Two leaders are emerging in autonomous driving and they may not be the companies you first think of in that space. Alphabet's (GOOG -2.86%) Waymo subsidiary and General Motors' (GM 0.24%) Cruise are both going to start sending out their test vehicles unmanned by the end of the year, pulling the backup drivers that have been a staple thus far.
Dozens of automakers from Tesla (TSLA 16.79%) to BMW have been adding driver-assistance features that are leading toward autonomy, but none have reached fully autonomous functionality yet. And most automakers haven't put their prototype systems through their paces in millions of miles of real-world road tests with only an emergency backup driver, so Waymo and Cruise are ahead of the pack in that respect. Now that those drivers are being pulled, the two giants can really begin to build their fully autonomous business models, and that's where the true innovation is going to take place.
Image source: Cruise.
Autonomy is just the beginning
Waymo will first pull its backup drivers from cars operating in a 50-square-mile area of Phoenix while Cruise plans to send its unmanned driverless vehicles out on the road in the difficult San Francisco area. While autonomous driving alone is a key milestone, it isn't the end goal.
The ultimate goal is to use this new technology to power autonomous ridesharing businesses, which have multibillion-dollar potential. Waymo is reportedly going to start allowing its vehicles to carry passengers this year, and Cruise has plans to launch its Origin self-driving vehicle, which is built specifically for ridesharing.
It's this type of disruption that all the companies in this race are building toward in the auto industry.
What is an autonomous rideshare business worth?
Let's just do some back-of-the-napkin calculations to show how big a market these autonomous businesses could eventually be, starting with the following assumptions:
- A business captures 1% of the market in 10 years.
- It generates revenue of $1 per mile (Uber/Lyft are around $2 per mile).
Given these assumptions and the 3.225 trillion miles driven in the U.S. in 2018, the most recent data available, 10 years from now, an autonomous rideshare company could generate $32.3 billion in revenue annually.
Keep in mind, too, that these companies are making the drivers unnecessary and (in Cruise's case) building electric vehicles that cost less to operate than traditional vehicles, so this has the potential to be a higher margin business than today's ride-hailing services.
To put that financial performance into context, that's more revenue than Uber or Lyft generate in a year. But given their lower costs and a decade to grow, it's reasonable to expect that one of these businesses could be carrying passengers on 1% of their road-travel miles -- or more.
UBER Revenue (TTM) data by YCharts
What I'm trying to underscore here is that the launch of fully autonomous ridesharing businesses in major U.S. cities is a big deal. Over the next decade, this could be an enormous opportunity, and Waymo and Cruise are clearly a step ahead of the competition.
Moving the needle
As investors, we can't own Waymo or Cruise directly yet, but we can own their parent companies. Alphabet owns Waymo outright and GM owns about 69% of Cruise, but GM clearly has the most upside from an investment standpoint. A 69% stake in a business with the kind of assumed revenue numbers above would move the needle much more for GM's stock than Alphabet's.
GM Market Cap data by YCharts
Alphabet has proportionally less upside to gain from Waymo just because of its sheer size, but even so, it could be a big addition to the tech giant's business.
While many companies are investing in autonomous driving and starting to build out their business models in the space, Waymo and Cruise appear to have a leg up on the competition. Their vehicles are built to be fully autonomous, and the companies are already developing ridesharing platforms that could upend the economics of vehicle ownership.
GM has the most upside potential from an investment standpoint, but don't count out how important Waymo could be to keep Alphabet's long-term growth story alive. Both companies have a lot to look forward to now that they'll have fully autonomous vehicles on the road.
