Imagine standing on the curb and your taxi pulls up… but there’s no driver inside.
You climb in the back and press the “start ride” button.
The car begins moving. It’s driving itself.
Sounds futuristic, right?
Self-Driving Cars Are on US Roads Today
Fully self-driving cars are driving around Phoenix, Arizona right now. You can call them just like an Uber.
The company achieving all this is called Waymo. It’s a subsidiary of Alphabet (GOOG)—better known as Google.
Let me tell you… Waymo is absolutely dominating the self-driving car game. Its driverless fleet has already covered more than 10 million miles on American roads.
Its cars continue to rack up one million miles per month today. The artificial intelligence powering these cars learns and improves with every mile driven.
Tesla, Uber, Ford, and several other companies are working on self-driving cars, too. But they lag years behind Waymo.
Google Has Been Quietly Pumping Billions into Waymo Since 2009
Do you know where it got all this cash to invest?
From Google’s online search business.
Google has an effective monopoly on the internet search market. For every 100 searches performed, 92 flow through Google.
To say Google’s search business is a cash-printing machine is an understatement. In 2018 it earned roughly $100 billion from selling internet ads.
It enjoys a net profit margin of about 35%. That is almost unheard of for a business of its size.
In other words, for every $100 in revenue, Google makes $35 in pure profit that it can reinvest into Waymo or other disruptive companies.
Google Can Invest in a Dozen Disruptive Offshoots at a Time
According to Reuters, between 2009 and 2015, Alphabet infused Waymo with at least $1.1 billion just to research and develop self-driving technology.
Alphabet keeps its total investment in Waymo a secret. But my independent research suggests it has invested well over $5 billion. Earlier this year Waymo ordered 62,000 Chrysler Pacific minivans—which cost $2.79 billion alone.
Waymo is just one of Alphabet’s many disruptive subsidiaries. Thanks to Google’s incredible profitability, Alphabet has pumped almost $10 billion into roughly a dozen offshoots in the past three years.
And here’s the real key: It has done so without borrowing any money.
Alphabet’s core business is so profitable that it allows the company to fund many disruptive upstarts.
Other Companies Can’t Compete
Ford (F) tried to catch up to Waymo. The company announced it would invest $4 billion developing its own self-driving cars. Its stock crumbled 7% on the news.
Unlike Alphabet, Ford doesn’t have a cash machine at its core. Its operating margin is just 3%. Meaning it must spend $19,400 to sell a $20,000 car.
That doesn’t leave much of anything left over to invest in other projects.
Here’s the thing most investors miss about disruptive trends like self-driving cars. Everyone wants to be the next company that disrupts, transforms, or creates a whole industry.
But few have the cash or staying power to actually achieve it.
Waymo was founded nearly a decade ago, and still doesn’t generate any profit. Few companies have the money needed to endure a decade of spending on research and development with no revenue to show for it.
But Alphabet does.
And its stockholders have reaped the rewards. Wall Street bank Morgan Stanley recently valued Waymo at $175 billion. What began as a moonshot in 2009 is now worth more than giant iconic American companies like Disney (DIS) or American Express (AXP).
Much Like Google, Amazon Uses Its Profit Engine to Fund Disruptive Offshoots
Only one other company on the planet can afford to pump billions into disruptive offshoots year after year.
It’s Amazon (AMZN), the world’s second-largest publicly traded company. It operates similarly to Alphabet.
You likely know Amazon as the dominator of online retail. For every $100 Americans spend online, $50 goes to Amazon.
In the past decade its sales have exploded 11X. In 2018 Amazon collected around $120 billion in online sales.
100% of Amazon’s Profit Comes from a Completely Different Business
Although Amazon’s retail business is huge, it generates virtually zero profit.
Its cloud computing segment is wildly profitable. Called Amazon Web Services (AWS), it generated nearly all of Amazon’s $3 billion in profit in 2017.
You can read about how cloud computing works here. In short, AWS sells and leases computing power. It’s an absolute cash cow of a business. AWS’s operating margin is 31%—nearly 10X the slim 3.4% that Amazon’s retail business runs on.
AWS Subsidizes Amazon’s Battle Against Netflix
Did you know Amazon ranks fifth in America in spending to develop original video content? In 2018 it spent around $5 billion making shows for its “Prime” subscription service, which has over 100 million paying customers.
Today Netflix (NFLX) is synonymous with video streaming. It has 137 million customers, and its stock has surged close to 600% in the past five years.
But can it compete with Amazon in the long run? I’m not so sure…
In 2018 Netflix spent about $12 billion making content. Unlike Amazon, it’s not built around a cash generator. So it must borrow a lot of this money.
Netflix’s debt has exploded by 70% to $8.4 billion in the past 12 months.
Netflix will probably earn a profit of around $1.4 billion for 2018. Compare that to its growing mountain of debt and you’ll understand why some investors are getting concerned.
Amazon’s disruptive investments go far beyond streaming video. Have you heard of Twitch? It’s a website owned by Amazon that broadcasts video game matches.
You might laugh at the idea that anyone would spend time watching kids play video games. But more people watch Twitch every day than CNN or MSNBC!
Do You See the Giant Advantage Amazon and Alphabet Hold?
Investing in disruption has never been more important than it is today.
Alphabet and Amazon have created huge sums of wealth by driving these trends forward. Amazon Founder Jeff Bezos is the richest person in the world. And Alphabet’s co-founders are both worth over $50 billion.
Their stockholders have done great, too. In the past 10 years, Amazon stock has soared over 2,300% and Google has climbed 510%.
It’s easy to look at these big run-ups and conclude their best days are behind them. But next time you hear a slick pitch from a company intent on disrupting an industry think: Where’s the money coming from?
For Alphabet and Amazon, the answer is easy.
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