Uber - Story Change

Big name investors such as Bill Ackman have invested a sizeable portion of their portfolio in Uber, which is why it is on our watchlist. However, after initial research we quickly realized that the debate on Uber was not about its core operations. Uber’s ride hailing business is expected to grow at 15% and meal delivery at 17% annualized to 2027. And the business finally broke even in 2023 and is making money hand over fist, net income is expected to grow 30% annualized to 2027. To all the investors, it’s a dream come true after billions dollars spent on building the platform and price wars with lyft then doordash to compete for marketshare, Uber has finally become an established platform with majority marketshare in ride hailing and ranked second in meal delivery. However, this market leadership will soon be disrupted by autonomous driving. And I believe this is not IF but WHEN story.

Investors are struggling to reach an consensus on how Uber will fare in the new world of autonomous, their core debate centers around three parts: 1. When will autonomous driving become a reality 2. How will Uber be in the world of autonomous? would it be completely destroyed and replaced by Waymo and Tesla and whatever might come next, or will it be a platform that hosts all the autonomous cars and keep extracting fees out of each transaction? 3. What would be the terminal value for each scenario and how to assign probabilities to each.

While I am not going to make a three statement model explaining my thesis, quite frankly I don’t need it and you will see why in a minute. Let’s review what gets us to this article in the first place, Bill Ackman’s investment in Uber:

Bill Ackman is stating the obvious here. Uber as a platform business controlling North America and international markets is minting gold at this stage. And everybody knows that.

He proceeds to say the AV fear is overblown and this is a great opportunity to buy the dip and wait for smokes to clear and value to shown itself. First of all, I doubt Bill Ackman is the best character to decide whether AV is coming or not. I have a lot of respect for him, but judging from his most successful investments and professional background, I think his strengths are in 1. real estate (I don’t see many people on Wall Street that beats Mr. Ackman on this given his family connections and extensive work in the sector like HHH, and General Growth, Brookfield , etc.) 2. restaurants given his active involvement in Chipotle and QSR. Technology is not really his strong suite, he purchased then sold Netflix right before the rebound, and I fear this time might be like the pharma (Herbal life and Valiant) that he was wrong.

In terms of meal delivery, I do think it will be effected by autonomous technology. In fact, it is already happening in China. It’s not hard to imaging a special fitted autonomous car that pulls up to the restaurant, picks up your food, then wait at your doorstep for you to pickup. And I believe it’s a much more efficient way to deliver your meals instead of having them sit on empty seat as the meal might get cold or spilled and driver is not always on time. and it’s quite expensive to have meals delivered, autonomous would cut on that cost. Although Uber eats is highly established in meal delivery, its competitors like Doordash could pioneer this delivery method partnering with Tesla. The platforms will have to cut in the autonomous company but the improved economics means everyone has more to share, so I am neutral to positive on the impact of AV on meal delivery.

On the international market front, I don’t think regulations or poor infrastructure might be an issue because after seeing the succuss and proven results of AV in other countries, governments will be incentivized to open regulation for AV, which brings significant efficiency boost to productivity. And infrastructure should not be a restraining factor because BYD is introducing hybrids PHEV to countries lacking infrastructure, BYD is also pioneering the AV ride hailing services. It might partner with Didi to compete with Uber.

Meituan’s autonomous delivery bot

Addressing the First question: When will autonomous come?

We had a conservative estimate initially but since this year following developments we saw in BYD launching its ADAS we have become more and more optimistic that autonomous is going to come faster than expected and it’s going to happen first in China. First, China has more autonomous cars on the road, it’s EV penetration rate surpassed 50% in sales and every brand is competing not only on price but also ADAS capabilities; compared to Tesla where there is no one competing on EV and it’s even declining, to the shock of the government due to high price and production issues. Less cars on the road means less data collected, which means slower model updates and farther away from Autonomous. Also less competition naturally means the process will be slower, and I doubt it’s a priority for Elon right now to achieve autonomous driving while he got bigger issues at DOGE.

China also has better infrastructure in terms of paved roads with clear signs, and well mapped cities that feeds back to training the models. Chinese engineers are more abundant and affordable to hire, so companies can afford to run their AV program at massive scale like couple thousand engineers which would cost a fortune in US. And Chinese auto manufacturers can quickly make adjustments on the hardware (the car itself) to customize it to the autonomous software it integrates with. This allows for better usability and mass production once breakthrough.

Naturally there will be a flow over effect to US as Tesla and Waymo picks up on software developed by their Chinese peers, and they will be incentivized to all-in on AV because it’s been proven in China. It’s like the Sputnik moment for US.

I couldn’t pinpoint a specific timeline saying AV will become reality by the year of 202X, but I believe it’s going to happen in the next five years. The closer it becomes, the more capital market discounts Uber, it will never stop as technology gets more advanced. This means there will never be time when Uber bulls are acquitted of the autonomous threat, it’s only getting bigger.

Addressing the Second question: How will autonomous effect Uber?

Some people believe that autonomous driving will evolve like large language models—with open source prevailing—allowing platforms like Uber to cooperate and dominate. They hope that software providers (players without actual car manufacturing capabilities) will win, creating a mutually beneficial environment—provided Tesla or Waymo do not massively expand and capture market share.

However, I think the current trend is toward closed-source autonomous driving. While the business model (whether to charge fees or not depending you are Tesla or BYD) is still up for debate, ultimately the automakers will control the ecosystem and will not cooperate with platform companies like Uber. The stronger manufacturers, such as Tesla and BYD, already have an impressive fleet on the road numbering in the tens of millions, and won’t need to integrate with Uber to pickup additional capacity. Ironically many user are driving their cars to do Uber, so the switch from Uber to their car branded AV app would not be a barrier. Moreover, I believe that pure software companies will find it very difficult to break through without partnering with automakers. Internet data is publicly available and can be scraped, but driving data—and the calibration of hardware—requires cooperation with car manufacturers. On their own, pure software firms can only achieve a fraction of the training needed, and their models simply cannot iterate as quickly as those running on real roads. Thus, the bargaining chip isn’t on Uber’s side; Uber can serve as an auxiliary platform to drive traffic, but not as the primary platform.

Given the unit economics, Uber with humans just can’t compete with robots. Uber will have to watch its market share gets taken away. It can partner with Tesla offering cybercabs on its app, but they would get a much smaller cut and majority of their users will be switching to Tesla robotaxi for obvious reasons. Uber at a skeleton of its former self is simply uneconomical to maintain its corporate structure and Unit economics. We are talking about a rapid decline in revenue like when a drug is off patent, dives like a cliff type if AV becomes reality. In this case, Uber investors are collecting residual cashflows from this instrument and I believe that’s undesirable, especially given the 30x PE that is still valuing the company as a growth company with significant terminal value basis.

Addressing the Third question; What probability do I assign to each scenario and what would terminal value look like?

Given our prior discussion, it’s clear that Uber would not be worth much if AV happens. If not, Uber’s valuation upside could be around 50% as I don’t think current market environment favors growth anyways.

I believe it’s highly unlikely that AV will not happen, and I assign a high probability that AV will see significant improvement in the next five years, to the degree that investors are reconsidering Uber valuations and began to question its going concern as the competition environment has changed. The platform that Uber built was for human drivers, and it will be disrupted by AV just like how Uber disrupted taxi networks.

Concluding Thoughts:

I would not invest in Uber given the risks associated with AV and I don’t think it’s valuation is attractive enough to compensate for this risk. Plus, I have better alternative investing in YMM, which is growing at about the same rate, and YMM’s growth may even be faster than Uber’s because it faces no competition, has room to increase its commission rate, and is expanding into new markets like less-than-truckload shipping—attracting more small vendors while its platform penetration is still in an explosive phase. Before the earnings report, Manbang’s stock price was around ¥11; if you factor in earnings of about 0.7 per share this year, that gives a P/E of roughly 16x. By contrast, Uber’s P/E is around 30x this year and expected to come down to about 21x next year, mainly due to the lingering uncertainty over autonomous driving.