On March 30, Alphabet’s (GOOG, Financial)(GOOGL, Financial) self-driving car business, Waymo, announced on its Waypoint blog that it had begun rolling out fully autonomous rides for company employees in San Francisco, California.
This marks the beginning of a huge test for the young self-driving car business. Success in San Francisco would prove that the fully autonomous technology can be safely deployed at scale in major cities. For the past six months, Waymo’s vehicles have been driving themselves in San Francisco, but they always had a backup driver behind the wheel.
While self-driving cars haven’t become the new normal as rapidly as many tech enthusiasts hoped a few years ago, they are beginning to pick up speed. With Fortune Business Insights estimating that this disruptive industry will grow at a compound annual growth rate (CAGR) of 31.3% through 2028, eventually becoming a multi-trillion dollar industry in a couple of decades or so, are investors overlooking Waymo’s potential to create value for Alphabet?
Waymo’s growth
In addition to its fully autonomous rollout in San Francisco, Waymo will also be expanding its driverless Waymo One service area in Arizona to include downtown Phoenix after operating exclusively in the exurban towns of Chandler, Gilbert, Mesa and Tempe for nearly five years. This move, too, marks a step up to big-city operations.
“We’re particularly excited about this next phase of our journey as we officially bring our rider-only technology to San Francisco—the city many of us at Waymo call home,” said co-CEO Tekedra Mawakana. “We’ve learned so much from our San Francisco Trusted Testers over the last six months, not to mention the innumerable lessons from our riders in the years since launching our fully autonomous service in the East Valley of Phoenix.”
The company isn’t just limiting itself to autonomous cars, though. Just this past February, Waymo announced a new testing partnership with brokerage firm CH Robinson for its autonomous trucks in Texas. The partnership will oversee a pilot in which Waymo’s test fleet of autonomous trucks will make deliveries on a 240-mile route between Dallas-Fort Worth and Houston.
Due to many unexpected difficulties encountered in getting self-driving vehicles to solve the often complex, split-second decisions human drivers face every day, these cars have had a slow rollout so far. Regardless, Waymo has come a long way from its first fully autonomous ride on public roads in 2015.
Bumps in the road
Not all has been smooth driving. Some problems Waymo has yet to fully solve include sudden, jerky vehicle movements, illogical route decisions and pickup location snafus.
CNBC’s Michael Wayland and Jennifer Elias both independently took test rides with Waymo One, and both reported that the vehicles sometimes made abrupt corrections. Whereas a human driver would normally make more gradual, real-time corrections, the sensors on self-driving cars don’t have the ability to predict the need for corrections before they occur; either there is a need to correct, or there isn’t. This results in them making the necessary correction all at once. Similar jerky movements are a common complaint among users of driver-assist software for the same reason.
Regarding route decisions, the fully autonomous vehicles often choose to take shortcuts through neighborhoods to avoid the traffic at major intersections, just like how Google Maps and other GPS systems will try to redirect drivers away from their chosen path and onto a “faster” route. The problem with this is that, due to stop signs and other obstacles, the “faster” back roads are almost always going to be slower than sticking with the main roads, even if the GPS estimates say otherwise.
Getting the pickup location precisely correct is another difficulty. GPS can typically pinpoint a location down to within 5 meters, but accuracy can be negatively impacted if you are indoors, if the weather is bad or if you are too far away from a recognized street location. Just like with hailing a ride on Uber (UBER, Financial) or Lyft (LYFT, Financial), your car might end up circling around, unable to figure out where the rider is.
Conglomerate discount
Waymo might still be a small operation with many miles to go before reaching its full potential, but it has cars on the road, which is more than can be said for may electric vehicle startups that have already gone public, like Canoo (GOEV) and Lordstown Motors (RIDE).
Investors might thus be wondering, why hasn’t Alphabet spun off Waymo into a separate public company yet in order to bring in higher valuations for both Alphabet and Waymo? Surely the great engine of Wall Street would snap this company up, and investors would get the opportunity to invest in a pure-play self-driving taxi service.
Google’s parent company has never really been keen on parting with promising subsidiaries, though. Seeing as it hasn’t spun off YouTube, it’s doubtful that it will ever consider doing so with Waymo. With a market cap of $1.88 trillion as of the writing of this article, Alphabet is very fond of its status as a market juggernaut. Even if subsidiaries like YouTube and Waymo could be worth more to the market as separate companies, they still have the potential to help grow Alphabet’s market cap.
Takeaway
With Waymo accelerating its progress in the budding market for self-driving cars, there is a good chance that it will create value for its parent company in the future. While remaining part of Alphabet keeps a significant conglomerate discount applied to the business and will greatly limit upside potential, the conglomerate structure also reduces the risk should the company fail entirely, so it’s not all bad.
