Why Alphabet Might Really Be Seeking Investors for Waymo -- Tech Check (original) (raw)

Giving major automakers a chance to own a piece of Waymo could make them more willing to strike the kind of deep partnerships that have thus far eluded Alphabet's self-driving arm.

Alphabet (GOOGL) had $109 billion in cash and equivalents at the end of 2018, and continues to produce massive amounts of free cash flow (FCF).

So why is the Google parent -- according to a recent report from The Information -- courting outside investors such as Volkswagen (VLKAY) for its Waymo self-driving unit? As The Information noted, investors could help Alphabet shoulder the bill for Waymo's heavy spending; former Waymo employees and other industry execs reportedly estimate Waymo, which recently launched a limited driverless taxi service in the Phoenix area, is costing Alphabet at least $1 billion per year.

However, Alphabet hasn't historically been the type of company to be bothered by such losses if it feels that there's a long-term payoff; YouTube, it should be noted, is believed to have produced big losses for many years, before its ad revenue took off. A bigger reason for seeking Waymo investors, perhaps, is to win over automakers that have cared a lot about controlling the user experience for their cars and have been wary to date of partnering with Waymo, in spite of the self-driving technology lead that it appears to have opened up thanks to a decade of R&D work.

Waymo has struck deals with Jaguar Land Rover and Fiat Chrysler (FCAU) to buy cars that it's retrofitting with its self-driving hardware and software. But the company hasn't yet struck a deal with a major automaker in which the automaker would use Waymo's tech within cars that it would sell to others and/or use in its own ride-sharing fleets. Last October, Bloomberg reported that talks between Waymo and Honda (HMC) fell apart in part because Waymo "wasn't willing to share" its technology with Honda. Ultimately, Honda struck a deal to invest $2.75 billion in General Motors' (GM) Cruise self-driving unit, which wants to launch a limited driverless taxi service later this year.

As a result, Alphabet might now feel that it's worth letting automakers own a piece of Waymo, if it yields deeper partnerships that gets Waymo's technology into cars sold by those automakers. And automakers, in turn, might be willing to accept merely having a stake in Waymo rather than owning outright the self-driving tech that goes into their cars, given Waymo's tech lead and the stake's potential long-term value.

Notably, The Information says that Alphabet is seeking a valuation for Waymo that's "at least several times" larger than Cruise's, which was valued at roughly $15 billion last year. Though only time will tell whether Alphabet gets its wish here, such a goal does act as another reminder of how valuing Alphabet solely based on its near-term earnings and FCF doesn't do justice to a company possessing valuable businesses that for now are either losing money or only producing modest profits.

To see Tech Check coverage from the previous trading day, click here.

Will You Have Enough Money to Retire?

Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.