The field of autonomous driving continues to captivate the world of technology and investment, with giants like Alphabet and Tesla leading the charge. However, despite Waymo, Alphabet’s autonomous vehicle division, already operating robotaxi services in major U.S. cities and accumulating millions of miles driven without human intervention, the stock market appears to largely disregard its significant progress. In contrast, Tesla, having only recently launched its robotaxi service with a limited fleet and initial reports of hiccups, has seen a substantial boost in its valuation, raising questions about how risk and potential are assessed in this sector.

The Stark Valuation Divide: Data vs. Expectations

Alphabet, as a company, traditionally trades at a lower earnings multiple compared to other leading tech firms, primarily due to its reliance on digital advertising revenues. Currently, Alphabet trades at 16 times its estimated earnings. Tesla, on the other hand, trades at an earnings multiple nearing 150, a significant gap that largely reflects the immense expectations tied to its robotaxi services. These figures paint a dichotomous picture: while Alphabet is built on a proven and profitable business model, Tesla’s valuation leans heavily on future potential, a significant portion of which is directly linked to the success of autonomous driving.

Samuel Rines, a macro strategist at WisdomTree, suggests that “people are underestimating Waymo in a pretty significant way, while overestimating Tesla,” reflecting a market trend. According to him, Alphabet’s valuation “assigns basically zero value to Waymo even though it has the best tech, it is already operating, and it has deals with OEMs.” This point is particularly striking given that Waymo itself was valued last October at over $45 billion, a sum equivalent to the market capitalization of giants like Ford Motor Co. and General Motors Co. Nevertheless, within Alphabet’s colossal market capitalization of over $2 trillion, this valuation seems like “a drop in the bucket.”

Waymo: Operational Reality Versus Market Expectations

Waymo has completed over 71 million miles of autonomous driving without a human safety driver. Its service is currently active, providing paid rides in Los Angeles, Austin, Phoenix, and San Francisco. The company has also expanded its collaborations and is set to offer rides through Uber Technologies Inc.’s platform in Atlanta later this year, followed by Miami and Washington next year. Last week, Waymo applied for a permit to test its vehicles in New York City, which led to declines in the stock prices of Uber and Lyft Inc., possibly due to concerns about future competition.

These figures indicate a company already in an advanced commercial stage, showing impressive growth. Waymo reported in its most recent earnings call that it provides over a quarter-million paid passenger trips each week, a five-fold increase from a year ago. Alphabet CEO Sundar Pichai even noted that this was likely the first time he had been asked about Waymo on an earnings call, suggesting growing interest from Wall Street.

Tesla: Future Potential and Inherent Risks

In contrast, Tesla launched its robotaxi service in Austin only last weekend. Initial reports indicate a limited number of vehicles and some operational difficulties at the outset. Despite this, Tesla’s stock surged 8.2% on Monday following the announcement. This jump largely reflects investors’ immense confidence in Elon Musk’s vision and Tesla’s extensive manufacturing potential. Shawn Severson, CEO of Water Tower Research, even points out that while Waymo “has the commercialization advantage today,” Tesla’s manufacturing capacity would be crucial in producing its robotaxis at a greater scale.

However, Rines highlights a significant risk in Tesla’s valuation: “Whereas Tesla’s rich valuation depends on its robotaxi service being rapidly adopted, there’s a risk that it could take years for a lot of customers to grow comfortable using autonomous vehicles.” Alphabet, on the other hand, benefits from its diversified business portfolio. Its core businesses – search, YouTube, and Google Cloud – mitigate this risk and provide financial stability that does not solely depend on Waymo’s success. “I’m more comfortable buying Alphabet with the optionality of Waymo,” Rines said.

Looking Ahead: A Market Big Enough for Both?

Investor excitement about self-driving technology stems from the immense size of the potential market. According to Bloomberg Intelligence estimates, annual ride-hailing sales could exceed $325 billion by 2030, with as much as $20 billion of that potentially coming from robotaxis. The sheer size of this potential market fuels optimism among analysts, who believe the market will be large enough for both Waymo and Tesla to thrive.

Andrew Choi, a portfolio manager at Parnassus Investments, clearly favors Waymo: “There’s no comparing the two, really,” Choi said. “One (Waymo) is live, scaling volume in a very impressive way, and getting people to pay. The other (Tesla) is still in development, and has been for years.” The distinction between a company already operating and generating revenue from robotaxi services and a company entering the field with high expectations but without a proven commercial operational base is key to understanding the valuation discrepancies.

In conclusion

while Tesla continues to captivate investors with a bold vision and immense manufacturing potential, Alphabet’s Waymo continues to advance vigorously, accumulating operational experience and expanding its deployment. The current valuation of both companies reflects a significant gap between operational reality and future expectations. As the autonomous driving market matures, it will be interesting to see if Wall Street begins to credit Waymo for its early deployment and accumulated experience, or if it will continue to price Tesla’s vision at high multiples. It seems the debate over who will win this race is far from settled, with both companies possessing significant advantages that could lead them to success in a growing market.