How Apple and Alphabet are De-risking Their Self-Driving Car Efforts

By Motley Fool

In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior technology specialist Daniel Sparks explain how Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) new autonomous car subsidiary, Waymo, is de-risking its efforts on self-driving car technology, and how this provides both upsides and downsides for the business' potential in the long run.

A full transcript follows the video.

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This podcast was recorded on Dec. 16, 2016.

Dylan Lewis: The quote from John, as we'll refer to him: "We're in the business of making better drivers. We're a self-driving car company, not a car company." I think,if you look back at some of the things that have happenedin the last month or so, you see thatApple (NASDAQ: AAPL) seems to be taking kind of a similar route with theirautonomous driving ambitions.

Daniel Sparks:Right. We see these big tech companies, and then you look at the giantautomobile segments, where companies like Alphabet and Apple don't have any significant revenue, and in theory,it looks like this awesome opportunity for Alphabet and Apple to start making these cars. Maybethat's why a lot of the speculationreceived so much attention, thinking about a Google-branded or Apple-branded car is a really powerful idea. It could open up the companies to huge new revenue opportunities. But,when you actually get down to think about it, especially in Alphabet's case,it would really be out of their core competencyto start making cars. Even Apple, byoutsourcing their manufacturing and building Apple-branded hardware products, along with their software, cars is just a whole 'nother breed. It's a really capital-intensive business. By Alphabet doing this -- and now, like we're going to talk about,Apple focusing on the software part of the business -- it really de-risks these new segments. But on the other hand, may decreasesome of the potential upside if things do go well.

Lewis:Yeah, youlook at the margin profile for the car businessand the smartphone business, and they aredramatically different. It would be very tough to achieve high-30% margins in cars. Foras much as I know about the industrials business, I know that. So,you can understand why these huge tech companies areinstead choosing to focus on something that's super scalable and can be easily brought into millions of cars without actuallyhaving to manufacture them themselves.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks owns shares of Apple. Dylan Lewis owns shares of Alphabet (A shares) and Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.