Waymo is worth $100 billion more than previous estimates, Morgan Stanley says (GOOGL)

JLR/Waymo

• Morgan Stanley says Waymo, Google’s self-driving car unit, could be worth $175 billion, its highest valuation yet. 
• That number is up $100 billion from the bank’s first estimate of $75 billion, thanks to taxis, logistics, and licensing.

The valuation estimates keep climbing for Alphabet‘s self-driving car unit, Waymo.

In a note to clients Tuesday, Morgan Stanley estimated the division, which graduated from Google’s secretive X lab to full-fledged subsidiary in 2016, could now be worth a whopping $175 billion thanks to three key business areas.

“One of the most common Waymo investor questions we have received in recent weeks has been around what Waymo’s business model could look like,” said a team of analysts led by Brian Nowak. “Our previous work has shown how Waymo’s autonomous robotaxi taxi business could be worth ~$75 billion. But that is likely just the beginning, as there are two other business models — logistics/delivery and licensing — now coming into view…which we see leading to a total ~$175 billion potential Waymo valuation.”

Elsewhere on the Street, Waymo is valued anywhere from $119 billion by Mark Mahaney of RBC Capital Markets to $135 billion by Eric Sheridan of UBS.

Of course, there are lots of assumptions in Morgan Stanley’s model that must come to fruition first.

1. Autonomous Taxis: $80 billion

“First, we believe Waymo remains on track to launch an autonomous ride hailing service in Phoenix this year,” said the bank. “We have detailed this business before and our latest model — assuming Waymo charges consumers an average of ~$0.90/mile over the next 20 years and reaches ~4% of global miles traveled (excluding China) and ROW by 2040 — shows how it could be worth ~$80 billion.”

2. Logistics: $90 billion

While autonomous robo-taxis might be the most exciting proposition to come from Waymo, Morgan Stanley says the biggest value driver is delivering goods, rather than people.

“Autonomous vehicles should eventually enable faster and cheaper last mile delivery, improving the customer experience by potentially enabling <1 hour delivery from local stores to the customers’ homes rather than from a centralized warehouse to the customer, while narrowing the margin gap between store and eCommerce sales,” said the bank. “Waymo could help traditional retailers better compete (from a cost and service perspective) against Amazon.”

When you combine those advantages with Waymo’s additional disruption of long-haul trucking, the opportunity is worth $90 billion, Morgan Stanley estimated.

3. Software Licensing: $7 billion

The smallest chunk of Morgan Stanley’s new valuation for Waymo comes from potential licensing opportunities like it’s already done with Fiat Chrysler.

“This is likely the beginning of similar relationships with other OEMs as (like search) we see autonomous technology being winner take most as scale improves the algorithm and creates the smartest/safest autonomous offering,” said Morgan Stanley. “We value this high-margin revenue stream at ~$7 billion assuming Waymo-powered units reach high teens share of US L4+L5 vehicles (of 7% of total vehicles) by 2040.”

Morgan Stanley has a $1,325 price target for shares of Alphabet — about 4.6% above where the stock was trading Tuesday but below Wall Street’s average of $1,364. The stock is up 17.7% since the beginning of 2018.