Is Google’s Waymo Really Worth $70 Billion?

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Automakers and tech companies are piling into the autonomous (self-driving) car business. Ford just fired a CEO partly because he hadn’t driven the company quickly enough into the autonomous car future that many people think is just around the corner.

Google’s Waymo division may be in the proverbial driver’s seat, at least according to analysts at Morgan Stanley who said on Tuesday that Waymo may be worth $70 billion to Google and that the division’s potential is not reflected in Alphabet Inc.’s (NASDAQ: GOOGL) share price.

Waymo is not worth $70 billion today, Morgan Stanley allows, but the division is a potential spin-off that could add 12% or more to Alphabet’s current enterprise value. At Tuesday’s closing price of $970.55 per share, that translates to $1,087.

CNBC cited the Morgan Stanley’s calculation:

If we assume that Waymo can grow to ~1% of global miles driven by 2030 (based on a fleet of ~3mn cars each driving ~65k miles/year) and that Waymo can generate on average ~$1.25 in revenue per mile driven, it implies a ~$70bn Waymo enterprise value. More miles/year and revenue/mile could lead to an enterprise value of ~$140bn.

That miles per year number should probably be 6,500, not 65,000, but even so the calculation works out to revenue of more than $24 billion. Alphabet’s current enterprise value is around $570 billion and trailing 12-month revenues total about $95 billion, so the Morgan Stanley estimate could even be conservative.

But unlike search, where Google is the undisputed heavyweight champion, the competition for a winner in the self-driving vehicle tournament is up for grabs. A recent report at CBInsights lists 44 companies now working on developing road-capable self-driving cars. Besides Alphabet, there are Tesla Inc. (NASDAQ: TSLA) and Uber, not to mention just about every major automaker in the world.

The companies know what’s at stake. Waymo and Uber are locked into a court battle over trade secrets that is one of the few times Google has gone to court as a plaintiff. That alone gives an indication of how seriously the company takes the potential of self-driving technology. Tesla has filed a lawsuit against a former employee for taking the company’s trade secrets with him to a startup he founded with a former Google employee.

Morgan Stanley reiterated its Overweight rating on Alphabet stock and reaffirmed its $1,050 per share price target.