Prediction: Alphabet Will Spin Off Waymo Within 5 Years

One of the most intriguing growth opportunities for Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) these days is in robotaxis, via its Waymo business. It has the potential to revolutionize the taxi industry. Last year, it averaged 150,000 trips per week, and that number is going to climb even higher this year, as the service expands into more markets.

But despite Waymo's promising potential, here's why I think it's highly likely that Alphabet will spin off the business within the next five years.

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Alphabet is already spending heavily on artificial intelligence

Creating and maintaining a growing fleet of robotaxis is going to be expensive. And the danger for Alphabet is that as Waymo grows in size, Alphabet's operations may get much more complex and costly amid that process. It's already operating in multiple cities, including Los Angeles, San Francisco, Austin, and Phoenix. However, Waymo has recently announced plans for more cities, with Atlanta, Washington, D.C., and Tokyo being on the list of markets it wants to expand into in the near future.

The problem is that by expanding into more markets, Waymo's costs are going to rise significantly at a time when Alphabet is investing heavily in artificial intelligence (AI). This year alone, Alphabet expects to spend $75 billion on building out its AI infrastructure.

In the midst of an AI battle involving many other tech companies, Alphabet is looking to protect its search dominance -- and it's investing in its Gemini chatbot to ensure that at least if users are relying on chatbots rather than Google Search, it's Gemini that they are using. The company is facing a considerable risk in its core business, one that it hasn't had to worry about in the past. AI chatbots could give other companies a way to finally wrestle away some valuable market share and ad spend from Alphabet.

Waymo may unlock billions in value for Alphabet

By spinning off Waymo, Alphabet may also be able to unlock a lot more value for itself and investors. Last year, Waymo was reportedly estimated to be worth more than $45 billion, based on a recent funding round. But with the business expanding and reaching more markets throughout the country, it's probable that Waymo's valuation will go much higher in the future.

That money could help Alphabet pursue other acquisitions that are more complementary to AI and its core operations. Plus, by spinning it off, the company may also be able to save billions by not having to spend more money in expanding and growing Waymo's business. By focusing on their core competencies and strengths, individually, businesses can sometimes achieve greater efficiencies and results in the long run than if they are all under the same umbrella.

Alphabet has gotten Waymo to this point, but the more compelling move may be to retain a stake in the car company and let it operate as a separate entity.

Why this could be a win-win for investors

A stock spinoff of Waymo could allow investors to have a stake in two fast-growing businesses: Alphabet and Waymo. And if you end up preferring one over the other, you could always sell your holdings in one of them. You only have to look at the excitement around Tesla and its robotaxis to see why investors may be thrilled with a Waymo spinoff as the stock could generate a lot of bullishness itself, and may even lure some investors away from Tesla if it's able to demonstrate superior results.

Right now, investors have to take the whole package -- Alphabet with all of its other businesses. By spinning off Waymo, investors will have more choice, and that could result in a much higher valuation for the two businesses combined rather than where Alphabet sits today.

Regardless of what ends up happening, you may want to consider buying and holding Alphabet stock, especially given its modest valuation; it's trading at 18 times its trailing earnings. Either way, whether the company spins off Waymo or it doesn't, you can stand to benefit from its future growth. Under the best-case scenario, a spin-off does end up taking place and you'll have two terrific growth stocks in your portfolio.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Tesla. The Motley Fool has a disclosure policy.