According to reports, self-driving vehicles will be a priority for the new presidential administration officials at the Ministry of Transportation. That could mean we’ll see an explosion of autonomous vehicles on roads across the country in the coming years.
In the race to develop fully self-driving cars, there are two clear frontrunners today: Tesla (NASDAQ: TSLA) And Alphabet‘S (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo. But Wall Street only sees one of those companies’ stocks rising in the coming year.
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Of the 57 Wall Street analysts covering Tesla, the average 12-month price target for the stock is $265. That is 24% lower than the price at the time of writing.
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Of the 66 analysts covering Alphabet, the average twelve-month price target for the stock is $210. That is 24% higher than the price at the time of writing.
Here’s what investors need to know.
The main thing that has driven Tesla’s stock higher is the expectation that it will successfully implement a “full self-driving” system, and that it can push that capability to every Tesla on the road with a simple software update.
The company held a major event in October at which CEO Elon Musk unveiled the Cybercab, a self-driving coupe, and the Robovan, a 20-seat vehicle with the sleek profile of a high-speed train. Musk also said he expects fully autonomous Model 3 and Model Y vehicles to operate as self-driving taxis in Texas and California next year and expects Cybercabs to enter production “before 2027.”
Tesla’s strategy puts Tesla at a major disadvantage in the short term. Because it sells a consumer vehicle, it can’t put all the technology being developed by its competitors into its cars. Specifically, it does not use lidar, which emits light beams in all directions and collects data that can be used to create 3D maps of the transmitter’s surroundings in real time. Musk has called lidar a crutch. He believes Tesla can solve the “seeing” problems of self-driving with just cameras and radar. If Tesla were to add lidar systems to its cars, it would significantly increase prices.
Because 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 will not help the company move forward. It needs a more advanced solution capable of responding correctly in all conceivable conditions and situations 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 significant user base and fleet. It has already delivered more than 6 million vehicles. This allows it to collect a lot of data. And with the push of a button, it can turn them all into autonomous vehicles once the technology is ready. That should make it possible to overtake quickly.
The most optimistic Tesla analysts see autonomous vehicle technology unlocking a lot of value for shareholders through a robotaxi service. Ark Invest, led by Cathie Wood, predicts that between 63% and 88% of Tesla’s revenue will come from robotaxis by 2029. And expect this robotaxis to be ready for use within the next two years.
It appears that most of Wall Street views this timeline as overly optimistic. Currently, Tesla is trading at an enterprise value/EBITDA multiple of over 80. That’s a huge premium to pay for a stock. Even if the stock were to fall to the average Wall Street estimate of $265, the multiple would still be high at around $60 – a level that suggests most analysts are extremely optimistic about the potential for Tesla to grow its car sales grow and capture a significant portion of share prices. the market with robotaxis as soon as they are launched. But that’s a huge risk, considering Tesla hasn’t even offered a taxi ride to a paying customer yet.
Self-driving vehicle company Waymo is owned by Alphabet, the same company that owns Google. That gives it the advantage of tapping into Google’s resources, including algorithms, computing power, and perhaps most importantly, its money.
Waymo is part of Alphabet’s “other betting” segment, which generated total revenue of $388 million last quarter and an operating loss of $1.1 billion. Alphabet has poured billions of dollars into Waymo over the past fifteen-plus years, and it’s only just beginning to deliver meaningful results.
But Waymo is growing quickly. The taxi 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 Waymo’s vehicles make 150,000 trips every week and travel more than 1 million miles in total. That was an improvement over 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. The current model involves taking already produced vehicles and installing self-driving technology on them. That has pushed the cost per vehicle to more than $200,000 in some cases. But if the company continues to expand into new markets and grow its market share in ride-hailing, it could eventually find a manufacturer that can integrate its technology directly into a production vehicle at the production stage, significantly reducing costs. That could give Waymo a significant cost advantage in ride-sharing, making it easier to capture market share and create a virtuous cycle.
Meanwhile, Alphabet’s core business Google is performing extremely well. It has been a major beneficiary of artificial intelligence spending as revenue from cloud platforms has grown to more than $10 billion per quarter. Pichai says the integration of AI into Google Search has gone well, increasing engagement and satisfaction. AI could also boost ad spending by making it easier for marketers to create and test ad copy and campaigns on Google’s sites.
Waymo remains a small part of Alphabet’s business, but it has a lot of potential. The latest funding round valued the self-driving sector at $45 billion. By comparison, at the time of writing, Alphabet is worth a total of over $2 trillion. Currently, it trades for just 19 times forward earnings. That’s an incredible price considering the company’s growth potential. On average, analysts expect Alphabet to achieve 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 virtually for free.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions at Alphabet. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.
Tesla Stock vs. Alphabet Stock: Wall Street Thinks Only One Will Go Higher From Here was originally published by The Motley Fool
