Quick Thoughts: UBER is Better Than Lyft – So What

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May 6, 2019

Quick Thoughts: UBER is Better Than Lyft – So What

  • Uber’s scale advantages, geographic diversity and broader business model gives it better economics than LYFT.
  • However, profitability will require growing bookings while holding pricing stable, improving driver utilization, and increasing UBER’s take of each booking. Disintermediation and competition will make this difficult to achieve.
  • Autonomous robo-cabs are an existential threat. We do not believe fleet operators like GOOGL and GM will participate in an UBER controlled ride hailing marketplace. UBER’s own self-driving development is far behind after years lost in scandal.
  • We believe the bull case for UBER is wishful thinking – counting on competition to ease, for the big internet platforms to remain a benign influence, for self-driving technology to emerge slowly and without clear leadership. Even then, profit would be unlikely before 2025.
  • Near term could see the now meager growth rate reaccelerate, but gains could be costly. Support for UBER’s investment narrative is likely to erode as the viability of GOOGL’s Waymo initiative becomes clearer. Our base case suggests no profits for more than a decade, if at all.

Up front, UBER deserves credit for starting a revolution in transportation, giving consumers a new option beyond driving themselves, calling a cab or hoofing it to the closest station stop for public transit. Founder Travis Kalanick saw that given the chance to summon via smartphone a clean reasonably-priced reliable ride that would arrive expeditiously and take you straight to your destination with the payment handled automatically via the app, that people would take it. UBER removed a ton of pain points for people all over the planet and built a business on it. Like “Google” and “Kleenex” the word Uber has become a general-purpose term for the product it provides. Bravo and thank you, but it doesn’t mean that its stock is going to be a good investment.

UBER’s pre-IPO roadshow is in full swing, with the company pitching a narrative quite similar to that put forward by its much smaller rival LYFT less than a month ago. Transportation-as-a-Service, a more encompassing term preferred to the catchier “ride hailing”, addresses a massive $7T annual global market for personal mobility. Indeed, UBER, with its additional focus on delivery and freight, might even define its target market as bigger than that. UBER is a transportation broker, making a market between consumers who want to go someplace and drivers willing to take them there at a clearing price. Until very recently, growth has been fantastic, but a push to clean up the operating economics ahead of the IPO seems to have sapped some of the company’s momentum. We suspect that a public UBER will put some more money into marketing and re-invigorate the top-line expansion. So far, so good.

Still, UBER is not profitable, and it is not altogether clear that it ever will be profitable. Management seems to be hoping that it will just work out. Competition is fairly fierce, with rivals looking to take market share with big bonuses for drivers to shift their focus to their alternative platform and with price breaks for riders. This has been expensive, and UBER is anxiously waiting for the rivalry to run its course, allowing pricing to stabilize and for the company to start taking a bigger chunk of the fees paid for rides. The idea is that attractive metro markets will eventually evolve to comfortable duopolies, with UBER’s scale advantages giving it a natural advantage on margins. Side businesses in deliveries (Uber Eats), trucking (Uber Freight), and E-Bike/Scooter rental (Jump) can add a bit of further opportunity to the platform. We are more than a little bit skeptical.

In our recent piece on ride-hailing, (UBER and LYFT: Welcoming the Robo-cab Overlords) we highlighted two major challenges faced by the business that present inherent risks to long-term profitability. First, the presumption that competition will narrow down to a well-behaved duopoly presupposes that UBER’s critical mass of riders and drivers is unattainable for most of its competition, its brokerage platform to match cars to customers is a major technical advantage, and that subscale rivals will eventually give up and go home. We are not so confident. We believe big internet platforms – Google with its Search, Maps and Assistant, Amazon with Alexa and Apple with Siri – are in position to take ride requests from consumers. In this context, the platform assistant steps in front of the ride hailing app and arbitrages multiple services to find the best combo of price and availability for the user. The platforms could also demand a piece of the action for business they funnel to their ride hailing partners. If the platforms get enough action from consumers, there would be nothing to stop them from cutting UBER or LYFT out entirely – already more than 75% of UBER drivers also work for a competing platform, what’s one more app to monitor for rides? None of this would be good for UBER.

Perhaps more ominous is the threat of autonomous robo-cabs. Current economics put ride-hailing costs at ~$1.30 per mile, but autonomous vehicles operating nearly round the clock could bring this down to less than $0.30. Both UBER and LYFT think that the operators of self-driving TaaS fleets would want to rely on their marketplaces to connect with riders and pay them a healthy chunk of the booking fees. This presupposes that these robo-taxi franchises would have no better alternative to reach consumers, perhaps reasonable if the operator were a start-up, but less so if the operator is GOOGL. We believe that GOOGL’s Waymo is at least 2 years ahead of all other players in bringing self-driving vehicles into the TaaS market. We also believe that its prowess in building the hyper-detailed 3D maps crucial to self-driving systems and its emerging ecosystem of partners (CAR, AN, etc.) give it a major advantage in rolling service to new markets once it is satisfied with its operations in Arizona. Waymo could be in 15-20 metro markets by 2025 and given the extraordinary reach and engagement of its parent’s consumer apps (e.g. Search, Maps, Assistant, etc.) we question that it would have any benefit from sharing any portion of its ride booking revenue with UBER. Since as much as 2/3rds of UBER’s US revenue comes from its top 12 urban markets, this is a grave threat indeed.

Exh 1: SSR Estimate of Booking volume on UBER’s platform, 2017 – 2030E

Exh 2: UBER will have to keep driving commissions upwards to sustain revenue growth – increasingly hard without ancillary business and driver pushback

Exh 3: SSR Estimate of UBER Revenue after driver commissions, 2017 – 2030E

Exh 4: Facing pressure from LYFT, other regional players and then Robo-cabs in a few years, we do not expect UBER to be able to turn a profit for a long time

Exh 5: Functions governing ride-hailing platform’s value are very limited

Ah, but what about GM’s Cruise Automation, generally considered the number two player in pursuit of the future robo-cab market. GM can’t just put a “Cruise” button on a search result for an address or on a map. It will need a partner(s) to reach the consumer, but we are not convinced that either UBER or LYFT will be its best option. Partnerships with AMZN (which could layer in deliveries as well as ride hailing) or AAPL (Apple branded rides via Siri and iOS) would seem to have more promise.

UBER’s own self-driving development efforts were badly damaged by a losing lawsuit vs. GOOGL over stolen trade secrets and by a fatal crash in Arizona. A massive brain-drain saw UBER shift its development center from Pittsburgh to Toronto as it recruited a new set of scientists to pick up its autonomous driving efforts. This lack of intellectual continuity has set back their efforts many months and it could be years before UBER will be ready to consider commercial deployment.

The flotilla of self-driving start-ups out there are not much further along. By the time start-ups are ready to play, the damage to the UBER and LYFT platforms could already be catastrophic. This will not have to happen to hurt UBER and LYFT investors – the market will just have to get a better whiff of the possibility for a more damaging narrative to take hold.

Uber presumes that it can keep growing revenues at a double-digit annual pace for more than 10 years. We think bookings will begin to flag as early as 2023, as robo-taxis show in a few major markets taking share and pressuring prices. It would only get worse, and assumptions that UBER could take more than 30% of each booking seem a considerable stretch. Revenues would flatten and the company would never get the scale needed to deliver profit. All said, UBER is in a better position than LYFT. It will likely take longer for robo-cabs to threaten the ride-hail franchise in international markets where UBER plays, and LYFT doesn’t. UBER’s diversification into food delivery and trucking could also partly blunt the near-term threat. Still, even in a scenario where autonomous driving turns out to be a dud, we believe that it would take 5 years or more for the company to reach breakeven. For our blood, the story is far too risky.

Exh 6: Snapshot of Self-driving partnerships and potential match-ups

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