Investment Thesis
Since going public in 2019, Uber (NYSE:UBER) has spent most of the last 5 years struggling to demonstrate profitability to the street. This changed in 2023 when the company made a post tech-bubble pop push to become profitable, therefore fundamentally changing the narrative around ride-hailing startups.
Profits are good for any business, but I think this is just the beginning. Uber’s management (and shareholders for that matter) know the key to serious profits and returns are autonomous vehicles powering autonomous Ubers across their network.
For a while, this has remained elusive. I think we’re now much closer than we were before.
In 2020, the multimodal ride-hailing and delivery company decided to abandon their in-house autonomous driving unit. Now they are expanding their partnerships instead, in favor of working with companies like Google’s (GOOGL) Waymo. I think this was the right move.
What’s key about this partnership is that this allows Uber to benefit from advancements in AV technology without the extensive training costs.
This is on top of Uber’s already in-place collaborations with General Motors’ Cruise to leverage their autonomous tech. Uber’s CEO Dara Khosrowshahi has emphasized that autonomous vehicles are integral to Uber’s future.
In essence, the company is getting serious now about autonomous driving. For too long, investors and the market alike have been told that autonomous driving is just around the corner. For the first time, I believe, it actually now is. With this, I think Uber shares are a strong buy. They will be one of the single biggest beneficiaries as this technology goes mainstream.
Background
Taking a step back, we have to look at the history of Waymo and Uber before this partnership to show how far they’ve come.
Prior to their partnership, Waymo, a subsidiary of Google’s parent company Alphabet, accused Uber of violating intellectual property. The ride hailing company was suspected in 2017 of engaging in the “calculated theft” of Waymo’s proprietary self-driving technology.
At the center of the lawsuit was Anthony Levandowski, a former Google engineer who had worked on the company’s self-driving car project, known as LiDAR. Before leaving Google, Levandowski supposedly downloaded around 14,000 confidential files related to LiDAR technology, which forms the core of autonomous vehicles by allowing them to detect surroundings using laser sensors.
In 2016, Levandowski founded Otto, a self-driving truck startup, which was later acquired by Uber for $680 million. This acquisition, however, raised concerns at Waymo, as they discovered that Uber had access to confidential data from their proprietary technology.
Waymo claimed that the stolen files were used to advance Uber’s self-driving program. They presented evidence that included striking similarities between Waymo’s LiDAR designs and Uber’s technology, and allegations that Levandowski erased forensic evidence from his devices to cover up the theft. The case was finally settled in 2018, with Uber agreeing to pay Waymo a settlement of approximately $245 million in equity.
Levandowski was later charged and sentenced to 18 months in prison for trade secret theft.
Internally at Uber, it proved more difficult than anticipated to build out strong autonomous technology, especially when one of their autonomous vehicles fatally struck a pedestrian in Arizona in 2018, which raised serious questions about the safety and feasibility of their autonomous efforts. Following this incident, Uber scaled back their ambitions and eventually sold their autonomous driving unit, Advanced Technologies Group (ATG), to Aurora Innovation in 2020.
What Waymo Provides
Waymo’s autonomous potential in San Francisco, in my view, makes them automatically a leader in the self-driving vehicle market. With the recent expansion of their “robotaxi” service to all San Francisco users, the company offers a fully autonomous ride-hailing experience that spans both urban streets and freeways. The technology in their vehicles utilizes an array of sensors, including radar and LiDAR, so the cars can navigate complex city environments like San Francisco with precision. San Francisco is not an easy place to drive around. I think this is some of the best training data you can get.
The company has reportedly accumulated over 20 million fully autonomous miles, with 3.8 million rider-only miles logged in San Francisco alone as of March of this year.
With their new partnership, I think Uber is well set up to leverage their own vast distribution platform and brand to take the technology Waymo has offered mainstream.
In essence, Waymo is bringing the tech. Uber is bringing the brand. Each has spent the last decade focused on optimizing the other one.
Now, Uber’s partnership with Waymo is set to expand to several major U.S. cities, including Austin and Atlanta, to expand their ride-hailing services in areas beyond their initial markets of Phoenix and San Francisco.
Over the long term, I really think Uber’s profit potential increases significantly if they can automate driving in highly congested cities like New York and LA.
The pain and wait for autonomous taxis seem to be ending. Uber has a lot of upside to capture from here.
Valuation
Uber currently trades at a higher than median P/E ratio of 33.82, compared to the sector average of 19.58. Normally, a higher than average P/E makes it harder to argue a stock is undervalued (or fairly valued for that matter).
I think what’s key here (and why the market has been willing to award Uber with a higher than median P/E) is that Uber has been underearning. The company for the first 15 years of its life has had to fight both competitive pressures from Lyft (LYFT) in the US, and they have not yet benefited from autonomous driving. Both are changing.
Lyft has struggled to achieve the economies of scale that Uber has, and their market share has only increased around 3%, compared to Uber’s 10% share year-over-year.
In essence, the company has seen both its biggest competitive threat subside and the potential of groundbreaking technology jump over the last 12 months. Even with this spat of good news, I think there is more room for upside.
If we look at Uber’s forward PEG ratio of 0.71, this metric actually comes in well below the sector median of 1.78. A lower PEG ratio here is telling me the market is somewhat skeptical about Uber’s earnings growth over the next 12 months. I think this is misguided, especially due to how fast their partnerships with Cruise and Waymo could pan out. Uber could start to see some real tailwinds from autonomous ride-sharing. I think investors haven’t priced this in.
If Uber’s PEG ratio were to converge with this sector median of 1.78, this would represent a potential upside of 150.7%.
Risks
While I am bullish on Uber for their long run autonomous driving opportunities, I think the biggest risks actually lie within their legacy business of human driven ride-hailing.
Minimum wage laws have been some of Uber’s worst nightmares. These regulations (becoming increasingly popular in major US cities) require gig economy businesses to pay drivers a set minimum wage for their time actively working, which often can be considerably higher than the base wages previously offered.
For instance, in Seattle, the minimum pay for delivery drivers was set at $26.40 per hour. CEO Khosrowshahi has argued that these laws have had the opposite effect of their goal, and have hurt the very workers they aim to help by reducing demand and driver engagement.
Uber hasn’t only been hit on the costs side for this ruling, and they also reported a huge drop in order volumes as they had to adjust in-app prices. Delivery orders in Seattle declined by 45% after the introduction of the new wage requirements.
Wage costs are a big deal to any labor-intensive startup. Uber is no different.
What’s ironic is that despite these wage set-backs, autonomous driving technology offers the long run solution. While the tech is not ready for a full roll-out anytime soon by any major AV software provider such as Waymo or Cruise, I think in the next 12 to 24 months, the benefits of AV technology will surpass initial expectations.
Even if Uber could see marginal cash flow improvements from AV tech, especially in high-density, high-cost areas like San Francisco and New York, I think this will allow investors to see the upside potential I outlined in the valuation section.
Uber knows in the long run they need to be more of a software play. AV tech is likely getting them there sooner than the market expects, helping improve margins and reduce key labor risks from their business
Bottom Line
While it’s been a long time coming, Uber has made strides in reducing AV operational costs and partnering with industry leaders like Waymo to integrate autonomous driving technology into key markets. The streamlined operation now provides a potential boost for Uber’s profitability, especially as they expand into more cities. Uber’s business model is working out, and I believe Uber’s strong market share and capital-light model, along with autonomy integration, make their shares a strong buy.
Uber has always been seen as the ultimate mobility play. Now is no different than before, except for one key fact: the technology really works now. It’s just a question of how it can scale in new markets with unique road conditions.
I think investors will be pleasantly surprised.
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