Kevin Frayer
Chinese tech giant Baidu (NASDAQ:BIDU) is quickly making advances and positioning itself atop the autonomous driving industry, a market expected to see tremendous growth across the next decade and opening up a massive long-term pathway for growth for Baidu.
Autonomous driving and Apollo Go’s operations have yet to have a meaningful impact on Baidu’s top and bottom lines, but as operations scale and expand, contributions from the unit are expected to grow tremendously, barring any setbacks.
With the arrival of fared robotaxi rides in Wuhan and Chongqing earlier this month, Apollo Go is on a pathway to begin scaling revenues at a higher degree. As more cities move towards (fared) driverless ride commercialization, revenue and geographic expansion further support the case that Apollo’s long term revenue potential will serve as a major catalyst for Baidu’s stock.
Baidu’s Q2 report on Monday will possibly give more insight into how Apollo Go continues to scale, with rides likely closing in on the 750,000 mark for the last twelve months. Scaling to 65 cities by 2025 may prove challenging from current levels around one dozen, but reaching 100 or more cities by 2030 drastically enhances Apollo’s revenue generating ability, to ~$1.5 billion per year in an initial forecast. With an estimated ¥150,000 ($22,000) in revenues this year, Apollo is projected to see revenues grow at an ~300% CAGR to 2030 in this scenario.
A Massive Market Opportunity
Robotaxis are still in the early innings, with deployments at the moment limited in size and scope. Apollo Go has an ambitious plan to scale, growing fivefold from nearly a dozen cities currently to 65 cities by 2025, and 100 cities by 2030. Thus, there’s the potential to expand both geographically, to service more and more cities, as well as within cities, with additional vehicles on the road as initial deployments are primarily limited to 30 vehicles at the moment.
The overall robotaxi market in China is expected to show tremendous growth over the course of the next decades as the technology explodes into a much larger scale. BloombergNEF’s 2022 EV outlook projected that China “will operate the world’s largest robotaxi fleet with about 12 million units by 2040, followed by the US which operates around 7 million autonomous vehicles.” IHS Markit projected that the robotaxi “sector is poised to witness robust growth in the coming years,” as the “market size of China’s self-driving taxi services is expected to surpass 1.3 trillion yuan by 2030, accounting for 60 percent of the country’s ride-hailing market by then.” IHS added that the “robotaxi market will eventually be dominated by two to three major service providers, with the top providers occupying more than 40 percent of total market share.”
Baidu is shaping up to be a key player, and even a significant leader in China’s robotaxi market. At the moment, Baidu’s core developments with Apollo Go, its current geographic scope and scale, combined with its expansion plan and latest robotaxi model unlocking favorable unit economics are positioning it to be one of the, if not the, most dominant players in China. However, all it takes in one slip-up in safety for Baidu to be overtaken, as the widespread deployment of driverless robotaxis hinges critically on safety.
Commercialization Passes ‘Go’
Wuhan and Chongqing approved the “first permits to offer fully driverless commercial robotaxi services to the public on open roads” to Apollo Go at the beginning of August. With the permits, Apollo Go now “is authorized to charge fares for robotaxi services – completely without human drivers in the car” in the two cities, encompassing populations of over 40 million.
The approval is still at small scale — Apollo can operate in “designated areas in Wuhan from 9 am to 5 pm, and in Chongqing from 9:30 am to 4:30 pm, with five self-driving vehicles operating in each city.” With just ten vehicles, revenue generation ultimately will be extremely small, but the approval lays the groundwork for future expansion in the two cities to larger fleets as well as the acceleration of fared robotaxi approval in other cities in China.
China is laying the foundation for large-scale robotaxi approval, and Apollo Go’s leading position with over 32 million km tested and over 1 million rides provided, (over 500,000 between Q3 2021 and Q4 2022) sets a path for a tremendous revenue opportunity in the long run.
Diving into different scenarios for quarterly rides, scaling up from the ~180,000 average over the last three quarters to tens of millions — from substantial geographic and fleet size expansion — unlocks a multi-billion opportunity.
Quarterly Ride, Revenue Projections
Over the next few years, Apollo Go is planning substantial expansion of its robotaxi services, targeting operations in 65 cities by 2025 with a fleet in the “tens of thousands.” By 2030, Apollo is aiming for operations in more than 100 cities across China and a fleet size of 100,000, equating to 1,000 vehicles per city on average. These plans are ambitious, but given the runway, are nonetheless possible in the long-run.
Before diving in to the ride and revenue scenario exploration, it’s important to note utilization data for taxis, such as distance and costs, in order to more accurately project as Apollo scales.
Taxi Utilization
Data has shown that in a large city such as Shenzhen, taxis can average ~272km of paid distance daily, while in Shanghai, data from the 50,000 taxi fleet points to an average of ~384 km of total distance daily; assuming a 60% paid utilization rate, Shanghai would average ~205km of paid distance daily across its taxi fleet.
Other data points to an average trip distance of ~7km for taxi fleets in Shanghai, as well as an average of 25 trips per vehicle per day in the city. This suggests an average of 20 trips per robotaxi per day is a feasible rate at scale.
For pricing, Apollo has not yet publicly announced its pricing scheme, but rival Pony.ai has — Pony.ai has disclosed that pricing of its robotaxi rides cost ¥2.6 per km in off-peak hours, and ¥3 per km during peak hours; this is comparable to a traditional taxi pricing scheme in Beijing.
Baidu CEO Robin Li has expressed intentions to bring robotaxi pricing to half of that of a taxi, suggesting Apollo Go in the future could charge a fare such a ¥1.8 to ¥2.2 per km in the long-term, of which the midpoint (¥2) will serve as the basis for projection purposes.
Long-Term Projections
Moving on to the brief scenario exploration for quarterly ride projections demonstrates how quickly revenues could scale if fleets can scale to Baidu’s targeted size:
1) At a 25,000 robotaxi fleet, with ~8 rides per day per robotaxi, Baidu could notch 18 million rides per quarter.
2) At a higher rate of 12 rides per day per robotaxi, Baidu could notch 27 million rides per quarter. This is still far below half of Beijing’s reported 50 order rate per day — 2,000 orders for a 40 vehicle fleet.
3) At 100,000 robotaxis across 100 or more cities (a fleet size of approx. 1,000 per city), a ridership level of 12 rides per robotaxi per day would equate to 108 million rides per quarter. However, at such a scale, it’s likely that ridership levels would be higher due to expanded operations and a much larger population within serviceable areas.
4) A ridership rate of 20 rides per day per robotaxi equates to 120 million rides quarterly.
Should Baidu reach a 100,000 robotaxi scale, by 2030 or 2035 or longer, with ridership levels about equal to the fourth scenario above (20 per day per robotaxi), revenues would project to ¥2.52 billion ($374 million) at an average ¥2 per km pricing scheme.
At Shenzhen’s 272km paid distance, with an average rate of ¥2 per km, revenues would project to ¥4.9 billion ($725 million) per quarter. Now, obviously not all cities will reach that 272km daily paid km rate, due to different population sizes, serviceable areas, and other factors such as fleet size and robotaxi demand. But the two scenarios with Shanghai and Shenzhen show the raw revenue potential that a robotaxi service can hold in the long-term.
A $1.5B+ Revenue Opportunity
Apollo Go, at full scale, commands tremendous revenue generating potential.
Working off a lower bound of ~150km paid distance driven per day (~20 rides with an average distance of ~7.5km) and an average of ¥2 per km, a robotaxi fleet could generate ¥30 million ($4.4 million) per day, or ¥2.7 billion ($400 million) per quarter. Assuming higher paid km per day only increases the revenue potential for the service.
Annually, that fleet would generate approximately ¥10.8 billion in revenue, or $1.6 billion. That means a 100,000 robotaxi fleet could generate the equivalent of ~9% of Baidu’s current ¥124.5 billion ($19.6 billion) in total revenues.
Having a single unit within Baidu’s field of autonomous driving generating revenues in excess of ¥5 billion to ¥10 billion per year can supercharge Baidu’s valuation, due to the high-growth nature as well as the massive revenue contribution potential from Apollo Go.
The service also could be fairly profitable once it reaches scale — Baidu is pointing to an operating lifecycle of over 5 years, meaning that a 100,000 robotaxi fleet at its current $37,000 production cost per unit (likely to decrease with new manufacturing and technological advances) would cost just ¥3.7 billion (an average of ¥740 million per year over 5 years). However, given the unknown factors in operating and maintenance costs, along with the lengthy timeline to reaching profitability for the segment (likely beyond 2030), this will not play a role in valuation.
The question here is, is Apollo Go reflected in Baidu’s valuation? Baidu’s 2x EV/sales multiple and 10x EV/EBITDA puts it valued in-line with tech peers Google (GOOG) (GOOGL), NetEase (NTES), and Alibaba (BABA). Given the relative valuation in-line with peers, the accretive potential from Apollo Go does not seem priced in. For example, GM’s (GM) Cruise was valued around $21 billion in March following the automaker’s purchase of SoftBank’s nearly 10% stake for $2.1 billion. As such, with Apollo Go’s projected pathway to $1.5B+ in revenues on a ~300% revenue CAGR, a $15 billion valuation is not out of the picture — earning a valuation of this degree should pave the way for Baidu’s valuation to soar in a sum-of-the-parts take, given that Apollo Go could account for a substantial chunk of the valuation model.
Risks
The major risk to Apollo serving as a major catalyst to Baidu’s shares over the course of the next decade stems from autonomous vehicle safety, and the risk that it won’t be able to scale to its intended degree due to adverse safety incidents.
Safety is critical for consumer acceptance, commercialization, scaling services, and policy — without ensuring safe operations, or accidents or vehicle failures, Apollo Go could see an inability to expand services within cities, to new cities, or within fleet sizes. This limits its ability to generate revenue and operate a rapidly growing, highly accretive service.
Outlook
Overall, Baidu has a tremendous opportunity in robotaxis ahead for the long-run if it can successfully reach internal targets, such as operations in 100+ cities and achieving a 100,000 robotaxi fleet size. In such a scenario, annual revenues from a robotaxi fleet could easily top $1 billion per year given modest paid driving rates, and if robotaxis can match traditional taxi paid rates, Baidu could see a 100,000 robotaxi fleet generating $2 billion or more in revenue per year.
Driving the long-term scalability is the recent RT6 release, with a substantially lower production cost allowing Baidu to ramp up fleet size quicker and cheaper. A five-year-plus lifespan also lets Baidu quickly recapture the bulk of these costs early on in the fleet lifespan.
Competition and safety are two key threats to Apollo Go’s emerging status as a robotaxi pioneer, with peers such as AutoX, Pony.ai, and others quickly pushing along with driverless tests and commercial operations. Safety poses an industry-wide risk, as incidents and accidents (of which Apollo Go has none) could threaten a regulatory slowdown and hinder expansion of commercialization efforts.
However, the future is bright for Apollo Go in the long run, assuming that it can successfully scale to a 100,000 fleet size across 100 cities or higher, and command similar driving metrics to traditional taxis, which it aims to displace.
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