1 Surprising Stock to Buy Before the Autonomous Vehicle Revolution Takes Off

Autonomous vehicles are getting easier to find on the streets in several major cities in the United States. As a handful of companies are testing their self-driving cars in select cities, Alphabet's (NASDAQ: GOOG)(NASDAQ: GOOGL) Waymo has pulled ahead of the pack with a commercial service. The company said it completed 200,000 rides per week as of February, doubling in just six months.

Tesla (NASDAQ: TSLA) could be next in line, with plans to launch a robotaxi service in Austin, Texas, this summer. Much of its value as a company stems from the high expectations investors have for its potential service.

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As more and more companies develop autonomous vehicles and get them on the streets, one company is head and shoulders above the rest. And it might surprise investors to learn which one stands to benefit the most from the self-driving revolution.

Image source: Getty Images.

The promise of self-driving cars

The promise of autonomous vehicles isn't that you'll have your own personal robo-chauffeur parked in your driveway ready to take you wherever you want. That's a waste of the technology.

The value of these vehicles is that they can be on the road nearly 24/7 moving people and things around the city with minimal marginal costs. Unlocking that value requires being able to drive demand for those services. So, developing a successful robotaxi service requires more than just putting a fleet of self-driving cars out into the wild. Consumers need to be able to find them and use them.

That's why the biggest beneficiary of the proliferation of self-driving cars will be Uber Technologies (NYSE: UBER). The company is the top demand aggregator for ride-sharing.

If you want to use your car to transport people, restaurant orders, or retail purchases, you're going to put your car on Uber whether it drives itself or not. That's because the customers are on Uber, which ended 2024 with 171 million monthly active users on its platform.

But its CEO is keen to point out that demand isn't constant throughout the day. That's a major challenge for a company that gets the most out of its service by ensuring it's used as close to 24/7 as possible.

Companies that want to get the most out of their capital investment in a fleet of robotaxis will find Uber's network essential in ensuring they don't need to have a bunch of robo-chauffeurs sitting around in a parking lot during slow periods waiting for peak demand. Uber can fill in periods of high demand with human drivers, ensuring maximum capital utilization for autonomous vehicles.

That eliminates the other side of poor utilization: demand exceeding supply during periods like rush hour. If users have to wait a long time for a ride, they're going to abandon the service. Uber's existing network solves that problem.

The transition will likely be long and slow for robotaxis to ramp up. And while a company like Waymo or Tesla could go it alone, that comes with significant risks of losing a lot of money and being left behind as users opt to stick with the familiar app for ride-hailing. That's why Waymo is testing various partnerships with Uber to see which works best while going it alone in some cities.

As self-driving cars become more available, it should drive down costs and increase demand. Car ownership becomes less necessary when a self-driving car is available within a couple of minutes after the push of a button, and it costs less per month than a car lease. And that trend serves to benefit the top demand aggregator -- i.e., Uber.

The trend is just getting started, but investors are asleep at the wheel

Many investors see autonomous vehicles as a major threat to Uber, but its importance to the industry appears undervalued. Self-driving cars could supercharge demand for ride-sharing, and Uber stands to benefit most from that growing demand as the aggregator.

Looking at the stock today, though, investors appear to think Uber's growth will die down as self-driving cars take off. Shares currently trade for an enterprise value that is 25 times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). However, management expects EBITDA growth between 30% and 40% per year through 2026. Its first-quarter outlook calls for 30% to 37% growth.

The company is also become a free cash flow (FCF) machine. FCF more than doubled last year to $6.9 billion. Management expects to drive higher FCF conversion over time, exceeding 90% by 2026.

The longer term could be even better for Uber as autonomous vehicles increase the value of ride-sharing relative to car ownership. Uber should see a huge benefit from the expanded market. As it scales up, there should be higher EBITDA margins and FCF conversions, which makes Uber's current valuation look like a great opportunity to buy shares.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Tesla, and Uber Technologies. The Motley Fool has a disclosure policy.