Meet Alphabet’s Next Multibillion-Dollar Business

Person reading a book while sitting at the wheel of a self-driving car.

It's finally here. Waymo -- the self-driving division of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) -- has launched its commercial robotaxi service in Phoenix. This was a long time coming, as Waymo has been testing the self-driving taxi service in Phoenix with a select group of customers since April 2017.

As the company looks to fine-tune its offering before launching it on a mass scale, the Waymo One robotaxi service is now open to those customers who were a part of the early rider program in Phoenix. The Alphabet subsidiary will be putting test drivers behind the wheel for now in case something goes wrong with the tech. There's a lot to like about how Waymo is approaching this launch.

A few details

Riders invited to use Waymo One can access the self-driving vehicles round the clock in a 100-square-mile area across several cities of the Phoenix metro area, including Tempe, Mesa, Chandler, and Gilbert. The company will gradually introduce the service to new parts of the greater Phoenix area.

What's more, the riders in the program will be able to bring along other people so that more people get to know how the service works. Another big change that Waymo One brings is that users will be able to publicly share their reviews about the service. The company is taking small but smart steps to ensure the gradual adoption of its self-driving taxi service and incorporating user feedback at the same time to make it even better.

As far as pricing, Waymo claims its fares will be comparable to those of rival ride-hailing services such as Lyft and Uber, and riders will get an estimate while making a booking. Additionally, riders can ask any questions they might have with the help of an in-car screen or through the app. This should go a long way in boosting Waymo's adoption by removing any fare-related barriers and clearing any doubts that users may have.

Huge, huge opportunity

Goldman Sachs estimates that the global ride-hailing market could be worth $235 billion by 2030, and if UBS estimates are to be believed, Waymo could carve out a sizable portion of this market for itself. UBS analyst Eric Sheridan predicts that Waymo could become a $114 billion business for Alphabet by 2030, as it could monetize its self-driving expertise in several ways.

For instance, Alphabet could leverage the search engine expertise of Google and its video repository on YouTube to deliver content and ads to riders in addition to making money from fares. So the possibility of Waymo's minting big money for Alphabet cannot be ruled out, as its rivals are already generating billions in revenue by simply delivering ride-sharing services.

Uber, for example, generated $2.8 billion in revenue in the first six months of 2018, while Lyft generated $909 million. Waymo's ancillary services could help it generate much more revenue in the long run, provided its self-driving service gains traction.

Uber reportedly holds around 70% to 72% of the U.S. ride-hailing industry, with Lyft capturing the rest. This is good news for Waymo, as it doesn't have to face a crowded market in the U.S., which should ideally be the first one the Alphabet subsidiary taps before moving abroad. More importantly, the ride-hailing opportunity in the U.S. is pretty sizable, with one estimate putting the revenue of the North American ride-hailing industry at $28 billion by 2023.

So Waymo could generate billions in revenue if it manages to take even a 20% share of this market in the next five years by deploying its service in more areas. Of course, the global opportunity is way bigger, and investors are hoping that Waymo can generate close to what UBS predicts in the long run. But investors shouldn't forget that the company simply has to get the basics right in the U.S. to properly monetize Waymo in the near term, and it seems to be doing that by competing on fares.

However, Alphabet investors shouldn't ignore the downsides of the ride-hailing business. Uber was sitting on a $1 billion loss in the third quarter of this year, while Lyft's losses for the first half of 2018 stood at $373 million. That's because these companies have been dependent on investors' money to subsidize rides.

Waymo's advantage is that its self-driving cars can take labor costs out of the equation, but at the same time, it remains to be seen if its outlay on software and customer support increases. But then, it is possible that Waymo can cover any additional costs by providing additional services to generate more revenue from advertisers.

On the other hand, Waymo can also deliver its self-driving expertise to corporate organizations willing to use its services. Walmart , for instance, has struck a deal with Waymo to ferry customers to its locations for picking up groceries, while AutoNation customers will get a Waymo car for use when their own vehicle is being serviced. Additionally, Avis Budget Group customers in the Phoenix area will be ferried in a Waymo vehicle when traveling to the pickup/drop-off location for a rental car.

It's advantage Waymo

Waymo could very well turn into a multibillion-dollar business for Alphabet given the massive end-market opportunity. The company seems to be making the right moves to gain traction in the ride-hailing market, and the fact that it enjoys a huge technological lead over other companies developing autonomous vehicles makes it one of the best means of taking advantage of this booming industry.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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