Forget Tesla, Buy This Rival Mega-Cap Stock for Autonomous Driving Upside

Picture yourself entering your car, casually mentioning your destination, and then relaxing while your vehicle handles the entire drive. What was once a sci-fi fantasy is now fast becoming a reality, thanks to cutting-edge advancements in autonomous driving technology. As self-driving cars shift into the fast lane, the global autonomous vehicle (AV) market is set to skyrocket, with forecasts predicting it to hit a staggering $115 billion by 2029. 

One company that is racing ahead in the autonomous driving space is Waymo, owned by none other than tech behemoth Alphabet Inc. (GOOGL). Waymo's journey began in 2009 when Alphabet set out to develop a self-driving car that could navigate complex routes without human intervention. By 2016, Waymo was a full-fledged subsidiary of Alphabet, cementing itself as a leader in autonomous driving technology. 

From its early goal of completing 10 uninterrupted 100-mile routes, Waymo has now far surpassed expectations, more recently racking up 100,000 paid rides in a week. It has proven the viability of its self-driving system, with its Waymo Driver technology powering vehicles that operate safely on public roads without anyone in the driver's seat. In fact, Waymo has become a pioneer in bringing driverless ride-hailing to the public. Its Waymo One service is already operational in major metro areas like Phoenix, San Francisco, and Los Angeles, and it plans to expand to Austin.  

While Tesla (TSLA) often dominates the headlines, with its market-leading position in electric vehicles (EV) and grandiose promises in the autonomous driving space, Alphabet’s Waymo has been quietly leading the charge, bringing us closer to a fully autonomous future. Although the spotlight is on Tesla as it gears up for the launch of its Robotaxi on Oct. 10, Alphabet’s progress so far might just offer better investment opportunities for those eyeing the AV market's growth potential.

About Alphabet Stock

Alphabet Inc. (GOOGL), the parent company of Google, is a powerhouse in the tech industry, renowned for its relentless innovation and transformative impact on everyday life. The Mountain View-based company has seamlessly integrated artificial intelligence (AI) into its core products, such as Gmail, Google Maps, and Photos, elevating user experiences and setting new standards for efficiency and convenience. Commanding a massive market cap of around $2 trillion, Alphabet’s revenue streams are primarily fueled by Google Search, which dominates the global search engine market. 

As Alphabet continues to push the boundaries of technology, its strategic focus on AI and autonomous driving is poised to reshape various industries and redefine the future of mobility. However, amid antitrust concerns, shares of this mega-cap stock are up roughly 18.6% over the past year and 16.8% on a YTD basis, trailing behind the broader S&P 500 Index’s ($SPX)healthy gains during both time frames. 

After peaking at $191.75 in July, the stock has since corrected by 15% as the tech giant grapples with a challenging landscape that includes the looming threat of losing search market dominance to ChatGPT maker OpenAI, as well as significant regulatory hurdles.

However, Alphabet remains a captivating investment opportunity, bolstered by exciting growth drivers such as its cutting-edge Waymo self-driving unit and strong momentum in its cloud segment.

Plus, from a valuation perspective, GOOGL stock is priced at 21.31 times forward earnings, which is lower than its own five-year average of 25.60x. In fact, when compared to its "Magnificent Seven" peer and autonomous driving rival Tesla, which trades at a lofty 105.28 times forward earnings, Alphabet stock looks like a bargain at current prices.

On June 17, Alphabet paid its inaugural dividend of $0.20 per share, signaling a new chapter in its commitment to returning value to shareholders. The company’s forward annualized dividend of $0.80 per share translates to a modest 0.48% dividend yield, in line with its primary focus on growth. 

Alphabet’s Q2 Earnings Exceed Wall Street’s Projections

Alphabet reported its Q2 earnings results on July 23, which soared beyond Wall Street’s expectations. The Silicon Valley giant’s total revenue climbed almost 14% year over year to $84.7 billion, fueled by the company’s Search and Cloud segments. EPS for the quarter reached $1.89, representing an impressive 31.3% increase from the previous year and exceeding consensus estimates.

A key highlight of Alphabet’s Q2 earnings report was the impressive performance of its Google Cloud segment, which achieved a major milestone by surpassing $10 billion in quarterly revenue and generating $1 billion in operating profit for the first time. This signifies a remarkable turnaround for Google Cloud, which was unprofitable less than two years ago. Furthermore, the tech giant reported $48.5 billion in revenue from its Search segment, representing a year-over-year increase of 13.8%.

During the quarter, Alphabet’s advertising revenue surged to $64.6 billion, marking an 11% increase from $58.1 billion in the same quarter last year. This growth was driven by a resurgence in online advertising strength through Google Search, as it recovered from the budget constraints brought on by inflation and rising interest rates over the past two years.

Alphabet's "Other Bets" unit, which encompasses its self-driving car company Waymo, generated $365 million in revenue, up from $285 million recorded in the year-ago quarter. During the Q2 earnings call, Chief Investment Officer (CIO) Ruth Porat revealed a fresh multi-year commitment of around $5 billion in Waymo. Plus, CEO Sundar Pichai pointed out that Waymo is now providing 50,000 paid public rides each week, primarily in San Francisco and Phoenix, showcasing the rapid growth and increasing adoption of its autonomous driving technology.

Despite the company's impressive Q2 performance, GOOGL stock plunged more than 5% on July 24, primarily due to softer-than-expected YouTube ad revenue of $8.7 billion. This unexpected miss overshadowed the otherwise strong results, highlighting the challenges Alphabet faces in the competitive digital landscape.

Analysts tracking Alphabet project the company’s bottom line to improve a notable 31.6% year over year to $7.63 per share in fiscal 2024 and climb another 13.3% annually to $8.64 per share in fiscal 2025. 

Alphabet’s Strategic Partnerships in the Autonomous Driving Landscape

In 2018, Alphabet’s Waymo set the wheels in motion for the future of autonomous driving by forging a groundbreaking partnership with Jaguar Land Rover. Together, they embarked on a mission to create the world’s first premium self-driving electric vehicle, with the I-PACE specifically designed for Waymo's driverless transportation service.  

On Oct. 4, Waymo announced a new partnership to add Hyundai to its fleet, integrating Waymo Driver technology into custom-made versions of the South Korean automaker’s IONIQ 5 BEV. This collaboration signals a new era of innovation, with plans for mass production later this year of IONIQ 5s equipped with Waymo's advanced systems. Initial on-road testing is set to kick off by late 2025. 

Beyond its new fleet expansion, Waymo in August partnered with GM’s (GM)self-driving Cruise unit to ink a multiyear partnership on autonomous ride-hailing that begins in 2025, and formed a pact with Chinese EV giant Byd(BYDDY) to expand its reach into the EU and Latin America, as well.

More recently, Waymo has accelerated its ambitions by teaming up with Uber (UBER) to expand its Robotaxi service into Austin and Atlanta starting in early 2025. This strategic move allows Uber riders to easily access driverless Waymo vehicles through the Uber app, marking a significant step in the race to dominate the autonomous ride-sharing market. 

As competition heats up, especially with Tesla's imminent Robotaxi launch, these high-profile partnerships position Waymo as a formidable player in the evolving landscape of self-driving technology. 

What Do Analysts Expect For Alphabet Stock?

Despite investors' underwhelming response to the company’s Q2 earnings results and recent regulatory hurdles, Wall Street remains highly bullish about GOOGL stock, with a consensus “Strong Buy” rating overall. 

Out of the 46 analysts offering recommendations, 35 advise a “Strong Buy,” three suggest a “Moderate Buy,” and eight analysts advocate a “Hold.”

The mean price target for GOOGL is $202.20, indicating an expected upside potential of around 23.9% from current levels. 

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On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.