To burn or not to burn?
Being even remotely close to the investing world, it is hard not to be aware of the story of Uber. Burning through tons of money, while building prevalent, but controversial service is a great way to polarize investing community.While Amazon or Netflix bears focus on sky-high PEs, the cash-burning enterprises such as Tesla, Uber or WeWork attract different kind of criticism.
Amazon or Netflix I never would have shorted, given the opportunity in front of these companies and irrationality of the markets. As for Tesla I always felt differently - my qualitative call was that the challenging auto business won't allow Tesla to become a big player with their inefficient operations, lack of durable moat and rationality of the majority of car buyers. I saw the worst case (for a bear) as them growing to the size of Toyota/GM/BMW/VW, with similar profitability profile. So hardly more than a $100B company. The energy/generation story was always not credible, given the commodity nature of these products.
Uber's advantage
On Uber, I had mixed feeling for a long time. On one hand the cash burning was despicable and buying market share that way felt wrong - a new player could always enter the market, undercut them and easily steal market share. And sure they did, adding to the common cash furnace.On the other hand, there are several types and levels of scale advantages:
- brand (country and global level)
- aggregation of demand and supply (mostly at city/metro level)
- aggregation of supply by having various services (rides, eats, groceries, same-day delivery, courier services)
- aggregation of demand for mobility (cars/carpool/personal mobility/shuttle/public transport/), perhaps also longer travel a'la BlaBlaCar
- cross-selling of products
- ability to seamlessly integrate autonomous means of transport (AVs, drones) into the network
While it remains to be seen whether Uber will succeed it is hard to imagine a different player who could build all of this. As Buffett said about BNSF, "No one is going to build a new rail network across the US".
The secular trend to abandon car ownership and focus less on things and more on experiences also provides a sustainable tailwind.
And I have no doubt that such an aggregating entity will come to be - it is inherently more efficient to share many of these resources and move people/goods in a manner that has less footprint than people going in cars. And while in China it might very well be Didi Chuxing (which Uber has equity in...) in the western world and few other markets Uber is best positioned to be the winner.
Self driving cars
The major concern I have are autonomous vehicles. I see two potential technological winners in the AV game: Waymo and Cruis. Even with Waymo's headstart and Google's ML prowess I like the long-term potential of Cruise/GM more - to scale the service a lot of vehicles are needed and integration between AV development and car manufacturing will be key for best systems and manufacturing efficiency and cost.GM/Cruise wants to start with their own service, perhaps in San Francisco. It's hard for me to tell whether they can be successful without human backup (not for oversight of AV, but to cover routes that are not mapped).
A hybrid network of autonomous drivers and AVs can have much faster response times in cases AV can't handle themselves - an idle, nearby driver can be summoned to AV which is in a challenging, non-driving-related situation (e.g. being in an accident with another vehicle not at their fault). Also it's hard to foresee in the short term use cases like eats, groceries, same day delivery or courier services operating solely via AVs.
With that assumption, Waymo and Cruise have only two potential partners to work with in US: Uber and Lyft. Alphabet has stakes in both, while GM has a stake in Lyft. Other Cruise owner (Softbank) also has stakes in both.
But even if first AVs would first be deployed via Lyft, I think that technological head-start will be no longer than 24 months - in that timeframe other players such as Ford/Argo will have their AVs ready and I have no doubt that some of them will want to tap into Uber's demand. There's also of course Uber's own ATG group.
Valuation
With this assumption that Uber won't go to zero, it's a question of value of this money-burning company. I've enjoyed reading several valuation from Aswath Damodoran and read several bullish and bearish stories. My simplistic model, based on Uber benefitting from operational leverage and continued, but slowing revenue growth implies 'adjusted profitability' in 2024 and current value per share of $34. Given management's guidance of (adjusted...) profitability in 2021 I think that's rather conservative.
Speaking of which, I like the recent focus of management on costs and exiting markets with no profitability in sight.
Purchasing plan
With Q3 results behind us and lockup period expiring today it's a good time to evaluate taking a position in Uber. I continue to like my gradual purchase/gradual sell approach. For Uber, I've modelled to start buying at $28 and build full position by the time it hits ~$18 (or ~$30B market cap).
For a company that in a few years can easily spot a few hundred billion market cap it will be a very reasonable price to pay.
At the time of writing this I had a few orders already executed, but I do hope that it will go down a lot today to build up a sizeable position at reasonable price.
And to support the company I now own, I'll probably switch to use Uber from now on... Not rational but gives opportunity to experience the service level.
