To The Moon

There was no press release or fanfare, but last week was more consequential to the future of autonomous driving than any week in recent memory.

Waymo and $Uber(UBER)$ broke up.

They’re still working together in Austin and Atlanta, but there’s now a clear business model split between the two.

In a lot of ways, clarity is important. Waymo has a clearer path forward as it scales the business around the U.S. and globally. Uber knows it can’t rely on Waymo either, but it also puts pressure on the partners Uber is betting on.

With new technologies, getting the business model right is more important than getting the technology right, so this moment is crucial.

As an owner of both stocks, I’m not surprised by the move and happy to see the shift. I think it will help everyone involved.

Waymo Bets on Itself

Waymo has been miles ahead in autonomous driving technology for years. It’s the first to get approval for fully autonomous vehicles and the only one to scale the business.

The question has always been, what business model will Waymo pursue? I see three options:

1. Vertically integrate and own the tech and ride-sharing app (demand source). Manufacturing can be outsourced, but this is like the Apple model in autonomous vehicles. The risk is in building a new app, hoping customers will adopt it in city after city.

2. Modularize as a tech and vehicle supplier, outsourcing ride demand to a third-party like Uber or Lyft (both current partners). This allows Waymo to be modular and not fight on the demand side with established leaders.

3. License autonomous technology to OEMs. Waymo has proven the technology and viability of the business model. Now, it could simply outsource the manufacturing and maintenance of vehicles.

#3 has been rumored, but never really put into practice.

#1 has been the main model for Waymo, but it has tested #2 with Uber in Phoenix, Atlanta, and Austin, and Lyft in Nashville. Now, we know that #1 is the plan, and it makes sense because Waymo has the name recognition to build enough demand to make the model work.

There’s also been tension between Waymo and Uber as Uber makes deal after deal with autonomous vehicle suppliers. That tension finally came to a head last week when the two quietly ended their initial agreement in Phoenix.

This allows Waymo to deploy its business model most effectively, including recently launching the new Ojai vehicles, manufactured by the Chinese company Zeeker.

Waymo Ojai

The dedicated vehicle is designed for ride-sharing, although it does have seats in the front. I think this is a step on the path to eventually having an optimized vehicle with no driver’s seat or steering wheel, and the flexibility to carry people and goods.

Waymo is also experimenting with its own business model, including recently launching Waymo Premier.

This invite-only membership is $29.99 per month and is similar to other loyalty programs from Uber and DoorDash, including:

• Priority Pickups: Skip the line with prioritized matching 

• Ride Savings: Earn 10% Waymo Cash back on every trip, and even more during busy times.

• Early Access: Be among the first to experience Waymo in new cities, as we expand.

• Flexible Cancellations: Peace of mind with up to five free cancellations per month.

I think we’ll see more of these pricing and demand tests from Waymo as it solidifies its own business model as a vertically integrated ride-sharing company.

Uber Has Already Moved On

This isn’t a big loss for Uber. The company has been signing partnership after partnership in autonomy to provide as much supply as possible to the market.

I think Uber is one of the clear winners because it’s in a position of power as the aggregator of demand. Waymo may be able to build its own network of supply and demand, but will Lucid and Rivian and Zoox and others be able to follow?

I don’t think so. People will check two apps for rides, but not three or four or five.

The early player often vertically integrates to extract value from being the first mover, as Waymo is doing.

But as the industry matures, we see modularization win out as companies specialize in what they do best. And then I think the most profit will accrue to the aggregator, which is Uber.

What About Lyft?

$Lyft, Inc.(LYFT)$ is the other company in the mix here. It doesn’t have as many partnerships as Uber, but it can follow closely. With a price-to-free-cash-flow multiple of about 5x, it could also be an attractive acquisition target for a company that wants to go it alone and vertically integrate.

• Follow Uber’s business model, risking being potentially #3 in the market as Waymo scales

• Sell to an AV company trying to vertically integrate

  • Zoox (owned by $Amazon.com(AMZN)$ )

  • $Rivian Automotive, Inc.(RIVN)$

  • Waymo

As a smaller business, it also has the flexibility to sell or even “burn the boats” by going all-in on autonomy in some markets. I would like to see this tested because what is there to lose?

What we learned this week is that the lines between companies are being drawn, which makes it easier for investors to see who is winning and who isn’t in autonomy.

I think Waymo just told us it’s playing to win the market as a vertically integrated company. Will anyone follow (can $Tesla Motors(TSLA)$ ?) or will Uber and Lyft commoditize the entire supply layer?

It’s a big year ahead for the autonomy players because Waymo has put its cards on the table.