Self-driving vehicles will be a priority for the incoming presidential administration's appointees at the Department of Transportation, according to reports. That could mean we'll see an explosion of autonomous vehicles on roads across the country over the next few years.
In the race to develop fully self-driving cars, there are two clear front-runners today: Tesla (TSLA -4.95%) and Alphabet's (GOOG -1.55%) (GOOGL -1.45%) Waymo. But Wall Street only sees one of those company's stocks moving higher over the next year.
- Among the 57 Wall Street analysts that follow Tesla, the median 12-month price target for the stock is $265. That's 24% lower than its price as of this writing.
- Among the 66 analysts covering Alphabet, the median 12-month price target for the stock is $210. That's 24% higher than its price as of this writing.
Here's what investors need to know.
Image source: Getty Images.
Tesla: Taking a different approach to autonomous vehicles
The big thing that has driven Tesla's stock higher is the expectation that it will successfully implement a "full self-driving" system, and that it will be able to push that capability out to every Tesla on the road with a simple software update.
The company held a big event in October at which CEO Elon Musk unveiled the Cybercab, a self-driving coupe, and the Robovan, a 20-seater vehicle with the sleek profile of a high-speed train engine. Musk also said he expects fully autonomous Model 3 and Model Y vehicles will be operating as driverless taxis in Texas and California by next year and anticipates that Cybercabs will go into production "before 2027."
Tesla's strategy puts it at a huge disadvantage in the short term. Since it's selling a consumer vehicle, it can't put all the technology being developed by its competitors into its cars. Specifically, it's not using lidar, which emits light beams in all directions, gathering data that can be used to create 3D maps of the emitter's surroundings in real-time. Musk has called lidar a crutch. He believes Tesla can solve self-driving's "seeing" problems with just cameras and radar. If Tesla added lidar systems to its cars, that would drive their prices way up.
Additionally, since Teslas are driven all over the world, pre-mapping relatively small areas in Texas and California to make it safe for Teslas to drive autonomously within them won't move the needle for the business. It needs a more advanced solution capable of responding correctly across every conceivable condition and situation before it can roll out a software update that makes full self-driving available to Tesla owners.
The advantage of the strategy is that Tesla is building a sizable user base and fleet of vehicles. It has delivered over 6 million vehicles already. That enables it to collect a lot of data. And with a push of a button, it can turn them all into autonomous vehicles once the technology's ready. That should allow it to catch up quickly.
The most bullish Tesla analysts see autonomous vehicle technology unlocking a ton of value for shareholders through a robotaxi service. Ark Invest, headed by Cathie Wood, predicts that between 63% and 88% of Tesla's revenue will come from robotaxis by 2029. And it expects those robotaxis to be ready to roll within the next two years.
It appears that most of Wall Street views that timeline as overly optimistic. Currently, Tesla trades at an enterprise-value-to-EBITDA multiple of more than 80. That's a massive premium to pay for a stock. Even if the stock price fell to Wall Street's median estimate of $265, its multiple would still be high at about 60 -- a level that suggests most analysts are extremely optimistic about the potential for Tesla to grow its vehicle sales and win a substantial share of the market with robotaxis once they launch. But that's a huge risk considering Tesla hasn't even offered a single taxi ride to a paying customer yet.
Waymo: Winning the race with a huge cash backer
Self-driving vehicle company Waymo is owned by Alphabet, the same company that owns Google. That gives it the advantage of being able to tap into Google's resources, including algorithms, computing power, and perhaps most importantly, its cash.
Waymo is part of Alphabet's "other bets" segment, which generated total revenue of $388 million last quarter and an operating loss of $1.1 billion. Alphabet has sunk billions of dollars into Waymo over the last 15-plus years, and it's only just starting to show meaningful results.
But Waymo's growing quickly. Its ride-hailing service is now available in four markets: Los Angeles, San Francisco, Phoenix, and Austin. During Alphabet's third-quarter earnings call, CEO Sundar Pichai said that each week, Waymo's vehicles complete 150,000 rides and drive more than 1 million total miles. That was an improvement from the 100,000 rides per week milestone it shared in October, and the 50,000 rides per week milestone it reached in June.
Waymo's biggest challenge is the cost of its technology. Its current model involves taking already manufactured vehicles and installing its self-driving technology on them. That has put its cost per vehicle at more than $200,000 in some instances. But if it continues to expand into new markets and grow its market share in ride-hailing, it could eventually find a manufacturer to incorporate its technology directly into a production vehicle at the manufacturing stage, significantly reducing its costs. That could give Waymo a meaningful cost advantage in ride-sharing, making it easier for it to take market share and create a virtuous cycle.
In the meantime, Alphabet's core business, Google is performing extremely well. It has been a big beneficiary of artificial intelligence spending, as its cloud platform revenue has ballooned to more than $10 billion per quarter. Pichai says integrating AI into Google Search has gone well, increasing engagement and satisfaction. AI could also drive advertising spending as it makes it easier for marketers to create and test ad copy and campaigns across Google's properties.
Waymo remains a small part of Alphabet's business, but it holds a lot of potential. Its latest funding round valued the self-driving business at $45 billion. By comparison, Alphabet overall is worth over $2 trillion as of this writing. Currently, it trades for just 19 times forward expected earnings. That's an incredible price relative to the growth potential of the business. Analysts on average expect Alphabet to deliver annualized earnings growth of 18% over the next five years. At today's price, you're not only getting a leading technology stock, you're getting the leading autonomous vehicle company practically for free.
