From frustration to excitement: The long, winding road of Alphabet's self-driving Waymo unit

Alphabet 's self-driving car unit Waymo is finally shifting into high gear. After years of heavy investment and losses, Waymo ridership is picking up momentum in its existing West Coast markets, and the company just inked an expanded partnership with Uber to bring its robotaxi service to the ride-hailing giant's app in Atlanta and Austin, Texas, in early 2025. That will put Waymo in five markets, including Phoenix, San Francisco and Los Angeles. Waymo and Uber are partners already in Phoenix. The ridership growth and deeper ties with Uber represent significant milestones for Waymo and its parent company, which has poured billions into the venture with seemingly little reward for investors. And the timing couldn't be better: Waymo is flexing its muscles just weeks before electric vehicle pioneer Tesla is set to hold its hotly anticipated robotaxi event on Oct. 10. Currently, Waymo is the only commercial robotaxi service operating in the U.S. Tesla's presentation will cast a spotlight on the broader state of autonomous driving technology, which has seen its fair share of hype and safety hurdles over the past decade-plus. While it remains a nascent industry, it's increasingly clear Waymo will be a significant player in its evolving commercial future. "Waymo has been a big disappointment until this very day. I no longer feel it is," Jim Cramer said shortly after the Austin and Atlanta expansion was announced last week. "This is a substantive reason to stay in Alphabet," added Jim, who has in recent months expressed frustration with the Club stock's performance and lamented not more aggressively trimming the position . Waymo has the potential to be "a very big business," Jim said. GOOGL .SPX 1Y mountain Alphabet's stock performance over the past 12 months compared with the S & P 500. A long road It's been a long and winding road for Waymo since its inception in 2009 as Google's self-driving car project. Seven years later, in December 2016, it graduated into a standalone company owned by Alphabet and housed in its Other Bets segment, a collection of more speculative ventures outside its core Google search engine, YouTube and cloud businesses. Its Waymo One rideshare service became available to the general public in Phoenix in 2020 . It launched with a waitlist in San Francisco in August 2023 before opening to everyone in the city three months ago. Paid service started up in Los Angeles in April . Now Atlanta and Austin are next up (currently, only Waymo employees can take rides in Austin). The robotaxi service now has about 700 autonomous vehicles on the road across its markets. Waymo has provided more than 2 million trips to date, and the pace is accelerating, which is good for revenue. Waymo doubled weekly paid rides to 100,000 in August from 50,000 in May, the company announced last month . Even before the recent Uber news, Morgan Stanley forecasted overall Waymo revenue to grow by 359% in 2024 and 109% in 2025 across Phoenix, San Francisco, Los Angeles and Austin. Adding into the mix Atlanta, a city of a half-million people, figures to boost the growth rate further. To be sure, Waymo is still small. TD Cowen estimates Waymo will generate gross bookings of $72 million in 2024 — merely 0.2% of Uber's expected amount in the U.S., and 0.5% of Lyft 's, according to the analysts. Some estimates on Wall Street are higher than TD Cowen's — Bernstein is at roughly $100 million, for example — but the takeaway is the same. Nevertheless, an improving revenue outlook at Waymo is welcome news for Alphabet investors, particularly those like Jim who had grown tired of heavy losses in the Other Bets unit dragging down the earnings of Google's mature businesses. Other Bets had $1.5 billion in revenue in 2023 — with an operating loss of $4.1 billion. Companywide revenue and operating income were $307 billion and $84 billion, respectively. Most of the revenue in Other Bets is generated by its life-sciences company Verily and GFiber, its WiFi and internet connectivity unit operating in some parts of the U.S, according to Alphabet . It's difficult to nail down Waymo's specific finances because Alphabet does not break out the specific companies inside Other Bets. Given that developing and deploying self-driving tech is expensive, Waymo's losses at this stage are likely significant. But so is its long-term potential to make investors money. "It is arguably the most compelling long-term bet in terms of value creation," Brad Erickson, analyst at RBC Capital Markets, said in an interview with CNBC. "There's billions and billions of dollars of equity value creation opportunity there." New funding Alphabet is leaning into that opportunity. In July, Alphabet announced a new multiyear investment in Waymo to the tune of $5 billion. Waymo has also garnered external support in previous years. In 2020, it landed $3 billion in its first round of external funding from investors including venture capital firm Andreessen Horowitz and car dealer AutoNation , among others. It secured an additional $2.5 billion in 2021 . "This new round of funding, which is consistent with recent annual investment levels, will enable Waymo to continue to build the world's leading autonomous driving technology company," Alphabet's then-CFO Ruth Porat said in July. Waymo can't build the leading robotaxi business alone. Its deepening ties with Uber makes that clear. When Waymo first launched in Phoenix, users ordered a ride through the Waymo One app. That changed about a year ago , when Uber added Waymo vehicles to its app. If an Uber user calls for a ride within Waymo's Phoenix operating zone, it might be matched with a self-driving car. A rider has to confirm the pickup. In Los Angeles and San Francisco, the Waymo One app is the lone way to summon a self-driving car. Atlanta and Austin will be different. In those cities, Waymo vehicles will only be available through the Uber app. And unlike in Phoenix, Uber also will provide some fleet management services such as cleaning and storage of the vehicles. "The fact that Waymo is choosing to enter new markets exclusively with Uber suggests positive traction in Phoenix, in our view, and speed to market advantages," Bank of America analysts wrote in a note to clients Monday. Partnering with ride-hailing incumbents like Uber is crucial to making the business more economically viable, analysts say. The heart of that viewpoint is an important concept known as vehicle utilization, which measures the amount of time vehicles spend servicing passengers. Higher utilization means more customers are using the service, which eventually materializes into more profits to help cover costs on the depreciating vehicle asset. "Those cars cost a lot of money to put out on the road. So, if they're not generating revenue, it's a very poor use of capacity," Erickson said. "The way you can generate almost instantaneous demand is to hook-in with Uber's network." And it's a big one: Uber said it had 156 million monthly active consumers on its platform in the three months ended June 30. Uber had been developing its own self-driving technology before selling the unit to Aurora Innovation , known for its autonomous semi-truck venture , in 2020. That marked a clear strategy shift for Uber and CEO Dara Khosrowshahi toward partnerships like the one it has with Waymo. Uber also is working with Waymo competitor Cruise, which is owned by General Motors . Last month, Uber and Cruise entered into a multiyear partnership that could bring Cruise vehicles onto Uber's platform as soon as 2025. Cruise will first need to relaunch its robotaxi operations after pausing them in October 2023 in the wake of a collision with a pedestrian. In that crash , a self-driving Cruise in San Francisco dragged a pedestrian about 20 feet after that person was first hit by a vehicle operated by a human driver. The incident underscored the safety challenges for autonomous vehicles, which remain a key risk for passengers, other drivers, as well as investors in the industry. Indeed, Waymo has had minor stumbles recently. The company recalled all of its 672 vehicles in June after a driverless Waymo vehicle hit a utility pole while attempting a low-speed pullover maneuver. In February, Waymo recalled 444 of its vehicles after two Waymo vehicles hit a towed pickup truck in Phoenix. In both recall scenarios, the company updated the vehicles' software to fix issues. Earlier this year, U.S. safety regulators also opened a probe i nto Waymo's performance. For its part, Waymo claims its vehicles make roads safer and in early September published a data dashboard showing statistics on how its cars have performed in Phoenix and San Francisco versus crash rate benchmarks for human drivers. In an interview on CNBC last week, Uber's Khosrowshahi called Waymo the "leader" in driverless tech, touting the company's safety record. And he suggested there's more expansion on the horizon for autonomous taxis on the Uber platform. "I can't predict timing, but this is a technology that is going to scale," he said. Analysts and investors alike want to see how Waymo ridership trends in its new markets and whether the company's rate of expansion into even more cities can accelerate. It's unclear where Waymo may go after Austin and Atlanta, though it has mapped more than 25 cities, according to Morgan Stanley analysts. "Stepping back, if Waymo is to make meaningful strides and grow its reach in a reasonable time frame, it will have to accelerate this pace of city launches," the Morgan Stanley analysts wrote in a Sept. 5 note. Waymo spokesman Ethan Teicher declined to comment on any future plans, but did say, "We're excited about Waymo One's growth and the positive feedback we're getting from our riders." In the very near future, Tesla's robotaxi event Oct. 10 will be a pivotal moment for the autonomous driving landscape and offer a refreshed look at Waymo's standing in it. Any details Tesla provides on its current plan to commercialize a robotaxi service, including launch timing, will be especially notable. Competition is definitely coming, but Waymo has a good head start. (Jim Cramer's Charitable Trust is long GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Alphabet 's self-driving car unit Waymo is finally shifting into high gear.