Excellent piece mate. Up there with some of your best material. Will forward you an email from Specialist sales at Bank of America on Uber.
I also note you asked for some considered feedback, so in the spirit of debate (given not one person commented), here goes. (NB I have no position in the stock and have never been long or short. thoughts are high level musings only). 1) Regulatory Arbitrage. Most of the successful (and unsuccessful) platform tech businesses have engaged in this in one form or another. Think Airbnb ("illegal" hotels); Facebook (a lot of content generated by journos paid for by others); Lime Scooters (OK, not that successful). The issue here for Uber being that they can be "bought in from the cold" and just charged the same rates/regulatory fees. Which are passed onto the consumer. This is happening in a lot of places, so as you say they compete on product rather than price. But what you'd expect to see is the incumbent raise quality standard through time. The incumbent could also lobby to have taxi fares lowered to reflect lower plate fees, which is revenue neutral to a taxi driver, but wouldn't be to an Uber driver. 2) Who needs a driver? A stat that Gerard Minack raised is that the largest employer by job category today in the USA is the same as 1900 (I need to check that). Drivers. Drivers of trucks, taxis, couriers etc is employment for 3mn Americans. Except in 1900 they drove horses. Here is an excerpt of a good video if anyone wants to watch on it https://youtu.be/7Pq-S557XQU?t=292 Removing drivers removes the largest inefficency (wages are 30% of costs for trucking businesses) in the system as the asset can be sweated 24/7. This loops into a bigger question involving Tesla/ self driving cars and lots of other stuff above my humble pay grade - but since most people don't derive utility nor value from owning a car (cars are driven on average 5-10% of the day), driverless cars would seem to be coming. This presents a problem for Uber. Their biggest arbitrage seems to be arbitraging "dead time" and dead assets" - people sweating their asset which has a sunk cost so they sell it for the marginal cost of production not the Average Total Cost. If there are a lot less cars sitting around and driverless cars are common what is Uber to do? The obvious solution is to own the assets. But this massively increases the capital intensity of the business model and cranks up CAPEX. You could argue that is many years away, but if you're using a DCF that will heavily impact the out years and hence a heavy weighting in the valuation. 3) What's in the price? It's got an EV of $50bn, market cap of lets call $50bn. Take off the holdings, I'll use your $10bn, If this is our PV it implies an ex-growth NPAT $3.5bn using a terminal P/E of 12.5x or 8% Equity yield, using 400bps ERP and 4% 30 year yields (yes yes this is debatable now). Use 20% US tax rate and thats $4.2bn PBT and with no gearing that is $4.2bn EBIT Say you reckon the ex-growth P/E is higher now we are in ZIRP, and comes down to $3.5bn EBIT. My point being - your 2025 upside is already priced by the stock. So the stock just de-rates as it goes into 2025, by which time we have driverless cars starting in lots of places and the market puts it on a classic "value" low multiple. So to me, there's a lot already in the price and given the uncertainty about the capital intensity of the business model post 2025-2030, I think there needs to be a case for well north $7bn of EBIT before 2028 to be cheap at this stock price Though having said that, I don't reckon that will happen - if they deliver EBIT of $3-4bn the market won't de-rate it that much. You and I have seen plenty of markets re-rate end of cycle cashflows they should be de-rating. Anyway, am sure there are plenty of holes in my logic!
Excellent, pragmatic article. Thank you. Such a polarising stock but as you have done, remove emotion, assess the business and the likelihood of a significantly higher stock price in a few years becomes evident.
thanks steve and chad - love watching both your brains work. 1. uber probably has modest pricing power - ??being left as strategic dry powder at the moment. (like you, irrespective of price, given the choice btwn taxi, car service, uber - most of us now just choose uber). 2. demand for uber might not pick up as quickly as expected, affecting medium term valuations. you'd get a read on this by looking at taxi demand (or other commuter travel indicators) during/after previous recessions. 3. chads point seems a key risk. as a government, i am gonna struggle to get tax revenue from consumers. and i have just spent a LOT. and foreign domiciled companies are politically and economically great targets. i would certainly be looking at Uber to (re)capture 'my' share of the regulatory arb margin that you have taken from me. this is a 'classic' bit of strategy work - an easy, cheap and low risk strategic/ economic lever for govt's to pull. 4. separately, as a govt i'd be getting serious about a revenue tax or similar on large multinational 'tech' companies to rebuild my tax base. So again margins might not be as good as expected. 5. Autonomous cars wouldnt have to be the end of uber. if/ when they become significant, it might be possible to do things like: Uber as consumer facing 'operating system' JV'ed with Zoox (or whatever) as 'hardware' . lots of water still to flow under this technological and strategic bridge - no idea how final profit pools will be distributed, probably net negative for uber though over 10+ year time frame. 6. for your fund, might USD:AUD changes trump any company specific business fundamentals in medium term, which is your usual exit window?
I believe there are some massive gaps in your analysis. 1) Using adjusted revenue. Stripping out driver incentives is not wise as driver churn is very important balancing act for Uber. 2) Game theory Bertrand Duopoly setting will drive competition to bleed each other ie Lyft and Uber. 3) AB5 ruling could be quite negative for Uber as well as other law suits 4) CTO leaving plus massive share sales by nearly every insider 5) Lyft / Waymo are way ahead of Uber in terms of driverless tech / research We had a look at Uber a while back and just kept scratching our heads
As Australian users know, some geog's for Uber are profitable already (maximum user spend per hour in Sydney without surge has risen by ~50% since launch), so the profit potential for Uber is likely more real and tangible than how it is widely perceived, once global subsidies taper, certain locations exited, and more locales mature. In the mid-term I would not want to bet against your Uber position Steve under $40/$50, given early signs indicate that ex-R&D, Uber’s revenue growth will outpace cost-growth, a powerful tool disguising its future profitability (5 or 10 years from now) as you convey. This runs entirely opposite to the prevailing narrative most of us carry about Uber as a dud investment. Thus for Uber, I see high likelihood of you capturing meaningful revaluation gains ($21 to $42+), as the stock at some point ceases to be toxic, and drives towards your numbers, as it hurdles now lowered expectations. Long-term though, once cars go driver-less, this will surely cut the cost to ride by 70-75%, destroying the economics of the ride-share industry under current driver-cost-structure. I do not think Uber' customer-experience and current market-leadership will count for much, once an equivalent offering emerges at 1/4 the cost! But until that eventuality looms large, Uber will likely change its stripes, focus on margin, and win back some lost friends…. For different reasons to your client, I struggle to see how you or anyone can value Uber conventionally, due to speedy business-model obsolescence, and no LT-defendible core business. Regulatory arbitrage built the business, and regulatory conservatism delaying driver-less cars is the primary moat Uber possesses, given the fierce deflationary cost-curve facing the industry.