To The Moon

$Alphabet(GOOG)$ $Alphabet(GOOGL)$ 's underappreciated subsidiary is scaling fast and building a lead over competitors.

Waymo’s Rise to the Top

The market still seems to think $Tesla Motors(TSLA)$ is in the lead in autonomy and Waymo, which is majority owned by Alphabet , is well behind because it has higher costs and uses “expensive” technology like LiDAR in its vehicles.

Waymo’s vehicles are indeed expensive, but 30 years ago mobile phones were held in bags and cost as much as a mortgage payment.

History tells us that proven technology will get significantly lower cost as it scales. And Waymo has proven the technology and is starting to scale.

Today, Waymo operates in San Francisco, Los Angeles, Phoenix, and Austin with Atlanta and Miami launching soon. Not only do they operate in those cities, but the service area is expanding quickly.

Despite a relatively small footprint, Waymo is now competing over 200,000 rides per week.

The growth is rapid too. According to data from Yipit, Waymo went from 0% market share in San Francisco to 22% in a little over a year and you can see above that the service area is expanding quickly.

But costs are still a concern and there’s competition coming, so why could Waymo be building an insurmountable lead?

Scaling → Lower Cost

There are two major questions around autonomy today.

1. Who can safely build and deploy autonomy?

   1. Only two companies — Waymo and May Mobility — have commercial operations in the U.S. today.

2. Who can build an autonomous fleet cost-effectively?

Waymo has chosen to answer #1 and I think has done so with flying colors. ~1 million rides per month and growing 20x over two years should grab anyone’s attention.

But the question around Waymo has always been about cost.

It’s estimated that Waymo’s vehicles cost between $150,000 and $250,000 apiece, which would likely make them uneconomical to operate even at high efficiency.

But making money today isn’t the point.

Waymo has taken a path of proving the technology and begin building the market, then leveraging higher volume and the natural deflation of technology costs to become economical in the future, starting a flywheel of lower costs in operations along with a network effect in its business.

On the cost side, this is a proven strategy in technology, exemplified by solar panels, which have seen costs fall over 99% in the last 40 years, or Tesla, who started with expensive vehicles in the Model S and Model X sold at a loss to prove the market and then moved down market and scaled the business with the Model 3 and Model Y.

Ultimately, Tesla and Waymo want to get to the same point, but they’re taking different paths to get there.

Interestingly, Tesla has taken the opposite approach to autonomy, choosing to focus on costs and figure out technology later.

I would argue that Mobileye is taking a similar approach to Tesla, building an economical system and hoping to scale through partnerships with multiple OEMs.

The question is, who will get to economic autonomy first?

Waymo’s path is clear.

The hardest part — proving autonomy and building a ride-sharing network — is a solved problem.

Lowering costs is “relatively easy” and Waymo has low-hanging fruit from building vehicles at scale, designing a vehicle with sensors and compute designed and built from the ground up, and operating its fleet at scale.

Tesla, Mobileye, and everyone else in autonomy have a more difficult path trying to compete with a proven solution that’s now offering commercial rides in four cities with at least a half dozen cities launching this year.

Don’t sleep on Waymo’s long-term potential to lower costs faster than competitors can catch up in technology. For Alphabet, it’s a great call option on a potentially massive market and an underappreciated business for investors.