Alphabet Inc.’s (GOOGL) Waymo self-driving car unit has received a major blow after one Wall Street analyst cut his valuation of the business by $70 billion. On a larger scale, Morgan Stanley’s move reflects the much more cautious outlook for the commercial viability of self-driving cars, also called autonomous vehicles, compared to a year ago. These vehicles are being developed by industry players such as Tesla Inc. (TSLA), General Motors Co.’s (GM) Cruise Automation, and Uber Technologies Inc. (UBER), in hopes of leading the next generation of transportation. 

What It Means For Investors

“There have been a series of hurdles relating to the commercialization and advancement of autonomous driving technology,” wrote Morgan Stanley analyst Brian Nowak, per a detailed recent story in Bloomberg. “Most notably, we underestimated how long safety drivers are likely to be present within cars and the timing of the rollout of autonomous ridesharing services," added Nowak, who cut his valuation estimate by 40% for Waymo from $175 billion to $105 billion.

Safety Issues

The first major incident that caused autonomous vehicle enthusiasts to take a step back was in 2018, when one of Uber’s self-driving vehicles killed a pedestrian. The event prompted a sharp public backlash and ignited regulatory investigations, serving as a warning sign for the nascent market. 

The progress in making reliable self-driving cars has been slow. Waymo, for example, has a pilot program that's limited to Phoenix, where it has 1,000 users for its self-driving car service. Currently, for safety purposes, those vehicles typically have human drivers behind the wheel. 

Morgan Stanley says that it underestimated the amount of time human safety drivers would need to remain present in the vehicles, and overestimated how quickly autonomous ridesharing services would be widely available. Another miscalculation by Morgan Stanley, per the note, was initially overstating the profitability of Waymo. Each driverless car unit costs more and stays in the red longer than expected. The pace of the development of autonomous logistics services also fell short of Morgan Stanley’s forecasts. 

A Look Ahead

Morgan Stanley's note comes as Waymo, automakers and auto service companies already have made huge financial commitments to driverless cars. At the time of its IPO, for example, Uber already had spent over $1 billion on autonomous cars, per another Bloomberg report. Given the industry's progress to date, losses may continue to mount until widespread commercialization becomes a reality, which may be many years away.