trails far behind Alphabet's (GOOG 0.83%) (GOOGL 0.88%) Waymo's ten million driverless miles, but it marks solid progress for Yandex's three-year-old project.

Last month, Yandex opened a new office in Tel Aviv and announced that it would double its number of autonomous vehicles to 100 by 2020. It's also testing its autonomous platform -- which includes an onboard PC, three lidars, five cameras, eight radars, and a GPS -- with big partners like Hyundai Motors. Let's see what the expansion of this business means for Yandex's future.

A woman sits in a driverless car.

Image source: Getty Images.

Why is Yandex interested in driverless cars?

Yandex is often called the "Google of Russia", since it owns the country's second largest search engine. It controls 43% of that market, according to StatCounter, compared to Google's 53% share.

Therefore, Yandex's expansion into the driverless market -- which mirrors the moves of Google's Alphabet sister company Waymo -- isn't surprising. Yandex and Alphabet both generate most of their revenue from ads, but Yandex also generates significant revenue from two car-related businesses: its ridesharing platform Yandex.Taxi, and its carsharing service Yandex.Drive.

Yandex.Taxi merged its operations with Uber's (UBER 0.78%) in Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, and Russia via a joint venture two years ago. Yandex owns 59.3% of the joint venture, Uber controls 36.9%, and the employees control the remaining 3.8%. The Taxi unit also includes the food delivery services Yandex.Eats and Uber Eats, the meal kit service Yandex.Chef, and the autonomous driving division.

Yandex.Taxi's revenue surged 116% annually to 8.8 billion rubles ($138 million), or 21% of Yandex's top line, last quarter. That growth was mainly attributed to a 49% annual jump in rides and the growing popularity of Yandex.Plus, a Mastercard credit or debit card that offers 10% cashback on Yandex.Taxi rides.

The Taxi unit also turned profitable, with an adjusted EBITDA of 423 million rubles ($6.6 million), as the profitability of its ridesharing business offset its higher investments in food deliveries and driverless cars. That growth looks more sustainable than Uber and Lyft's (LYFT 1.59%) deeply unprofitable ridesharing businesses. But like Uber and Lyft, Yandex believes that autonomous cars will eventually reduce its long-term expenses by cutting human drivers out of the loop.

An overhead view of driverless vehicles on a freeway.

Image source: Getty Images.

Meanwhile, Yandex.Drive, which lets drivers rent vehicles for short periods of time, is the largest carsharing service in Russia. Yandex doesn't disclose the unit's revenue separately, but it accounts for a significant portion of its "other" revenue, which rose 207% annually and accounted for 8% of its top line last quarter.

Yandex stated that growth was "primarily driven" by the growth of Yandex.Drive, its media platforms, and other Internet of Things (IoT) platforms like smart speakers. Upgrading Drive's carsharing fleet to autonomous cars could improve the safety and efficiency of that network, and possibly lead to a marriage of the Taxi and Drive businesses.

What does this mean for investors?

Yandex's driverless cars won't generate any meaningful revenue in the near term, and will weigh down the Taxi unit's earnings growth. But over the long term, it should complement the expansion of Yandex's ecosystem beyond its core search engine. That ecosystem already includes cloud, news, email, e-commerce, payment, and virtual assistant services, as well as hardware devices like smart speakers, Android phones, and an onboard computer for connected cars.

All those services lock in more users and widen the company's moat against Google. However, investors should still monitor the Taxi's unit's bottom-line growth to see if its driverless expenses offset the profitability of its core ridesharing business.

Yandex also plans to spin off Yandex.Taxi in an IPO within the next two years. It's unclear if Yandex's investors will get a slice of that new company, but the stand-alone company could be a much better investment on ridesharing and driverless cars than Uber or Lyft -- especially if its current streak of profit growth continues.