Will Alphabet’s Waymo and GM’s Cruise Ever Get the Tesla Premium?

Self-driving cars are finally here, and somehow nobody’s talking about it.

In a year when investors have fallen over themselves trying to get a piece of AI stocks, they seem to be missing a potentially bigger story as AI-based autonomous vehicles (AV) are whizzing all over cities like San Francisco as I write this.

Alphabet’s Waymo and General Motors Cruise have emerged as two of the leaders in the AV race, but there are other companies actively ferrying passengers around in driverless cars.

In its recent earnings call, Alphabet said Waymo is onboarding riders from its waitlist in San Francisco of more than 100,000 people. As of August, Waymo had a fleet of 250 driverless vehicles in San Francisco, and the Alphabet subsidiary has expanded to Phoenix and just entered Los Angeles. It plans to launch in Austin shortly as well.

GM’s Cruise, meanwhile, has been operating in San Francisco, Phoenix, and Austin and has plans to expand to 14 more cities. However, the company recently hit a roadblock in San Francisco,the biggest test market for driverless vehicles, as California just suspended its ability to operate driverless cars on its roads, saying Cruise had misrepresented the safety of its technology following several accidents involving Cruise vehicles.

While that is certainly a setback for Cruise, GM remains optimistic about its long-term potential as it’s poured billions of dollars into the project. CEO Mary Barra said on the earnings call, which came out before the California suspension, “We know from the data that Cruise AVs are involved in far fewer collisions than human drivers.”

Cruise became the first company to reach 1 million driverless miles in February, and it’s now topped 5 million miles. GM also shared on the call that it’s aiming to launch Cruise in Tokyo by 2027 in partnership with Honda, making it a global platform.

Investors don’t seem impressed

Emerging technology stocks tend to fetch high valuations on the stock market, and autonomous vehicles certainly fit the definition of an emerging technology and one with a massive market opportunity.

Ark Invest’s Cathie Wood estimates a $9 trillion addressable market for robotaxis by 2030, and Barra believes that Cruise could generate $50 billion in annual revenue by 2030. Cruise is targeting $1 billion in 2025.

However, Alphabet and GM stock valuations don’t seem to reflect any upside from the potential of their AV projects. Alphabet is cheaper than most of its big tech peers at a price-to-earnings (P/E) ratio of 25, while GM stock is among the best values on the market based on any conventional standard, trading at a P/E ratio of just 4.

While GM did withdraw its guidance due to the United Auto Workers strike, and it faces competition from electric vehicles, that valuation seems like an unreasonably low price for a stable, profitable company.

Morgan Stanley’s Adam Jonas addressed this subject directly on the earnings call, saying, “Mary, you’ve acknowledged for some time that the General Motors share price is not really getting any credit for the Cruise business. I think many would argue that at $29 a stock might even be implying a negative value for Cruise, which I think you’d reckon would be pretty ridiculous.”

Jonas makes a good point. It’s clear that the market is attributing little to no value, if not negative value, to Cruise.

The Tesla effect

The lack of benefit from Waymo or Cruise to their respective parents’ stock prices would seem more logical if there wasn’t another company that seems to be getting a clear premium from its robotaxi efforts.

That’s Tesla, which currently trades at a P/E of 70 even as its margins have rapidly compressed and its growth rate has slowed. A large part of the reason why Tesla stock gets a premium from the market despite a normalizing growth trajectory is CEO Elon Musk’s efforts to sell its potential in autonomous vehicles.

Musk has said the company will build a robotaxi, a driverless vehicle specifically designed for that purpose, but it’s announced no specific production plans for one. Additionally, the Tesla chief envisions Tesla owners being able to rent out their own vehicles to be used as robotaxis in a revenue-share arrangement with Tesla once full self-driving (FSD) is available. However, it’s unclear when FSD will be ready, and there seems to be no mechanism in place to facilitate Tesla’s own driverless ride-sharing marketplace.

Will Waymo and Cruise ever earn a premium?

Waymo and Cruise are still largely unproven, experimental brands in the eyes of investors and consumers, while Tesla has earned its reputation as an automotive disruptor.

More importantly, Waymo and Cruise aren’t viable businesses at the moment. GM posted a net loss of $791 million in the third quarter from Cruise, and it’s lost $2 billion through the first three quarters of the year. Meanwhile, Cruise has brought in just $76 million in revenue during that time.

Alphabet doesn’t break out Waymo’s revenue, filing it in with its “other bets,” which reported revenue of $297 million in the third quarter and an operating loss of $1.2 billion.

Given those numbers, it will likely take significant revenue growth or meaningful steps toward profitability for Cruise and Waymo to have an impact on share prices. That could happen sooner than you think, especially as both services are rapidly expanding to new cities, and Cruise is targeting $1 billion in revenue in 2025.

With the real-world driverless ride-hailing projects largely having gone well, it’s only a matter of time before these businesses scale up. Buying a few shares of Alphabet and GM today would be a smart way to get exposure to this underrated AI technology.

Source: theglobeandmail

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