Alphabet’s Stock Decline and Waymo’s Promising Launch in Austin
The stock of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has seen a drop in recent months due to tariff-related economic uncertainty. Currently, it stands out as the cheapest option among the Magnificent Seven stocks, with a price-to-earnings (P/E) ratio below 20.
The main concern surrounding Alphabet is the potential impact of generative AI on its primary revenue source, Google Search. Despite these concerns, Search has continued to show double-digit growth over the past year, even amid the rise of generative AI chatbots. While a decline in Search revenue is a possibility, it is expected to occur gradually.
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In addition to its search business, Alphabet operates several other promising ventures, including YouTube, the world’s leading streaming service, and Google Cloud, which experienced accelerated growth last year.
For Alphabet shareholders, there is excitement surrounding another potential breakthrough: Waymo, its autonomous robotaxi service.
Waymo has been operational in Phoenix, San Francisco, and Los Angeles for over a year. As of last month, it expanded into Austin, Texas. Initial data suggests the service is off to a strong start, buoyed by an important partnership that has enhanced its performance.
Waymo’s First Month in Austin: A Successful Launch
In its first 27 days of operation, Waymo in Austin logged 80% more rides than it did during the similar launch period in San Francisco. Although San Francisco was the first city to launch and had previously exhibited fast adoption rates, Austin’s results indicate a strong early response.
Image source: Yipit Data/Bloomberg.
Many analysts had questioned how quickly residents outside of San Francisco would embrace the idea of riding in an autonomous taxi. However, the successful start in Austin is encouraging for potential adoption nationwide.
It’s noteworthy that Waymo’s early success in Austin has benefited from a strategic partnership with Uber. This collaboration marks a new approach, differing from past city launches where Waymo operated independently.
Implications of Waymo’s Austin Launch for Uber
While the success in Austin is promising for Waymo and Alphabet, it presents an even more significant opportunity for Uber (NYSE: UBER). In Austin, Waymo’s service debuted exclusively through the Uber app, contrasting with its previous launches in other cities that utilized a separate Waymo app.
Details surrounding the extent of increased demand due to the Uber partnership remain unclear. However, it’s evident that Waymo’s integration within the Uber platform is yielding notable results, with Waymo rides making up about 20% of all Uber rides in Austin during the last week of March.
This development is significant for Uber, particularly since the emergence of autonomous ride-hailing services poses long-term risks to its business model. In 2020, Uber sold its autonomous driving unit to Aurora (NASDAQ: AUR), raising questions about how it plans to remain competitive as autonomous technology advances.
Uber is currently pursuing a dual-path strategy, serving both as a demand aggregator and a service provider for Waymo’s fleet of electric Jaguar I-PACE vehicles. The pivotal question remains: how will Uber monetize the Waymo partnership, and can it compensate for potential revenue losses from its existing human-driver service?
The successful launch of Waymo in the Uber app appears to bolster adoption and revenue for both companies. This is valuable for Waymo, as enhanced utilization may move it closer to achieving profitability. However, the specifics of their revenue-sharing agreement have not been made public, leaving uncertainties about whether Waymo will eventually establish an independent app in Austin.
Comparing Waymo’s Partnership with Past Streaming Models
A compelling comparison can be drawn between Waymo’s collaboration with Uber and the early evolution of streaming services. Initially, traditional networks and cable channels sold their content to Netflix (NASDAQ: NFLX) as it launched its platform, creating a mutually beneficial relationship.
This deal offered cable companies a new revenue source while Netflix enhanced its content library for subscribers. However, as time progressed, it became evident that cable networks inadvertently empowered Netflix to gain subscribers and invest heavily in original content. Ultimately, Netflix emerged as a leader in the streaming wars, prompting cable channels to retrieve their content in an effort to remain relevant.
In this evolving scenario, Uber occupies a similar position to Netflix. However, it faces a critical difference; while Netflix could create its original content, Uber lacks the ability to develop its own self-driving technology post-divestiture. Currently, Uber holds a 23.5% stake in Aurora.
For Uber to remain competitive in the autonomous space, Aurora must enhance its capabilities to match those of Waymo. Meanwhile, Waymo continues to gain traction, potentially gearing up to deliver its services directly to consumers through an independent app.
The positive reception of Waymo in Austin bodes well for Alphabet, potentially establishing a fourth significant revenue stream alongside Search, YouTube, and Google Cloud. As Alphabet’s stock is currently valued lower than Uber’s, some investors may find it the preferential option among these two technology leaders.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Billy Duberstein and/or his clients have positions in Alphabet and Netflix. The Motley Fool has positions in and recommends Alphabet, Netflix, and Uber Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
