While Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) is known primarily for its flagship Google search, one of its most compelling opportunities is in self-driving cars. Waymo is the company's autonomous-vehicle unit that was spun off from its "moonshot" research arm last year. The company currently has a substantial lead in development and testing of the technology, having logged more than three million self-driving miles on public roads.
In a move that seemed destined to happen, Alphabet has been in discussions with ride-hailing company Lyft, and Bloomberg is reporting that the Google parent could invest as much as $1 billion in the start-up.
This wouldn't be the first collaboration between the two. Earlier this year, Lyft reached a deal with Waymo for the companies to work together on projects that would help bring autonomous driving into the mainstream. An investment of this magnitude would be a coup for Waymo, and further strengthen the ties between the two companies. It also provides insight into how Waymo could quickly ramp up revenue in the nascent industry.
The beginnings of a multibillion-dollar industry
While forecasts vary, the market potential for self-driving cars is huge. Research from The Boston Consulting Group estimates that by 2035, 12 million fully autonomous and 18 million partially autonomous vehicles will be sold globally per year, and "the market for partially and fully autonomous vehicles is expected to leap to nearly $77 billion in 2035."
Fleets of self-driving cars could hit the roads sooner than you think. The U.S. has recently proposed legislation which could rapidly increase the deployment of driverless cars. A bill has passed the House, and a similar proposal awaits a vote in the Senate. If passed, the law would allow companies to put up to 25,000 autonomous cars on the roads in the first year, and up to 100,000 by the third year. They would be required to provide safety data to lawmakers and the public, as well as information about privacy and cybersecurity.
A quick road to mass-market
A partnership between Lyft and Waymo makes a lot of sense for both companies. Lyft's co-founder John Zimmer believes that self-driving cars will provide the majority of Lyft's rides within five years, and all of them within the next decade. Partnering with the company that possesses the most advanced self-driving system is a step closer to those goals.
It also gives Lyft a potent ally against Uber, its archrival in the ride-hailing space. Uber has been embroiled in several very public scandals, as well as a legal battle with Waymo, which accused Uber of stealing trade secrets for its self-driving cars. These distractions could provide Lyft with an opportunity to close in on its larger competitor, particularly as it seeks to expand internationally.
Lyft could become a significant customer for Waymo's autonomous systems, creating a fleet of self-driving cars for its riders. Waymo is looking ahead to a world without drivers. It has already partnered with Avis Budget Group (NASDAQ: CAR) to provide servicing, maintenance, and parking for Waymo's fleet at Avis and Budget rental facilities. With Avis providing fleet support and cleaning, the vehicles will always be ready for the next group of riders.
A brave new world
We are barreling down the road toward a self-driving future, and Waymo is leading the charge. This potential investment in Lyft is a logical next step in the company's comprehensive strategy in the space. Much as Google was in the search arena, Waymo could be one of the first companies to capitalize on an emerging industry that it may dominate for years to come.
This could be a billion dollars well spent.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.