Quick Thoughts: This Week in Robocabs

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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June 4, 2018

Quick Thoughts: This Week in Robocabs

  • Waymo announced a deal with FCA for 62,000 autonomous hybrid minivans, adding to 20,000 electric SUVs ordered from Jaguar – This is 6 times the number of Yellow Cabs in NYC
  • Waymo also discussed a 4-pronged approach to monetization. Robocab service will be first and most lucrative – trucking, delivery and OEM licensing must still overcome real obstacles
  • Softbank is investing $2.25B for 19.6% of GM’s Cruise, valuing it at $11.5B. Cruise is ~2yrs behind Waymo, but Softbank could help it close the gap, plus offer entrée to Asian markets
  • Uber wants to offer Waymo rides through its network. We do not expect Waymo to bite – GOOGL has many ways to reach consumers without Uber’s help. Softbank could help Uber link to GM

The news on self-driving cars keeps coming. Alphabet’s Waymo is the unequivocal leader – we have written of this extensively (http://www.ssrllc.com/publication/self-driving-cars-waymo-and-gm-are-far-ahead-of-uberand-everyone-else/http://www.ssrllc.com/publication/googl-waymo-is-worth-75b-right-now/). On Thursday, the company announced that it was ordering 62,000 Chrysler Pacifica minivans kitted out with its autonomous driving hardware and software. This expands its previous 20,000 van commitment and adds to a 20,000 unit order for Jaguar’s new all-electric SUV. Putting this in perspective: There are fewer than 14,000 taxi medallions in New York City, so 82K autonomous vehicles, worth more than $1B, is far more than Waymo will need to cover Phoenix Arizona, particularly given that the utilization of the self-driving fleet could be higher than the typical Yellow Cab. Waymo suggested that the San Francisco market could be next up – interesting, as GM’s Cruise Automation has made that its ground zero for market testing – but vehicle testing in Austin Texas, Kirkland Washington, and Atlanta Georgia suggest that the company may be thinking several markets ahead.

With its expanded order, Waymo also commented that it sees four different ways to monetize its self-driving technology investment. Number one is the on-demand ride-hailing service – already poised for launch in Phoenix. Waymo can leverage the enormous reach of Google – seven of its franchises have more than a billion users plus the Google Assistant could lead in displacing apps as the primary way people call for rides. We think monthly subscriptions is the best model – like Netflix or Amazon Prime – building a more robust competitive moat against ride-by-ride arbitrage. Once the first market is launched, expect Waymo to methodically move to grow city by city. With a 2-3-year head start over GM, Waymo is establishing clear leadership in autonomous Transportation-as-a-Service – a market we expect to grow to $200B worldwide by 2030.

The number two monetize lever is trucking. We’ve written about this (http://www.ssrllc.com/publication/autonomous-trucks-self-driving-convoys-are-years-away/). It will be WAY more complicated than many commentators have suggested and take several years to pass the myriad obstacles in the way. The same is true for delivery – Waymo’s third mode. It will happen, but a few things need to be resolved first. Wait a few years. The last lever was OEM licensing – Fiat Chrysler is obviously interested in putting Waymo tech in the vehicles it sells to consumers. While we see a strong market for driver assistance tech – highway autopilots, self-parking systems, collision avoidance, etc. – that’s not what Waymo does. For now, full self-driving relies on extremely detailed local maps – Waymo has invested to build those for Phoenix and the other specific markets where it is testing. It will be a long time before the same level of detail is available for most of the country and a long time before the self-driving systems are good enough not to require those maps. That is the problem for the full-autonomy plans for all automakers and Waymo doesn’t solve it for Fiat Chrysler.

Meanwhile, GM’s self-driving initiative, Cruise Automation, was in the news on the same day. Softbank has committed $2.25B in exchange for 20% of the venture, valuing it at $11.5B – a nice return on the $568M GM spent to buy it 2 years ago. $900M will be paid right now, to help fund further refinement of the self-driving solution, with another $1.35B due when it is ready for commercial deployment. While Cruise is clearly number two in the race to offer robotaxi service, it is still quite far behind Waymo. A recent story in The Information (https://www.theinformation.com/articles/inside-cruises-bumpy-ride-the-limits-of-self-driving-cars – Paywall) highlights the challenges that remain before GM can “pull the goalie” like Waymo has in offering entirely driver-less rides. Rides in San Francisco, all with a Cruise employee behind the wheel and poised to take control, reveal a list of difficulties, including left hand turns without a signal, changing lanes and distinguishing between cars and bicycles. These issues are solvable – Waymo has mostly solved them – but they raise doubt about GM’s goal of offering driverless commercial service by 2019.

Still, Softbank’s money will certainly help to pay for a larger test fleet and more engineers to move things along a bit faster. Once Cruise gets over the hump and is ready for commercial service, Softbank could also be invaluable in opening opportunities in Asia and elsewhere. While GM seems committed to launching a service under its own brand, Softbank’s investments in Uber, Didi and Grab could be a considerable asset.

Uber, which carries the onus of its likely culpability for a fatal accident involving its own driverless vehicle in Arizona, seems to be considering its options. While Waymo and GM were making their big announcements on Thursday, Uber’s new CEO Dara Khosrowshahi was signaling his company’s interest in teaming up with the Alphabet subsidiary. Notably, Waymo CEO John Krafcik did not include competing for rides on rideshare networks like Uber as one of his four ways of monetizing self-driving technology, so we won’t hold our breath for a potential tie up. Perhaps Cruise, which doesn’t have obvious reach to consumers, would be a more appreciative partner.

For investors, Softbank’s investment in Cruise at a $11.5B valuation spurred a $6B jump in GM’s market cap, suggesting that the consensus had only ascribed $3B to it prior to the deal. We think the market is similarly undervaluing Waymo, which we see as worth about $75B – now a bit under 10% of Alphabet’s $778B market cap. If Cruise is worth $11.5B despite the heavy lifting still to be done (and we think that it is), Waymo – launching commercial service this year – is clearly worth at least 6.5x that. This is just one of reasons why we believe Alphabet is undervalued.

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