We Study Billionaires - The Investor’s Podcast Network - TIP844: Uber (UBER): The Autonomy Referendum — Is Mr. Market Completely Wrong? w/ Daniel Mahncke & Shawn O’Malley

Starting point is 00:00:00 You're listening to TIP. Welcome back, folks, to The Investors Podcast, episode 844. And today's a special one because we're not pitching a new company. We're here to discuss a company that I feel gets referenced in nearly every episode that we do. So it definitely deserves to actually be revisited with a full update, especially since it's one of the largest holdings in our intrinsic value portfolio of stocks. So for context, last year, Sean, you pitched Uber to me and we added it to the intrinsic value portfolio with some pretty good timing. It was around the time when the market sold off over

Starting point is 00:00:34 terra fears last April, which by now feels like a decade ago. And I would say both of us, including our colleague's stick, have become increasingly excited about Uber's long-term prospects, while the stock on the other side has been basically flat since we first looked at it. So Borkings are compounding at around 20% a year. The user base is growing at 16% a year. And free cash flow is running at $10 billion annually. And the company is buying back billion. in stock, just $3 billion last quarter alone, shrinking the share count, which is something that we always like to see with our portfolio holdings. And the stock has gone, again, basically nowhere. Recently, we just did an episode talking about our biggest losers and our biggest winners.

Starting point is 00:01:14 And Uber didn't make the cut because, again, it didn't fit into the conversation because it has just been flat. And so maybe the stock was just a bit too richly valued a year ago. But now I see fundamentals have actually continued to catch up. And we've gotten more clarity on how Uber will partner with all of the AV companies out there to strengthen the platform. I think the question we're asking ourselves today is whether this opportunity has only gotten more attractive or if there's actually something that we're missing, well, we might have been blinded by our own confirmation buyer. So I would say we just listen to your thoughts on the risks facing Uber the first time

Starting point is 00:01:49 we cover the company. So don't make the same mistake I made of writing off this company because of distant fears around automation. And that is sort of my message up front to the audience. And at least listen to the rest of this episode before you make up your mind on whether Uber is a good company to own. 15 months later, the entire market seems to be making exactly the mistake you want us about. Or maybe, that could also be the case. We've just underestimated the threat of automation to Uber's specific business model.

Starting point is 00:02:16 And I got to say, I find myself jumping a bit from being very bullish on the company to being slightly in doubt. And I got to say, that's never a good sign for you as an investor, which is also why I, look forward to this episode so much because it does give us the opportunity to dig really deep into Uber again. And I'm also quite sure that you've got some very important updates for us today, right? Yeah, that's right. When we pitched Uber in April of last year, the company traded at around 55 times its operating profits, which was a rich price, admittedly, unless you were as bullish on the company's growth as at least I was. And today, now that valuation multiple is at 22 times operating profits, which is much, much more reasonable. So over that same

Starting point is 00:02:59 period of time, profits have roughly doubled. So the business doubled, but the multiple got cut by more than half, and then the stock went sideways. So that alone has me feeling very bullish, but all that is for not if the terminal value of Uber is in peril. Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own,

Starting point is 00:03:49 and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manker. So for anybody new to Uber, how about we start with a 60-second refresher on the company? Uber is the world's largest ride-hailing platform, but it is really three different businesses. Mobility is the rides business, we all know. There's delivery, and that refers to Uber Eats, and actually now includes a growing list of grocery shops and retailers beyond just restaurant delivery. And then there's a smaller freight brokerage business that connects truckers with shippers.

Starting point is 00:04:35 And we're going to pay less attention to that today because it's not material to our thesis about the company, nor does it really generate much of a financial impact. And again, for anybody kind of new to Uber, this will sound strange. But the way to think about Uber is that Uber is a marketplace. They are an intermediary connecting supply with demand, whether that be demand for rides or demand for pad-tied deliveries. And so Uber owns no cars, and they actually technically employ no drivers, at least in most markets, they are contractors.

Starting point is 00:05:05 And then it matches riders with drivers and eaters with couriers across roughly 70 countries and takes a cut of every single one of those transactions, which is called the take rate. And they earn that for aggregating demand and supply and coordinating the logistics. That's at least part of the value they add. And for context, 200 million or so monthly riders and eaters spent about $190 billion plus through Uber's apps over the past year. And that 190 billion figure, that's what the company calls gross bookings, a total amount

Starting point is 00:05:41 of the order values that go through the platform. And then Uber's revenue is roughly a 20% slice of that gross bookings number, basically after they pay out the drivers or the restaurants. And the fact that Uber doesn't own the cars that people ride in or, you know, the restaurants, it's really the point of the entire Uber thesis, right? Especially later when we talk about its advantage over AV companies like, for example, Waymo. So basically, what you have to understand is that Uber is just a platform meant to serve drivers, you know, restaurant owners and customers, whether that be through food or, you know, rights,

Starting point is 00:06:17 as we all know it for. And when we covered Uber originally, one of my hangups was exactly how profitable this business could be. because they have a lot of incremental costs. I mean, you call Uber's economics of scale more like Walmart's than Google's, with the idea being that every incremental rate requires paying a driver for their time and also the insurance. So margins would always be kept well below what other software companies could earn. It's kind of similar to what we also discussed with Spotify back when you covered it.

Starting point is 00:06:45 So operating margins were about 6% back then, but just in a year, quarterly operating margins have doubled. So even just looking at your financial model for the company, we may have both underestimated what Uber could actually accomplish. And as you know, if you listen to our biggest winners episode, outperforming our margin estimates by white margin is a common denominator with all of our biggest winner. So I literally used Uber as an example when I talked about Remittly's margin expansion and profit

Starting point is 00:07:13 inflection. So this is a company that shows, as well as few others do, how you can quickly become a way more profitable company. Well, as you know, I love to talk about Uber's swing in operating margins over the last five years. It's one of my favorite topics to bring up at cocktail parties. The revenue growth is great. But if you look at a chart of their margins, it really is one of the most beautiful things I've ever seen. From 2020 through today, Uber's operating profit margins have swung from negative 43% to positive 12%. And if you're keeping along at home, that is a 55 percentage point swing

Starting point is 00:07:49 in margin profitability in less than six years for a company that was already doing billions. and revenue. And I mean, that is, come on, that's astounding. I'd agree that Uber's ceiling is higher than I appreciate it last year. And the core logic, though, still holds that Uber probably won't ever have Microsoft's 40% margins, but with further scale, higher margin advertising, cross-selling between Uber rides and eats with lower customer acquisition costs, Uber's membership program, driving more order frequency, and then integrate a Vs into its app, which comes with a different cost structure, and without totally displacing human drivers, which we can speak more to, Uber could become a structurally better business

Starting point is 00:08:36 than was imaginable to anyone just a few years ago. Just to double down on those points you quickly made there about what could further drive Uber's margin higher, I think you firstly mentioned advertising, and Uber's ads business didn't exist just a few years ago, and now it's a business with more than $2 billion annual run rate. So going more than 50% a year. And ad dollars are, as we all know, nearly pure profit compared to the core business. That's why we own so many businesses that at least expanding into the advertising space. I mean, Macado Libre, Amazon, all of those companies, right? And these are the ads that can be shown on devices in the back of driver's cars, in-app ad placement,

Starting point is 00:09:14 with even just having your restaurant position more prominently on the Uber map while people just check on their right status, for example. So you could even have search-based ads where restaurants bid to be the first result when you search something like Chinese food near me in the Uber Eats app. And I still remember us standing, I think it was in Lisbon last year, ordering an Uber and basically discussing how you could best place ads on the map. And it looks like that's what's now happening. And then as we've alluded to, Uber Eats is no longer just eats. It probably needs a sort of rebrand. I mean, you can now order a whole lot more than just food. And honestly, they're stepping to some extent, at least on Amazon's toes here. I mean, Uber can

Starting point is 00:09:54 bring an urgency to delivery that Amazon, at least currently, is not designed to match. I mean, I don't know, let's say you run out of makeup and you have a party in two hours, right? And you might not have enough time to actually run to the store. Well, you also have to do all the other stuff that you need to prepare to go to a party. Well, then you can just call an Uber driver to pick your order up from, let's say, order to beauty and bring it to you in 45 minutes time. And I use that example, not necessarily because you or me just love wearing makeup, but because Uber literally partnered with Oita Beauty not too long ago.

Starting point is 00:10:26 So this is something that is happening right now in the real world. Well, it's also a great example, too, because OULTA was actually our first holding in the intrinsic value portfolio. It was the first company we ever invested in. And we did very well on the stock before selling. We thought the valuation got a little rich for our taste, but it is a fabulous business. And yeah, I was really excited to see them partnering with Uber. And to your point, Uber has over 1.5 million merchant partners.

Starting point is 00:10:51 globally. And that ranges from a lot of that as restaurants, but grocery stores, cosmetic stores, sporting goods stores, alcohol retailers, florists, and really everything in between it. They expanded much quicker than I think both of us thought they would do. And another thing on the margin front that you didn't yet mention, I think, is insurance. I mean, that became a huge cost headwind post-COVID because vehicle prices just exploded. And so if vehicles are more expensive, then obviously insurance premiums must rise correspondingly. And I think we spent a lot of time on that in the original episode, and I didn't know about any of that business.

Starting point is 00:11:27 So I think it was kind of hard to fully understand it the first time you hear about it. But there was really an unprecedented inflation in car insurance, and especially in the US, which is still Uber's biggest market. But as I come across in my research for an episode that I will soon release, which is Copa, I think those are wins that are now starting to change, right? I think this could be a tail one for Uber in the future. So for context, Uber renegotiates rates with its insurance carriers every March. And this year's renewals came in at, I think it was low single-digit increases, which is the most benign increase in many years.

Starting point is 00:12:03 And this happened in addition to receiving hundreds of millions of dollars in savings from state-level insurance reforms. It's a great point for sure. And that's not even to mention that in a future where, say, 30% of Uber's fleet is, autonomous vehicles and drones and maybe delivery robots, then insurance costs as a share of revenue would just keep dropping. And just a few days ago on that point, actually, Uber announced that it was partnering with a company named Zipline to bring drone delivery to millions of Americans by the end of 2029. And so just to kind of go down that tangent for a moment, Zipline is a company operating across four continents with 135 million autonomously flown miles. And 2.7,000,

Starting point is 00:12:47 million deliveries that have helped reduce traffic and carbon emissions. And the ambition, I think Uber is hinting at there is really, really big. And they're not even hinting. It's not very subtle. They're pretty explicit about that they want to revolutionize convenience. And that is something that appeals to everybody. Everybody values convenience. And just reading from the press release, Uber said, quote, it's building the world's most flexible hybrid delivery network, seamlessly integrating couriers, sidewalk robots, and drones to match every delivery with the best mode of transportation. So I don't know about you, Daniel, but I can't wait to get my first drone delivery from Uber

Starting point is 00:13:27 Eats. That is going to be a great, great day for me. And just a line here from Ziplines co-founder, he adds, teleportation is not science fiction anymore. It's becoming part of everyday life. Every great transportation revolution has changed where people live, how businesses operate, and how economies grow. So together with Uber, we are taking the next step toward building a world where getting what you need is as fast and as effortless as sending a text no matter where you are.

Starting point is 00:13:55 And we were talking beforehand about how we're not the most DIY types of people, Daniel and I. We really appreciate convenience. Let's just put it that way. So this new world that we're entering into and that Uber is ushering us into this new age of unriended. I'm pretty excited about that personally, and I'm pretty excited about it as an investor. And so I'm getting a little cared away, but my main point was actually that drones don't come with insurance costs, or at least not the same insurance costs as drivers on a road. And then if you believe that AVs will broadly be safer than human drivers, which does so far

Starting point is 00:14:35 to be true in limited cases, that insurance costs as a share gross bookings or revenue will almost certainly go down, and that creates room for margin expansion. I don't want to go on a tangent here. And perhaps the Zipland co-founder has a different definition of what teleportation means. But I think generally, we just had Moderna coming out with, I think, the news that they now have the first vaccine against cancer, at least a form of it. So whenever we have these stories, and I just feel about what will the world look like in 10 years time, you just have to be excited, right?

Starting point is 00:15:08 I mean, you might order food and there's a drone coming. and I think it's even happening in some countries. I mean, we covered coupang a while ago, and they already used drones to deliver packages. But all of that just gets me excited to thinking about where the world could be in 10, 15 years' time. And I think that's also a great part of why we like to look at these companies, and especially Uber, is one of those where you just see so many things

Starting point is 00:15:27 that could just make your life better. But anyway, just to add to that, and I think for a couple of years, Uber's U.S. rights business was noticeably slowing, while Europe and Latin America still grew quite fast, I think it was about 30%. And it turns out that some of this was self-inflicted in a sense since U.S. insurance costs were inflating at, I said it before, double-digit rates, and Uber passed those costs onto U.S. pricing.

Starting point is 00:15:52 And there's no evidence, and I guess it shouldn't really come as a surprise to anyone, that higher pricing slowed down demand. And management actually described it as an accidental A-B test on price elasticity. With America, as the test group, I don't really know what I think about that. I think this is perhaps a bit too important to turn it into an A-B test. But anyway, now that insurance has normalized, they are passing those savings back into lower prices and the US business is very much really accelerating, which is great because it's obviously one of the most important parts of the Uber business. But also, it's kind of funny to say that the US is not necessarily Uber's most profitable

Starting point is 00:16:29 market in terms of per capita economics. Because in some countries, and I think it's namely developing markets, Uber isn't even required to provide insurance at all. So each right there can be more profitable than a right in the US, at least in percentage terms. But still, we're not complaining that growth in the US is turning up again. No, no, not at all. And one of the things I've also been most excited about is Uber 1. That is the company's membership program. Proudly, we are both members of it, right, Daniel? And it's increasingly becoming an alternative to Amazon Prime or maybe better way to put that is it's like the Amazon prime of on-demand same-day convenience. And so in the

Starting point is 00:17:12 US, it's something like $10 a month and it gets you free Uber Eats deliveries. And then 6% credits on every Uber ride plus some other benefits there. But for me, it does pay for itself. And anyways, Uber 1 now has 50 million members. And so that's an increase of 14 million paying subscribers just from when we looked at the business last year. And you can do the math and realize that this amount of subscription revenue for a $150 billion company is not terribly consequential. And in other markets, the subscription rate is not even as high as $10 a month. But the way to really think about it is that Uber One drives greater loyalty to the Uber platform and an aggregate that significantly increases order frequency.

Starting point is 00:17:58 And so I can attest to it. And I used to order food delivery very, very infrequently, maybe once every three months. you know, once in a blue moon. But now I actually find myself doing it maybe two or three times a month, which is not a ton, but I'm incentivized to do so to capitalize on the perks of Uber Eats. And as shareholders, we've got to test out the product, right? And Uber One members really are, they're like super users. They now are driving roughly half of Uber's total gross bookings and about two-thirds of

Starting point is 00:18:28 delivery booking. So you can see that for most Uber-1 members, the Uber Eats perks are what? particularly stand out. They're driving a disproportionate amount of delivery bookings. Let's take a quick break and hear from today's sponsors. For most of my 20s, my money story was simple. Earn more and the rest takes care of itself. My income did go up. My spending went up right alongside it, though. I just didn't notice. My savings rate had quietly slipped from 30% down to 20%. And I didn't catch it until Monarch put every account on one screen and showed me the trend.

Starting point is 00:19:06 which sings a little for a guy who spends all day pulling apart someone else's balance sheet. And now the investment view shows me my whole portfolio in one place and how it's actually doing against the S&P 500. And when a big purchase is coming, I map it out first and see whether I'm on track before it's too late to adjust. Write your own money story with Monarch. Use code WSB at Monarch.com to get your first year of Monarch core half off at just $50. That's 50% off your first year at monarch.com with code WSB.

Starting point is 00:19:44 Curious about online trading, but haven't taken the first step yet, you're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. From crypto to commodities, there's always something happening. The platform is soon. super easy to use so you can trade on the go right from your phone. You can get started with just $100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks. And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience,

Starting point is 00:20:24 Plus 500 makes trading more accessible than ever. Check it out at Plus500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify plus 500. It's trading with a plus. Most leaders are automating work. They've never actually watched happen. They know how the process is supposed to go. Someone walked them through it once. It sounded clean, but the version that runs day to day looks completely different. And nobody's doing anything wrong. That gap is bigger than most of us realize. And it means the decisions about what to fix, automate or hand to AI are running on gut, not data. That's exactly the problem that today's sponsor, Scribe was built to fix. Scribe is a workflow AI platform

Starting point is 00:21:08 trusted by 94% of the Fortune 500, and Scribe Optimize is your AI roadmap. It passively captures how your team actually works across your approved business apps, no interviews, no manual process mapping, and follows workflows wherever they go, even when they start in one tool and finish in another. The dashboard shows you what's happening and where the time is going, live right now, not a report someone built last quarter, and its top issues view doesn't just flag your biggest inefficiencies, it tells you why they're happening and gives AI-powered recommendations with estimated time savings built in. Importantly, it's a leadership visibility tool, not employee monitoring. It only runs on apps your admin approves, user level data

Starting point is 00:21:49 is anonymized by default, and sensitive information is automatically redacted and never leaves your firewall. To see Optimize inaction, head to scribe.com. W-S-B and mention the investors' podcast for a 30-day risk-free trial. That's S-C-R-I-B-E dot how slash W-S-B. All right, back to the show. I'm actually surprised to hear that Uber 1 is $10 in the U.S. I think I'm paying $5. And even with the conversion of euros to U.S.D, that's still quite cheap,

Starting point is 00:22:20 which kind of makes me question whether I even get the same perks as you. I know that especially whenever we talk about credit cards. And I've even asked some people or some friends, you know, some friends in my circle, we just don't have any good credit cards here. There's no payback to the same extent that you always talk about when you talk about your credit card. So I should probably check whether Uber One is even giving me the same advantages as it is giving people in the US. But that's for another day. I think there was quite an interesting line from Dara, Uber's CEO, who compared Uber One to Netflix, where you basically pay one fee and then the platform with the most

Starting point is 00:22:53 content wins, except Uber's content is basically cars and careers and, you know, careers and restaurants and now also groceries and hotels and parking and all sorts of stuff. And I guess I did say parking, by the way. In February, Uber announced that it was acquiring the parking app Spot Hero where you can basically reserve spots at more than, I think it's 13,000 garages. That might sound a bit random at first. But if you see Uber as a convenience platform in all regards, I think it makes a lot of sense.

Starting point is 00:23:21 I mean, especially right now here in Hamburg, when I want to go somewhere, it's not really about will the car take, let's say, 10 minutes. it's more about how much time do I need to actually find a parking spot. So I think this is one of the most important problems for all big cities where you have a lot of cars. And it's not a huge business, but it's one of those where you just have one more reason to open the app. And if Uber does it job well, it can then cross-sell you on, for example, paying for other services from Uber. So they basically bake as much stuff as possible into Uber 1 as an additional value add just to get you on the app and then cross-sell you on other things. And what they found is that multi-product users spend more than three times what single product

Starting point is 00:24:01 users do. So just by getting existing users to use more different services from Uber, they can drive a ton of growth at lower acquisition costs. And as they say, getting a customer you already have is obviously cheaper than getting a new one. And I think that's also one of the things that I thought about the first time we covered the company where I was like, doesn't everybody already have Uber? How are they supposed to keep growing for 20 plus percent?

Starting point is 00:24:23 Well, it's exactly this. you know, getting these existing customers and making them more profitable. But anyway, I'm sure we could talk about half a dozen other things that we're excited about for Uber. But I would be more interested today in actually getting into what the market is paying attention to instead, because again, Uber stock isn't exactly matching its results over the past year. And I assume that largely boils down to our name, which shouldn't come as a surprise, is Waymo. Yeah. So let's lay out the facts first. I'll try to do so as neutrally as I can. In February, Waymo, Alphabet's driving subsidiary, raised $16 billion at $126 billion post-money valuation. And they raised that capital from some very

Starting point is 00:25:10 well-respected venture capitalists like Sequoia and Drescent Horowitz, with Alphabet remaining majority owner in Waymo. And so that's another pretty powerful backer to have. And WAMO's vehicles have now driven well over 100 million fully autonomous miles, completed 15 million paid rides in 2025 alone, which is triple the prior year. And it's doing something on the order of magnitude of 500,000 rides a week. And they say that they're hoping to expand to more than 20 new cities this year. And that includes Tokyo and London. And maybe they'll be coming to Frankfurt and Hamburg one day soon, Daniel, and all that sounds really impressive, but just to emphasize how optimistic the market is about Waymo's future, you've got the private markets valuing Waymo at roughly the same

Starting point is 00:26:00 valuation as all of Uber. A company that I should say, in contrast, is doing more than three billion trips a quarter and has $10 billion in free cash flow. So somebody has to be wrong here. Waymo is either grossly overvalued or Uber is grossly undervalued, at least in my opinion. And don't get me wrong, Waymo is incredibly impressive technology. But there is a difference between novel technology and being a scaled, multi-billion dollar profitable business that can support a more than $100 billion market capitalization. We know that Waymo can plug into cities that already have lots of ride hailing and transportation options, places like San Francisco. But I should mention that a chunk of the rides if completed were actually ordered

Starting point is 00:26:53 via the Uber app. And so can Waymo fully replace Uber? That's the question. And then the other question is, can it take enough market share from Uber to undermine Uber's business long term in a space that's already growing incredibly quickly? And so I think they have a lot to prove still to warrant that kind of valuation. and my belief at a high level is that drones and autonomous vehicles are going to make convenience cheaper than ever. And so it'll be so easy to get picked up or to order whatever you want

Starting point is 00:27:26 and have it in minutes, maybe not quite teleportation, but something pretty close. The industry is going to expand massively. We're going to find ourselves all using these services much, much more often. And I think we'll just become more spoiled by convenience and more dependent on it. And a lot of folks who are on the margins as Uber or DoorDash customers at the moment, I do believe they'll be won over as more frequent users as automation brings prices down. It'll become cheaper to hail a ride or to get food delivered. And then the frequency of order volumes will increase dramatically. That's sort of my view on it. And with the point being, Waymo could take a slice of market share from Uber, they almost certainly will. But if the

Starting point is 00:28:12 whole pie is growing fast enough, there will be more than enough room for multiple huge winners. You sort of touched on it briefly, but a lot of Waymo rights have actually been ordered through the Uber app, as we all know, and not necessarily the Waymore app exclusively, reflecting that until now the two companies have tried to partner. And I think the bear argument has always been, despite that, that Wayne was just using Uber, right? That they are exploiting their wide distribution to build their own brand awareness, and that they're trying to pull it off by themselves. just sort of pulling the rack out from, you know, underneath Uber. And just by breaking up and basically pulling Uber's users to the Waymo app, to the exclusive

Starting point is 00:28:51 offering it, that's not exactly what we've seen yet. But I think there are signs that this is what could be happening in the future. I mean, Uber stock was knocked to its 52-week low. And I think it was late July after Waymo formally notified Uber that it will end the exclusive partnerships. And I think it was Austin and Atlanta. And those were two cities where all. So Waymo's robot taxis were available only through the Uber app,

Starting point is 00:29:15 which is not the case in every city that they actually partner in. So Waymore plans to launch its own app in both of those cities. I think it's early 2028 when the existing contracts with Uber expire. And just to clarify, that doesn't necessarily mean that their partnerships are fraying in every city. But clearly, there are tensions between Uber and Waymore and they are intensifying it. If Waymore were to indefinitely remove their fleets from Uber's app, that would be a setback for Uber without a doubt. And that's also why Uber is racing to partner with as many other A.V companies as they can

Starting point is 00:29:48 so that no single AV maker actually comes around the corner and dominates the entire market. And instead, you have many players competing with each other. And then Uber is sort of the neutral aggregate of demand for customers in that field. And I got to say, I do actually worry about the Waymo dynamic specifically. However, what gives me some peace of mind is that there's no loyalty in the world. right-hilling business at all. And you would probably think that's a negative for Uber because it's the biggest brand. And you could say, you know, as the number one, people will choose Uber because of the loyalty. But I actually think it's an advantage because if there's no loyalty,

Starting point is 00:30:23 you need an aggregator of demand. And even if people don't choose Uber because of its name or because of the brand, they just choose it because it will be the best aggregator of demand because it has the most scale. So that means either it's the cheapest or just coming faster. You know, if I'm at a restaurant, I just want to get home. I don't want to wait for 20 minutes. If I can go into Uber app, and then it's a 10-minute right, right, even if they charge up a bit for that. And Waymo is cool and it's unique. And I would love to drive one at some point. Unfortunately, I can here in Hamburg. But when there are 10 AV companies, why would anyone care to order Waymo instead of any other AV? I think it's pretty cool right now. And it's sort of the

Starting point is 00:30:57 only one that you actually see on the streets. But 10 years time, when you have drones flying around you, you know, food delivery, I think there will be so many companies and nobody really cares. Today is turning into a very futuristic episode, evidently. But yeah, the Uber and Waymo fallout is real. And the Financial Times reported that around this time back in July, the two companies had begun lobbying regulators for opposing frameworks, which is what has put them at odds increasingly. Uber wants these rules in place that enshrine hybrid networks of human drivers and robots

Starting point is 00:31:31 working together. So, for example, in New Jersey, Uber lobbyists propose. that any platform offering robotaxies services be required to have human drivers provide at least 85% of all rides during a three-year pilot program. And so that is not very subtly, clearly intentioned at Waymo and setting them back. And you can imagine why this would tick off Waymo. And so things have actually gotten pretty petty, honestly. Waymo has accused Uber of not taking good care of their vehicles, and then Uber has turned around and pointed the finger back at them complaining about safety issues on Waymo's end. It's getting personal, I think, but I think,

Starting point is 00:32:12 Sean, you 15 months ago in your first pitch laid out a pretty good case for why these hybrid right-hailing networks will probably, most likely, win out over strictly AV platform. So instead of me just repeating what you said, I would say we just give that a listen. The beauty of Uber's model is that the vehicles are not on their balance sheet, and drivers can opt to make themselves available in response to demand in real time. Thus, Uber drivers can be incredibly flexible about responding to ride requests and a lack thereof. Another way to maybe say that is that supply on Uber's platform naturally adjusts to demand. And for, say, Waymo, to try and allocate XYZ number of cars through a city that will displace Uber, well, the reality is that they're either going to

Starting point is 00:32:55 under-allocate vehicles or over-allocate them at any given moment in time. There's just no way to perfectly match demand with a fixed supply of vehicles driving around, which is why it's better to deploy a more limited fleet and just partner with Uber, tapping into their network for bookings. So, great yourself, Sean. How do you think about that argument today? How does it stack up compared to how you thought about the company and also all the developments 15 months ago?

Starting point is 00:33:21 I mean, the market certainly has an opinion. And I think at the moment, it's fair to say that it doesn't exactly favor Uber. I'm as vulnerable to confirmation bias as anyone, but I would argue that actually the logic of that clip has been validated. Demand for rides remains wildly spiky, and that is just fundamentally not going to change. The peak to trough ratio within a single day's demand for rides is something like 4 to 1, and a fixed fleet of robo taxis that's size for peak-to-trothraxia. in demand is going to sit idle during those trough times of the day, while a fleet that's

Starting point is 00:33:59 sized for the demand troughs is going to leave riders stranded at rush hour and be completely unreliable. And Uber uniquely solves this by flexing millions of human drivers in and out of the market in real time, which is why in Austin, Uber's own data showed with Waymo vehicles on its network were busier than 99% of human drivers. But that's because Uber's demand aggregation kept them full. There were so many people. There's almost a liquidity to the Uber network that is very, very hard to replace. I've actually heard that even today, if you open the Waymo app in California,

Starting point is 00:34:36 rate times once for like 18 minutes versus just a few minutes on Uber. So I think the reality of needing to have flexible supply where drivers can come online to work for just an hour or two doing these demand spikes hasn't changed. then it's already being felt for the people who actually use Uber and Waymo. But again, I think currently Waymo just has this advantage of being more exciting if you get into them. So maybe some people will use it. But if you just think about your daily life, right, you don't want to wait, let's say, 18 minutes if you could just wait five minutes. Yeah, I don't think that these challenges are lost on Waymo.

Starting point is 00:35:11 You know, this is a pretty smart company. And that's why longer term, I do believe that they will want to continue to work with Uber. if that proves to be the best platform for monetizing their hardware. So, of course, they want to try it on their own with their own app. But if that doesn't work out as well, they may ultimately revert back to wanting to plug in to Uber. And one thing that gives me pause, though, is that Waymo does not necessarily have to be efficient, doesn't have to be profitable. What it's trying to do is be strategic in the sense of with $16 billion of fresh capital.

Starting point is 00:35:45 and really virtually unlimited backing from Alphabet if needed, though that is sort of changing as Alphabet is allocating a lot of resources toward AI and data center construction. But basically, Waymo can afford to have terrible fleet utilization for years if that's what it takes to displace Uber. And you know who proved how to use that playbook? Uber. Uber subsidized rides for a decade to gain scale. And some people thought the business would never be profitable.

Starting point is 00:36:13 And so the question now is really how ugly does Waymo want to get in this competition with Uber? Are they going for the grand prize? Do they want to completely wipe Uber off the map? Or are they okay with maybe a more secondary role in the market or, you know, a role where there's room enough for both of them? And so if it's the former, they can certainly cause Uber a lot of pain for some time to come. And that could be in the form of burning lots of capital for the next decade and really triggering a race to the bottom and pricing, but I don't think kills Uber long term, but would certainly set back the returns that we expect them to generate. And so, you know, again, I don't think

Starting point is 00:36:55 that they'll be able to just grid it out for so long that they'll inevitably kill Uber, but a subsidy war is really not going to be good for anyone but consumers. I mean, consumers will benefit from cheap ride prices, but for us as shareholders, it'll be a bleak picture for us. And so, like I said, there is, though, a version of reality where they choose to avoid this race to the bottom and opt to instead treat Uber as a strategic partner long term, where both sides can win big by working together. When I said in the beginning that I find myself sometimes, you know, questioning my conviction in Uber, I think this is what it actually comes down to.

Starting point is 00:37:35 I mean, Google has spent billions of dollars on Waymo and I just struggled to see how they did that with the goal of mine to, I don't know, become one of 10 AVs integrated into the Uber network. So they must have had the goal. And this is also what they're currently showing with the strategy to actually dominate that market. And if they do, they could throw so much money at it that it just destroys Uber's margins for many, many years and therefore also our investment. And even if they don't kill it, that would be sort of a worst case outcome, at least if you think about it for the next five to 10 years.

Starting point is 00:38:05 And whether we like it or not, at least in select cities, the single best autonomous as a vehicle company on earth, just looked at everything, which Uber is offering, which is, you know, 200 million users, the demand aggregation, the utilization logic that you basically just talked about. And then said, no thanks. We'd rather build it ourselves. And I don't know, if I were to be a bear here, I would say, isn't this the market's whole point that they say, well, if the technology leader doesn't need Uber, why would the eventual winner of autonomy, whether it's Waymo or any other company, still need Uber? It's a good point.

Starting point is 00:38:40 And just to put everything in context so far, Waymo does 500,000 rides a week, whereas Uber does 40 million trips a day. So the entire global autonomous vehicle industry, all the players combined, is only doing something like 50 million trips a year, as Uber adds roughly 3 billion trips a year, chest and growth. So, in other words, autonomous rides today are around one-tenth of one percent of global ride share volume. And, you know, maybe he's biased, but Uber's CFO has been pretty blunt that over the next five years, AVs are, quote, relatively immaterial to Uber's volume. So he doesn't even see AVs as really being something significant for a while down the road. And the fastest growing

Starting point is 00:39:32 AV deployments today are, at best, tripling their volumes, each. year. And in Uber's early hypergrowth years, they were actually 9 to 10xing their volumes annually. So even for the best case scaling curve for robotaxies, things are progressing slower than what we saw during the ride hailing platform wars of the 2010s. And that tells me that the integration of AVs is going to play out over a long, long time. Overnight, every car on the road is not going to become an AV. And so there's going to be lots of regulations. It's going to be protests. Customers are going to be hesitant to adopt the new technology. And then also there's just a lot of work to be done for AVs to still operate safely in all environments, not just on the pristine

Starting point is 00:40:18 roads of San Francisco and Austin, Texas. So they're going to need to be able to navigate rainstorms and blizzards and chaotic traffic and cities like developing countries and a whole bunch of other really complex problems. And so again, I think we have to put everything in perspective, even if there is some plausibility to the market's concerns about the terminal value of Uber, it's certainly not on any sort of immediate timeline. Although the business and the geography are concentrated, I mean, if you decompose Uber's profits, mobility, which is obviously the right-hailing business, is roughly 60% of operating profits, and then the US represents roughly 60% of the mobility business. And then if you just

Starting point is 00:41:01 look one way further, looking at the top top. 20 cities in the US, they're the only places that Robotex is currently, realistically, operate at scale in the foreseeable future. And that includes about a quarter of US mobility profits. So we're mainly talking about the risk of them getting into the US and then competing with Uber there. And what that comes out to, if you just look at all the numbers, that's effectively 9% of Uber's profits that are genuinely exposed to Robert Tax the competition, at least in the near to medium term. And what is that? Probably like five to 10 years time. That's what I would label this.

Starting point is 00:41:33 And if you include the suburbs, which AVs, if we're being honest, won't reach for a long time. You get to maybe 18%. But actually, again, the suburbs have been one of Uber's, I think you mentioned last time, biggest growth areas with their weight and safe initiatives. We can wait longer and then you get a lower price. And again, it took even Uber a long time until they got into the suburbs because it's just a lot more organizational things that you have to do to even there have enough drivers at the right time to actually pick up people. And meanwhile, the other half of the company is just delivery.

Starting point is 00:42:04 And that involves a human walking food to your door. And I know that robots are not doing that at scale at any time soon, although we talked a lot about drones today. But I don't know, thinking about drones that can do this, I think it will still be, you know, five to 10 years out at a minimum. And before that, you know, you won't see any restaurants setting up to work with delivery drones, assuming that would even be possible for most restaurants. So when Uber's valuation multiple of operating profits gets cut in half,

Starting point is 00:42:30 like it has been in the past year. The market is implicitly writing down the whole company for a risk that directly at least touches maybe a tenth of current profits. Although we all know, it's not how the market works. They look out 20, 30 years at least sometimes, and

Starting point is 00:42:46 this appears to be the thing here with Uber. What's really interesting is that in Austin, in Atlanta, sure, supposed to be two of Waymo's biggest showcase markets. These cities have actually been among the fastest growing Uber markets in the US. And in San Francisco, which is Waymo's most mature market, which is funny to say, mature for

Starting point is 00:43:07 a business this young, but still, Waymo does legitimately have a 15 to 20 percent share of rides, but Uber's trip growth accelerated in San Francisco in 2025. So if you're asking how it can be, it goes back to a point I mentioned earlier. Robotaxies are expanding the market. They are converting people who would have driven themselves or taken public transit into ride share users. And so the category is growing faster than market share is shifting. And ride share today is less than 1% of the roughly 3 trillion miles that Americans drive every single year. And as autonomy pulls costs down toward being on a closer parity with car ownership, at least in cities, that leaves a lot of room for that 1% number to grow. Let's take a

Starting point is 00:43:59 Quick break and hear from today's sponsors. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas. But by the time I sit down to write it all up, half of them are already gone. That's why I've been using Plod Note Pro. It's a small device that sticks to the back of my phone and captures the conversation

Starting point is 00:44:29 and hands me back a clean, searchable recap. And so the key points, the follow-ups, the things I usually want to act on. It has all of that. And that allows me to stay present in the room instead of scribbling notes that I won't be able to read back later. And I notoriously have very bad handwriting. And so it's changed how I prep and how I follow up with investors. It's also built for people who take conversations seriously.

Starting point is 00:44:52 Enterprise-grade security. So if you're recording calls with clients or industry contacts, that's covered too. So if you live in meetings, calls, and interviews, we'll give it a look. Go to plod.a.i slash USB and use code WSB for 10% off. That's plod.a.i slash WSB, code WSB. And always get consent before you record a conversation. Curious about online trading, but haven't taken the first step yet. You're not alone. And plus 500 futures is a great place to start. The futures markets are moving Fast and with plus 500, you can explore popular assets like oil, gold, S&P 500, Bitcoin, and more. From crypto to commodities, there's always something happening.

Starting point is 00:45:37 The platform is super easy to use so you can trade on the go right from your phone. You can get started with just $100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks. And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience, Plus 500 makes trading more accessible than ever. Check it out at Plus500.com.

Starting point is 00:46:03 Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. They say that every day your business is late to AI. You fall two days behind. But how do you keep up when the competition is only moving faster? Fortunately, there's NetSuite next.

Starting point is 00:46:23 You probably know NetSuite, the AI-powered business management suite that securely connects all your data, financials, inventory, commerce, HR, and CRM, all in a single source of truth, trusted by over 44,000 customers. NetSuite Next is the next huge leap in how business gets done because AI is built into everything you do. It surfaces custom insights throughout your day. AI agents work alongside you to handle routine work, and anytime you have a question about anything, You just ask like you're talking to a colleague. It's customized for a wide range of industry,

Starting point is 00:46:58 so it supports the way your business truly works. And I use this and you should too. For the first time ever, you can try NetSuite next for free. If your revenues are at least in the seven figures, go to netsuite. A.I. slash TIP built for every industry, ready for every boardroom. NetSuite.

Starting point is 00:47:17 aI. slash TIP. All right, back to the show. Well, I would say with great. opportunity comes great competition, I guess. I got to say, I watch Spider-Man this weekend, so maybe that's true into my mind here right now. But I got to say what you said, actually reminds me of an argument that we had with Adobe a while ago. We said that, especially in the beginning, there will be even more videos and photos to edit because AI creates

Starting point is 00:47:41 them. And, you know, before that, they were just not in the system. I think it's again, like a short-term versus long-term thing, where especially right now, Waymo's just get more people to use Uber and Waymo and just write, hey, like, in general. And then you have to question 10 years, 15 years time, where will they actually go? Is it still Uber that acquitats demand or is it just a single company where they will go? I mean, Tesla, for example, is also scaling its own Robotexie servers and potentially has the manufacturing base to just flood with purpose build. It's called it 30K cyber caps, assuming their camera-only technology, actually gets to a point of being truly autonomous, which I think is a question for people who have

Starting point is 00:48:19 a better understanding of how this technology actually works. But for better or worse, Tesla remains the industry outlier still refusing to use lighter sensors. Although I think the prices of those have come down, I've learned that a way more car by now is supposed to only cost about 25K in terms of the lighter sensors. It used to be 100K just a couple of years ago. And then if you also look at Amazon with their Zooks subsidiary, they're also playing both sides as well. So Zooks will put its vehicles on Uber's networks in, I think it's Las Vegas and Los Angeles.

Starting point is 00:48:49 but it will keep its own app too. And I think Amazon's CEO of devices literally just asked, quote, why should we give that up, right? When discussing owning the customer directly and Amazon currently has about 260 million prime members compared to Uber's 50 million Uber one members. And they also have a long history of being willing to burn cash to win the market. And I think we discussed all of this last time and especially once when we gave a presentation on Uber that they are competing with all of these companies that are not only expanding into

Starting point is 00:49:18 the field, but who just have a lot of money to burn. I would say Uber's response to account for all this has been pretty dizzying. It feels like every other week there's a press release with a new self-driving partner attached to Uber. And so a year ago, Uber had 14 autonomous vehicle partners, but today it has more than 20. And more importantly, these partnerships have gone from being abstract deals to concrete commitments with vehicle counts and cities and in dollars, all defined clearly. With Neuro and Lucid in particular, Uber committed to having a minimum of 35,000 lucid gravity SUVs running

Starting point is 00:49:59 Neuro's self-driving system following a commercial launch in the San Francisco Bay Area late this year, and Houston and mid-20207, and then hopefully dozens of markets after that. And Uber and its fleet partners will own those vehicles. And then what's also pretty cool, is Hertz. The rental car company, yes, Hertz, has spun up a new affiliate called Oro Mobility, and they are going to handle the charging, cleaning, maintenance, and depots for these AV fleets. And they've already leased a 50,000 square foot depot in Houston for that exact purpose. And so then there's Rivian with 10,000 autonomous R2 robotaxies that are going to be starting in San Francisco and Miami in 2028. And then they have an option to take that number to

Starting point is 00:50:45 50,000 vehicles across 25 cities by 2031, all plugged into the Uber network. And then on top of that, Uber is investing up to $1.25 billion into Rivian based on certain technical milestones, which is another important part of Uber strategy. They've taken billions of dollars worth of ownership stakes and various self-driving companies, I think probably to hedge risk to some extent, but also mainly to invest in ensuring there's more competition than just Waymo and Tesla, because in a world where there are many AV options, Waymo pretty much loses all of its leverage. And Uber wins by being simply the best place for human drivers and AVs to all come together on one neutral platform.

Starting point is 00:51:31 That sounds a bit like the circular funding that we see in AI just on a much smaller scale, I got to say. And still, I mean, seeing all of the AV players in the game is what makes me most bullish on Uber, because I don't like the idea of them competing with Google. but then you also have Tesla. You have so many OEMs and perhaps the biggest threat that you can have in capitalism lately, which is Nvidia. And Nvidia is putting its full self-driving software stack into rover taxis that will launch on Uber in Los Angeles and San Francisco in the first half of next year while targeting

Starting point is 00:52:03 28 cities globally by 2028. And Nvidia also shares the thesis that autonomous driving software will become a commodity layer that basically any automaker can license, meaning that in the long run, Waymo is just nothing special if you think about it that way. And internationally, we ride is already running a fully driverless, fair charging service with Uber in Dubai plus Abu Dhabi with Zurich and Madrid coming soon. So there are just so many players coming in that it's hard to even wrap your head around. You only hear about Waymo against Uber, but every company is having these cars now.

Starting point is 00:52:38 Yeah, it's much more than that. We're seeing AV companies roll out internationally, but we're also seeing that it's not just U.S. tech companies working on AVs. The Chinese company, Baidu, has a product called Apollo Go, and that's coming to Uber in Dubai. And then there's pony.aI, which is a funny name. That company was relatively new to me, but they're partnering with a European fleet operator called Vern that Uber is investing in, and they're hoping to launch Uber's first commercial robotaxie service. I'm glad you also mentioned the Chinese providers, because just like with LLMs,

Starting point is 00:53:11 there's very much a tech rivalry in AVs between the US and. and China too. And I think you would probably argue that once again that this is a good thing for Uber at least, because Uber's management has said that Chinese AV companies, hardware and software costs are, quote, better than anything, they are seeing anywhere else. And Bidu's Robotex it costs under $30,000 to build. So while everyone in the US watches Waymo, there's a parallel autonomy race in the Middle East, in Asia and in Europe, but Uber has skin in the game. And it's essentially every horse in the race. And there's one other thing I think we should mention. mentioned, Uber launched something called Uber Autonomous Solutions, Creative Name. And this includes

Starting point is 00:53:51 insurance, customer support, fleet management, and remote assistance that any AV operator can buy instead of having to build themselves. And so the other reason Uber is excited about this part of the business is for the data they'll get. Uber is putting sensor kits on regular human-driven Uber's. And because Uber does 40 million trips a day, those cars see every weird edge case on Earth multiple times a day. And by the end of the year, they're expected to be collecting up to two million miles of training data per month. And then actually selling that data to AV partners, it kind of reminds me of Reddit selling out their data to LLMs to train on. So Uber is basically monetizing data from its human driving network to help AVs.

Starting point is 00:54:40 competitors and companies that they've invested in catch up to Waymo. Which is a pretty smart strategy, I've got to say. I want to touch on one of the things you mentioned in our last episode on Uber, which is that you think there will be financial companies that arise similar to reeds for hotels and office buildings, but instead, for fleets of basically AVs that will be run as businesses through Uber. I think that idea being somewhat similar to how Marriott operates hotels, but does own the real estate? Is there anything new on that end or that front?

Starting point is 00:55:13 It's probably a good way to think about it. And that's an inside-it-out from Uber's CEO, Darcosa Shahi. And to be honest, it sounded a little like science fiction when we first discussed it, but this is now Uber's literal official corporate strategy. Per Uber's CFO, the autonomy ecosystem has five layers. So there's the marketplace facing the consumers, and that is Uber. There's the AV software developer, so that's Neuro and Waymo. Then you have the automakers who are building the cars. You've got the fleet operators that are running depots and charging stations. So think Hertz. And then fifth, you'll have third party financing to make this all happen. These are the institutions that will actually own the vehicles that comprise

Starting point is 00:55:57 these AV fleets and take on those balance sheet risks. So Uber runs the network. Someone else owns the cars. And that is how Uber stays a capital light business. But still, I mean, today we have Uber signing off take agreements, guaranteeing it will buy cars rolling off assembly lines, kind of like the deals that we also see from hyperscalers, guaranteeing compute demand to support data center construction. And Uber is basically leasing depose in, I think it's Houston, and investing in Vern and Rivian and Nero. And if you would add it all up, it's something like $10 billion that has been committed to the AV buildout and that would have sound like a lot more money just a few years ago. But gosh, nowadays, that does sound modest compared to the investments that especially the

Starting point is 00:56:42 Mac 7 are making into AI. And still, I mean, the financialization, if you want to call it that, of AVs where, you know, pension funds and read like vehicles take these assets off Uber's balance sheet is the promise phase two that we got last time, right? I mean, for the time being, Uber's increasing its capital intensity by owning these assets on its balance sheet compared with their normal model where, of course, as well, no, human drivers own the vehicles and they aren't on Uber's balance sheet. So that's just some perspective to keep in mind. But there's some really big news that we've made it this far into the episode

Starting point is 00:57:15 without even mentioning. And that is, while the market was reacting to the news about Uber and Waymo having sort of a fallout, Uber was attempting the largest acquisition in its history, which is the company delivery hero. Delivery hero is a food delivery company, actually headquartered in Berlin. So I thought at first that you were going to be very familiar with it, but actually it's a German company with no business in Germany after they actually sold off their German operations a few years ago. And what it does have is leading delivery platforms across the Middle East, Asia, some other parts of Europe, and then also Latin America. And these are brands like Taliban in the Gulf, which most listeners probably won't know. And then there's Bayman in South Korea. And that company

Starting point is 00:58:00 basically dominates the Korean market. And so what happened was Uber quietly built up. up a stake of about 25% in Delivery Hero. And then on July 16th, it launched a formal offer valuing Delivery Hero at about $14.8 billion or 13.7 billion net of the stake that Uber already owned. And so what happened next is you had Proces, which is a big Dutch investment firm that's pretty well known in value investing circles. They irrevocably committed to tender their shares where tendering just means agreeing to sell into the offer. And so correspondingly, that takes Uber past 50% ownership and really it guarantees that the deal will succeed because they have the voting power to make it happen, barring any regulatory concerns. And on that front,

Starting point is 00:58:48 to preempt antitrust concerns, delivery heroes selling its operations and 14 overlapping markets to a third party for about $1.6 billion. And so the deal should close in the second half of next year without any hiccups. Just for the sake of the audience, what would you say is the logic behind this deal? I mean, they're not necessarily buying delivery here at a bottom bin price and right-hailing and food delivery industries that don't exactly create economies of scale benefits for users. I mean, the fact that Uber has more operations in the Middle East does basically nothing for me here in Germany.

Starting point is 00:59:23 And your experience with Uber is entirely contingent on the density of their presence in the city that you actually live in. It's a really good question. And the short answer is that it's all about expanding the number of places where Uber can make its full range of products available. So Uber operates both rides and delivery in 34 markets. But after this deal, that number will jump to 58. And that opens the door to them selling Uber one more. And, you know, we talked about at the beginning of the episode, how cross-selling between its mobility and ride apps,

Starting point is 00:59:57 where they encourage Uber riders to try to order food on Uber Eats and vice versa. That is one of the most reliable value creation levers Uber has at its disposal. And so delivery hero brings them 50 million new consumers and two dozen new markets to run that playbook in, plus, again, the extension of Uber 1 into all of those places or the possibility to do so. And so the first time we looked at Uber, we talked about how it was very pragmatic for Uber to recognize which markets they were losing in globally. And instead of racing to the bottom there, they chose instead to invest in the local winners.

Starting point is 01:00:33 And so they did that by taking passive stakes in DEDY in China and Grab in Southeast Asia. But the delivery hero deal here flips that upside down a bit and shows that they can go from taking a passive stake to making a full acquisition and integrating that company into Uber. You often hear about a lot of synergies in corporate MNA. And these so-called synergies have been used to justify many. bad deals over the years, but in this case, delivery hero does have a big disparity in margins compared to Uber, despite actually having a higher tech rate. And that's because of their substantial technology costs. I think delivery hero spends far more on tech as a percentage of bookings, because it basically lacks Uber's scale. So Uber runs its entire global delivery business on one

Starting point is 01:01:20 tech platform. And for delivery hero, I do think it's quite plausible that this will really help the business, but just tying into Uber's backend instead of building out their own. And there's also a really interesting ads angle to their deal, too, because delivery hero monetizes about 3% of its gross merchandise value through advertising, which is a good bit ahead of Uber. I mean, if you compare that, for example, to Macadulip or Amazon, 2 to 3% is quite high. So I was surprised to learn that. And if Uber's ads business were to converge toward those penetration levels across a delivery business that post-deal exceeds $100 billion of bookings, you get several billion dollars of incremental, very high margin revenue over four or five years.

Starting point is 01:02:04 There is one other more strategic point that I think we should mention too, and that I'm sure the market is underappreciating, which is that the deal is also sort of an autonomy hedge in the intermediate term to some extent. So if robotaxies do eventually pressure the economics of Uber's U.S. business, well, now they'll have a bigger global delivery in local commerce machine and markets where autonomy is going to be a more distant concern. It's just a fact that we know AV adoption will roll out more slowly in most international markets than in the U.S. And as such, having more geographically diverse revenue at least helps sort of further to minimize the threats from Tesla and Waymo in the immediate future as the company continues to prepare,

Starting point is 01:02:51 basically its counter response to the threats from those businesses. We've been going for a while now, and I still feel there's so much for us to discuss and to cover when we talk about Uber. But when you're truly excited about a company and one of our investments' prospects, it's just so easy to talk all day about it. And do you think there's anything important that we have missed and not yet covered here. One big thing not related to AV's or Deliver Hero is that Kroger, the second largest

Starting point is 01:03:20 grocer in America, added roughly 2,700 stores onto the Uber Eats app nationwide in January. And then we mentioned Ulta Beauty earlier. And they've also partnered with some other familiar names like GameStop. And, you know, I haven't been as excited about grocery long term because I can imagine a lot of big grocers. I'm thinking Walmart and Target in particular will want to control the relationship with their customers directly. So they won't want to have a middleman like Uber in the way. And so they may have the resources to build out their own version of the delivery service, sort of like what Amazon has with Whole Foods. And so that was my worry. But again, what has actually

Starting point is 01:04:02 happened, at least so far, is that Kroger, a company with every resource to go it alone, has chosen to plug into Uber's network instead. And to just quickly list a handful of other things that Uber has unveiled in the last year, I think I should mention that Uber partnered with Expedia to sell hotel bookings inside the Uber app with 700,000 plus properties that offers Uber One members a chance to earn 10% back in credits.

Starting point is 01:04:29 And again, actually got to check if that's also the case for me or if it's US only, which I hope it isn't. And Expedia might have a US buyer, so perhaps I can't benefit from that. And they also acquired, going back to where I live, another German company called Black Lane, which is a premium chauffeur service operating in 500 plus cities,

Starting point is 01:04:49 so it's quite big. That very much complements the luxury end of Uber's offerings that we haven't touched on at all today, but I think we covered it last time we talked about Uber, at least to some extent. And they also added in a feature they refer to as women preferences. So it basically allows women riders to match only with woman drivers. So you can imagine that's pretty attractive to many women for safety purposes

Starting point is 01:05:13 and just makes it all the more likely that people will use Uber on the margins. I mean, if you're partying and you're out and you just want to have an Uber and get home, it's way better if you're a woman, you can also have a woman driver compared to a man. And I think this is where we would normally go through the valuation in detail, but we already own Uber. And as we've shared today, we've arguably gotten more optimistic. about its growth runway, while the valuation has become more and more reasonable over the last year. So I don't think we need a model to tell us that we are very happy owning Uber and may

Starting point is 01:05:45 even continue to add to the position. But I didn't want to play another clip from our last episode together, which was a response from Dara, the CEO of Uber to a Financial Times column criticizing Uber's buybacks instead of using that capital to just invest in growth. And let's listen to you reading Dara's letter from last time. I believe Uber's best days are ahead. We have a large utility-like business that is still in the early days of penetrating its market. This has led us to conclude that a consistent buyback program is the right answer for Uber. We are taking the humble investment route of dollar cost averaging over what we hope will be multiple years.

Starting point is 01:06:25 So at that time, the buyback was a $7 billion program, and there was real concern that Uber was either overestimating. growth prospects to Wall Street or misallocating capital to conduct buybacks when it would be better spent on growth investments. And well, thanks to the inflection in Uber's margins when your profitability doubles year over year, they have found the cash to comfortably do both. And so actually, what has happened is the board authorized a $20 billion repurchase program while making all the investments and partnerships that we've talked about for the last hour and not stretching their balance sheet either in doing so. So I think that's incredibly,

Starting point is 01:07:08 incredibly impressive. But how about we bring it all home? I think the evergreen lesson of this episode for me is whatever happens to Uber, the thing is markets can watch a business get objectively better quarter after quarter and simultaneously decide to pay less for it. And in many cases, that is for good reason because they're right about anticipating future growth deceleration or decline in the business in light of maybe current success. But that is where we see things differently than the market with Uber. And ultimately, to outperform the market, you do need to have some strongly held contrarian opinions.

Starting point is 01:07:45 So this is maybe our most strongly held contrarian opinion. I think the only other option is to perhaps be early to the party. And that's part of why I like companies like we're middly or delocal that we've also covered on the show, because I think you don't need a highly-contrary. opinion on those companies. Of course, the market had its doubts. For example, if you talk about remitally, how profitable can that company actually be? And I thought it was quite obvious that they can be very profitable. So to some extent, it's still a contrary intake, but I don't have to bet against, let's say, the market on a terminal risk question, where also technological process

Starting point is 01:08:19 plays a big role. And all of that said, I must say that I feel even more confident now than I did prior, because a lot of news is about Waymo. So it seems like it's Waymo. against Uber and who's winning and it's just pretty white or black in this case. But in reality, Waymo is competing with all other AV players. And if Waymo can't reach global scale before any of them expand, it will be Uber's markets to win. And while Waymo has made tremendous progress, and I think the technology itself is just astonishing, right? But I don't think they have a chance at monopolizing AVD man globally, which is probably what they would need to do to actually kill off Uber. So I guess that means.

Starting point is 01:09:00 that after this episode, I have to lock into my personal account and buy some more Uber. Well, there you go. I've successfully made Daniel more and more bullish on Uber over the last year, and hopefully that doesn't come back to bite us. But to close things out, I think the quote really kind of pakes itself for this week. And it's a quote we've probably used in the past, but it's such a good one. I can't help but use it again. Ben Graham, the father of value investing, Warren Buffett's mentor told us that, quote, in the short run, the market is a voting machine, but in the long run, it's a weighing machine. And so the voting machine idea is sort of, you know, a popularity contest. And then in the long run, this idea of being a weighing machine is about

Starting point is 01:09:44 recognizing the weight of something properly. And so I think the market will weigh Uber properly over time. And that would be in dramatically pushing the stock price higher. So with all that, we'll see you again next time. time. Thanks for listening to TIP. Follow the Investors podcast on your favorite podcast app and visit the Investorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle

Starting point is 01:10:23 and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice. References to any third-party products, services or advertisers do not constitute endorsements, and the Investor's Podcast Network is not responsible for any claims made by them. Copyright by the Investors Podcast Network.

We Study Billionaires - The Investor’s Podcast Network - TIP844: Uber (UBER): The Autonomy Referendum — Is Mr. Market Completely Wrong? w/ Daniel Mahncke & Shawn O’Malley

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.