TIP844: Uber (UBER): The Autonomy Referendum — Is Mr. Market Completely Wrong? w/ Daniel Mahncke & Shawn O’Malley

0:00You're listening to TI-P. 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 be 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 terror fears last April, which by now feels like a decade ago. And I would say both of us, including our colleagues stick, have come increasingly excited about Uber's long-term prospect. While the stock on the other side has been basically flat since we first looked at it. So bookings 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 billions in stock, just $3 billion last quarter alone,

1:03shrinking 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. 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 as the 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, where we might have been blinded by our own confirmation bias. So I would say we just listen to your thoughts on the risks facing Uber the first time we covered the company. So don't make the same mistake. I made it right off this company because of dissent tears around automation. 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.

2:0515 months later, the entire market seems to be making exactly the mistake you want us about. And maybe that could also be the case, we've just underestimated the threat of automation to Uber specific business model. And I got to say I find myself jumping a bit from being very bullish on the company to being slightly endowed. 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're 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 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.

3:08So 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. Study deeply the principles of value investing and uncover 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 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.

4:12Uber is the world's largest ride hailing platform, but it is really three different businesses. Mobility is the ride's 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 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 padtye deliveries. And so Uber owns no cars and they actually technically employ no drivers, at least in most markets, they are contractors. 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.

5:16And they earn that for aggregating demand and supply and coordinating the logistics. And 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 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 the restaurants, it's really the point of the entire Uber thesis rate, 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's just a platform meant to serve drivers, you know, restaurant owners and customers, whether that be through food or, you know, rights as we all know it for.

6:18And what 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 it Uber's economics of scale more like Walmart than Google's with the idea being that every incremental ride requires paying the 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. 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 winners. So a literally used Uber as an example when I talked about remittlies margin expansion and profit and flexure. So this is a company that shows as well as few others do how you can quickly become a way more profitable company.

7:20Well, as you know, I love to talk about Uber's swing in operating margins over the last five years. So 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 2023 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 in margin profitability in less than six years for a company that was already doing billions and revenue. And I mean, that is, I come on. That's astounding. I agree that Uber ceiling is higher than I appreciated 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.

8:20Uber's membership program driving more order frequency and then integrating a V's 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 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. Thank 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 two billion dollars and you're going to run rate. So going more than 50% a year and at all as all as we all know, nearly pure profit compared to the core business. That's why we are on so many businesses that at least expanding into the advertising space. I mean, Macadaly, Burian Amazon, all of those companies right. And these are the ads that can be shown on devices in the back of drivers cars in app ad placement with even just having your restaurant position more prominently on the Uber map while people just check on their right status, for example, right.

9:22So you could even have search based ads were restaurants bit to be the first result when you search something like Chinese food near me in the Uber eats app. And I still remember standing I think 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 not happening. And then as we've alluded to Uber eats is no longer just eats it probably needs. I know 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 toast here. I mean Uber can 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 into hours right and you might not have enough time to actually run to the store. But 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 the Uber driver to pick your order up from let's say, a beauty and bring it to you in 45 minutes time. And I use that example not necessarily because you're me just love wearing makeup, but because Uber literally partner with all to beauty not too long ago.

10:26So this is something that is happening right now in the real world. It's also a great example to because all to was actually our first holding in the intrinsic value portfolio is 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 globally. And that ranges from a lot of that is 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 for that we didn't get mentioned, 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 than 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. So I think was kind of hard to fully understand at the first time you hear about it.

11:31But you know, 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 coparred, I think those are wins that are now starting to change right. I think this sort of be I think this could be a tailwind for Uber in the future. So for contacts, Uber renegotiates rates with its insurance carriers every March. And this year's when you all came in at there was no single digit increases, which is the most benign increase in many years. 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 a 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.

12:35And 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 million deliveries that have helped reduce traffic and company. 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 eats that is going to be a great, great day for me and just a line here from zip lines co founder he adds teleportation is not science fiction anymore.

13:37It's becoming part of everyday life every great transportation revolution has changed where people live, how businesses operate and how economies grow 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. And we're talking beforehand about how you know we're not the most DIY types of people Daniel and I what we really appreciate convenience. Let's just put it that way so this this new world that we're entering into and that Uber is ushering us into this new age of unrivaled convenience. 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 are at least not the same insurance cost as drivers on a road and then if you believe that a V's will broadly be safer than human drivers, which does so far to be true unlimited cases that insurance costs as a sure gross bookings are revenue will almost certainly go down and that creates room for margin expansion.

14:46I don't want to go in attention here and perhaps the zip line co founder has a different definition of what teleportation means but I think generally we just had modern 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 that just feel about what will the world look like in 10 years time. You just have to be excited right 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 use drones to deliver packages but all of that you know just gets me excited 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 we just see so many things that could just make your life better but anyway just to add to that I think for a couple of years Uber's US rights business was notice will be slowing. While Europe and Latin America still grew quite fast I think was about 30% and it turns out that some of this was self inflicted in a sense since US insurance costs were inflating at a set it before double digit rates and Uber passed those costs on to US pricing 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 the price of the

16:05America 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 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 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 quote in the US is turning up again no no not at all and one of the things that I've also been most excited about is Uber one 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 US it's something like $10 a month and it gets you free Uber eats deliveries

17:16and then 6% credits on every Uber ride plus some other benefits there but for me it does pay for itself and anyways Uber one 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 $450 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 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 shareholders we gotta test out the product right and and Uber one members really are are they're like super users they now are driving roughly half of Uber's total gross bookings and about two thirds of delivery booking so you can see that

18:31for most Uber one 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 sponsors

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20:42fold two days behind but how do you keep up when the competition is only moving faster fortunately there's net sweet next you probably know net sweet the AI powered business management sweet 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 net sweet next is the next huge leap and 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 so it supports the way your business truly works and I use this and you should to for the first time ever you can try net sweet next for free if your revenues are at least in the seven figures go to net sweet dot AI slash TIP built for every industry ready for every boardroom net sweet dot AI slash TIP all right back to the show I'm actually surprised to hear that Uber one is 10 bucks in the air so I think I'm paying five years and even with the conversion of years to us

21:56to that's still quite cheap which kind of makes me question what I even get the same perks as you know that especially whenever we talk about credit cards and I've even asked some people are you know some friends in my circle we just don't have any good credit cards here you know there's no payback to the same extent that you always talk about when you talk about your credit card so I should 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 Darra uber CEO who compared uber one to Netflix where you basically pay one fee and then the platform with the most content wins except uber's content is basically cost and you know careers and restaurants and now also groceries and hotels and parking and all sorts of stuff and guess I did say parking by the way in February uber announced that it was a crying the parking app spot hero where you can basically reserve spots at more than I think it's a 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 I mean especially right now here in amber when I want to go somewhere it's not really about

23:03what that car take let's say 10 minutes it's more about how much time do I need jetty find a parking spot I think this is one of the most important problems for 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 job well it can then cross sell you on for example paying for the services from Uber so they basically bake as much stuff as possible into uber one 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 with single product users to just by getting existing users to use more different services from Uber they can drive a ton of growth at a lower acquisition cost 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 they supposed to keep growing for 20 plus percent well it's exactly this you know getting these existing customers making them more profitable but anyway I'm sure we could talk about half a dozen other things that we are excited about for Uber but I would be more

24:12interested today and actually getting into what the market is paying attention to instead because again the stock isn't exactly matching its results over the past year and I assume that largely boys down to our name which shouldn't come as a surprise is way more. Yeah so let's lay out the facts first I'll try to do so is neutral as I can in February waymo alphabets driving subsidiary raise 16 billion dollars at a hundred and twenty six billion dollar post money valuation and they raise that capital from some very well respected venture capitalist like Sequoia and recent Horowitz with alphabet remaining majority owner in waymo and so it's another pretty powerful backer to have and waymo's vehicles have now driven well over a hundred million fully autonomous miles completed 15 million paid rides in twenty twenty five alone which is triple the prior year and it's doing something on the order

25:13magnitude of five hundred thousand rides a week and they say that they're hoping to expand to more than twenty 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 valuation as all of Uber company that I should say in contrast is doing more than three billion trips a quarter and has ten billion dollars and free cash flow so somebody has to be wrong here waymo is either grossly over valued 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 a hundred billion dollar 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 via the Uber app and so can waymo fully replace Uber that's the question and and then the other question is

26:38can it take enough market share from Uber to undermine Uber's business long term in a space is 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 and have it in minutes maybe not quite teleportation but something pretty close to 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 door dash customers at the moment I do believe there'll be one over as more frequent users as automation brings prices down and become cheaper to hail a ride or to get food delivered and then the frequency

27:38of order volumes will increase dramatically that's sort of my view on it and with the point being wemo could take a slice of market share from Uber they almost certainly will but if the whole pie is growing fast enough there will be more than enough room for multiple huge winners. It's not a lot of way more rights have actually been ordered to the other as we all know and not necessarily the way more exclusively reflect that until now the two companies have tried to partner and I think the bear we man has always been despite that the way was just using the right that they are exploiting the white distribution to build their own brand awareness and that they're trying to pull it off by themselves you know just. Sort of pulling the rack out from you know underneath uber and just by breaking up and basically pulling uber users to the way more app to the exclusive offering it it's not exactly what we've seen yet but I think the our science that this is what could be happening in the future mean uber stock was knocked to its 52 week low and I think was late July after way more formally notified Uber that it will end the exclusive partnerships and I think was awesome and Atlanta and those were two cities were also way more.

28:50So it's really a lot of time was robot access were available only through the uber which is not the case in every city that they actually partner and so way more plants to launch its own app in both of the cities and I think early 2028 when the existing contract with Uber expire and just to clarify that doesn't necessarily mean that the partnerships are in every city but clearly the attention between uber and way more they are intensifying it if way more word 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's racing to partner with as many other AV companies as I can so that no single AV maker actually comes around the corner and you know dominates the entire market and instead you have many players competing with each other and then uber sort of the neutral aggregate of demand for customers. In that field and I got to say I do actually worry about the the way more dynamic specifically however what gives me some piece of mind is that there's no loyalty in the right telling business at all and you probably think that's a negative for uber because it's the biggest brand and you could say you know it's the number one people choose uber because of the loyalty but actually think it's an advantage because if there's no loyalty you need an

30:01aggregator 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 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 ride 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't hear him but when there are 10 AV companies Why would anyone care to order a Waymo instead of any other AV I think it's pretty cool right now and it's sort of the only one that you actually see on the streets But 10 years time when you have drones flying around you in your food delivery I think there will be so many companies and nobody will it 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

31:06hybrid networks of human drivers and robots working together so for example in New Jersey uber lobbyists propose that any platform offering robot taxi 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 thanks Actually on 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 Sean you 15 months ago in your first pitch laid out a pretty good case for why these hybrid right hailing networks would probably most likely Win out over strictly AV platform 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

32:10Available in response to demand in real time Thus uber drivers can be incredibly flexible about responding to ride requests and elect 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 under allocate vehicles or over allocate them at any given moment in time There's just no way to perfectly match to man 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? 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 is anyone but I would argue that actually the logic of that clip

33:13Has 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 days Demand for rides is something like four to one and a fixed fleet of robo taxes that size for Peaks in demand is going to sit idle during those trough times of the day while a fleet that size 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 awesome uber's own data showed with waymo vehicles on its network We're busier than 99% of human drivers But that's because uber's demand aggregation kept them full. There are so many people There's a 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 whamway app in California

34:14Great times ones for like 18 minutes versus just a few minutes on uber I think the reality of needing to have flexible supply where drivers can come online to work for just an hour or two during these demand spikes Hasn't changed and 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 use it But if you just think about your daily live 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 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 into 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

35:18What it's trying to do is is be strategic in the sense of with 16 billion dollars of fresh capital 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 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? So 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 Oh roll 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 at the bottom and pricing

36:23But 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 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. I mean Google has spent billions of dollars on Weimar And I just struggled to see how they did that with the gold of my to I don't know become one of 10 AVs integrated into the uber network

37:23So they must have had the gold 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 ten years and whether we like it or not At least in select cities the single best autonomous vehicle company on earth Just looked at everything which uber's offering which is you know two and a million users The demand aggregation the utilization logic that you basically just talked about And that said no thanks would rather build it ourselves and I 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 with its Weimo or any other company still need uber It's a good point and just to put everything in context so far Weimo Does 500,000 rides a week whereas uber does

38:2840 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 three billion trips a year chest and growth So in other words autonomous rides today are around one tenth of one percent of global rideshare 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 a vis is really being something significant for a while down the road and the fastest growing a V deployments today are at best tripling their volumes each year and in ubers early hyper growth years They were actually nine to ten xing their volumes annually so even for the best case scaling curve for robot axes Things are progressing slower than what we saw during the ride hailing platform wars of the 2010s

39:33That tells me that the integration of AVs is going to play out over a long long time overnight Every car in 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 roads of san francisco and austin taxes 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 markets 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 to best profits mobility which is obviously the right-hailing business is roughly 60% of operating profits and then the u.s. represents roughly 60% of the mobility business

40:39And then if you just look on way further looking at the top 20 cities in the u.s They're the only places that robotax is currently realistically operate at scale in the foreseeable future And that includes about a quarter of u.s. mobility profits So we're mainly talking about the risk of them getting into the u.s. and then competing with uber there Well, 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 robotax competition At least in the near to medium-term and you know, what is that? Probably like five to 10 years time That's what I would label this and if you include the suburbs which Evies 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 ubers. 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 and then involves a human walking food to your door

41:45And 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 restaurant setting up to work with delivery drones assuming That would even be possible for most restaurants so when ubers valuation multiple of operating profits gets cut in half like it has been in the past year The market is implicitly riding 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 you know 20 30 years at least sometimes and this appears to be a thing here with uber What's really interesting is that in Austin and 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 you know mature for a business this young but still

42:46Waymo does legitimately have a 15 to 20% share of rides But ubers trip growth accelerated in San Francisco in 2025 And so if you're asking how it can be it goes back to a point I mentioned earlier Robo taxis are expanding the market they are converting people who would have driven themselves are taking 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 one percent of the roughly three Trillion miles that Americans drive every single year and as autonomy pulls cost down Toward being on a closer parity with car ownership at least in cities That leaves a lot of room for that one percent number to grow Let's take a quick break and here for today sponsors One part of being an investor that I don't think it's enough attention is how hard it can be to continue to improve as an investment researcher

43:47And 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 plot note pro It's a small device that sticks to the back of my phone and captures the conversation 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 and set a 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 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 well, okay, I'm gonna look go to plot.ai slash WSB and use code WSB for 10% off that's plot.ai slash

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46:50TIP built for every industry ready for every boardroom net suite dot AI slash TIP All right back to the show Well, I would say with great opportunity comes great competition I guess I gotta say I watch Spider-Man this weekend so maybe I'll go into my mind here right now But I just say what you said actually reminds me of an argument that we had with Adobe a while ago What we said that especially in the beginning there will be even more videos and photos to edit because AI creates 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 Waymost just get more people to use uber and waver and just write hailing in general and then you have to question 10 years 15 years time Where will they actually go is it still uber that acquiesce demand or is it just a single company where they will go I mean Tesla for example is also scaling its own robot taxi servers and potentially has the manufacturing base to just Flut the market with purpose build It's called a 30k cybercaps assuming their camera only technology

47:52Actually gets to a point of being truly autonomous Which I think is a question for people who have a better understanding of how this technology actually works But for better words Tesla remains the industry outlier still refusing to use lighter sensors Although I think the price 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 a hundred k 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 new business networks And I think it's Las Vegas and Los Angeles But it will keep its own app too and I think amazon CEO of devices Literally just ask quote why should we give that out right when discussing owning the customer directly And amazon currently has about 260 million prime members compared to ubers 50 million uber one members They also have a long history of being willing to burn cash to win a market And I think we discussed all of this last time and especially once when we gave a presentation on uber

48:53That they are competing with all of these companies that not only expanding to the field But we just have a lot of money to burn I would say ubers 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 Neuroself driving system following a commercial launch in the San Francisco Bay area late this year And Houston in mid-2027 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

50:00And 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 in Miami in 2028 and then they have an option to take that number to 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 dollars 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

51:05To all come together on one neutral platform That sounds a bit like the circular funding that we see in AI just on a much smaller scale I gotta 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 in video and a video is putting its full self-driving software stack into robot axes that will launch on uber In Los Angeles and San Francisco in the first half of next year while targeting 28 cities globally by 2028 and and video 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 you know 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 mid-ride coming soon

52:07So they're 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 It's much more than that what we're seeing AV companies roll out internationally But we're also seeing that it's not just us tech companies working on AVs the Chinese company Bydo has a product called Apollo go and that's coming to uber in Dubai and then there's pony dot AI Which is a funny name that that company was 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 Robo taxi service. I'm glad you also mentioned the Chinese providers because just like with LLMs There's very much a tech rivalry in AVs between the US and China too and 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 set that Chinese AV companies hardware and software costs are quote better than anything They are seeing anywhere else and bydo's robot taxi costs under 30,000 dollars to build so whatever one in the US watches waymo

53:13There's a parallel autonomy race in the Middle East in Asia and in Europe Uber has skin in the game and is essentially every horse in the race And there's one other thing I think we should mention uber launched Something called uber autonomous solutions creative name And this includes insurance customer support fleet management and remote assistance that any AV operator can buy Instead of having to build Themself 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 ubers 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 LLM's to train on So uber is basically monetizing data from its human driving network to help AV competitors and companies that they've invested in

54:20Catch up to waymo Oh, she has a pretty smart strategy. I gotta 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 reads for hotels and office buildings But instead for fleets of basically AVs that will be run as businesses through uber and I think that idea Being somewhat similar to how merit operates who tells but doesn't own the real estate. Is there anything new on that end or that front It's a probably a good way to think about it and that's an insider got from ubers CEO dark kosher 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 ubers cfo the autonomy ecosystem has five layers So there's the marketplace facing the consumers and that is uber There's the AV software developers. So that's neuro and waymo Then you have the auto makers who are building the cars

55:21You've got the fleet operators that are running depots and and charging stations So think hurts 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 can prize these AV fleets and intake on those balance sheet risk So uber runs the network someone else owns the cars and that is how uber stays a capital-like business But still I mean today we have ubers signing off take agreements guaranteeing it will buy cars rolling off assembly lines Kind of like the deals that we also see from hyperscalers Guaranteuring computing ad to support data center construction and ubers basically leasing depose in I think it's Houston and investing in verne and rivian and neuro And if you would add it all up It's something like ten billion dollars that has been committed to the AV build out and that would have sounded like a lot more money Just a few years ago. But gosh nowadays that does sound modest compared to the investments that especially the max seven are making into AI

56:22Still, I mean the financialization if you want to call it that off AVs where you know pension funds and read like vehicles Take these assets off ubers balance sheet is the promise phase two that we got last time right? I mean for the time being ubers increasing its capital intensity by owning these assets on its balance sheet compared with their Nomen model where of course is where no human drivers only the vehicles and they aren't on ubers balance sheet That's just some perspective to keep in mind But that's a really big news that we've made it this fine to the episode without even mentioning and that is while the market was reacting to the news about uber and weimo 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

57:22And 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 talibat in the golf which most soon as probably won't know and then there's Baiman in South Korea and that company Basically dominates the Korean market and so what happened was uber quietly built up a stake of about 25% and delivery hero and then on July 16th it launched a formal offer valuing delivery hero at about 14.8 billion dollars or 13.7 billion net of the stake that uber already owned and so What happened next is you had process which is a big Dutch investment firm that's pretty well known and 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 guarantees that the deal will succeed because they have the voting power to make it happen

58:23barring any regulatory concerns and then on that front to preempt antitrust concerns delivery hero selling his operations and 14 overlapping markets two way third party for about 1.6 billion dollars 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 hero at you know bottom bin prize and right hailing and food Deloria 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 is basically nothing for me here in Germany You experience with uber's entirely contingent on the density of their presence in this city that you actually live in It's 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 and 34 markets

59:23But 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 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 one 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 and said to invest in the local winners And so they did that by taking passive stakes in dd and china and grab in southeest 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

1:00:26Integrating that company into uber You often hear about a lot of synergies and carbon M&A and these sole quality 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 scale So uber runs its entire global delivery business on one 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 back end instead of building out their own and there's also a really interesting ads angle to the 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 my cat olipua amazon 2 to 3% is quite high So I was surprised to learn that and if uber's ads business were to convert to work those penetration levels across a delivery business that

1:01:32Post deal exceeds a hundred billion dollars of bookings you get several billion dollars of incremental very high margin revenue over four or five years There is one other more strategic point that I think we should mention too and and that I'm sure the market is under appreciating Which is that the deal is also sort of an autonomy hedge in the intermediate term to some extent So if robot axes do eventually pressure the economics of uber's us business Well now they'll have a bigger global delivery and local commerce machine and markets where autonomy is going to be a more distant concern and it's just a fact that we know avia adoption will roll out more slowly and most International markets than in the us and as such having more geographically diverse revenue At least you know helps sort of further to minimize the threats from Tesla and Waymo and the immediate future As the company continues to prepare basically its counter response to the threats from those businesses

1:02:34We've been going for a while now and I still feel this so much for us to discuss and to cover when we talk about uber But we're truly excited about a company and you know one of our investments plus backed It's just so easy to talk all the way 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 avis or deliver hero is that croaker the second largest grocer in America Added roughly 2700 stores onto the uber eats app nation-wide 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

1:03:34Sort of like what Amazon has with all foods and so that was my worry But again, what has actually happened at least so far is that croaker accompany with every resource to go it alone Has chosen to plug into uber's network instead And to just quickly list and full of other things that uber has unveiled in the last year I think I should mention that uber partner with expedia to sell hotel bookings inside the uber app 700,000 plus properties that offers uber one members a chance to earn 10% back in credits and again Actually got a check if that's also the case for me of its us only which I hope it isn't an expedia Might have a us buyer so perhaps I can't benefit from that and they also acquired going back to wildhift Another German company called the black lane, which is a premium shop first service operating in 500 plus cities So it's quite big that very much complements you know the luxury and 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

1:04:41They refer to as a woman preferences So it basically allows woman writers to match only with woman drivers So you can imagine that's pretty attractive to many women for safety purposes and just mix it all the more likely that people will use uber On the march and so I mean if you're partying and you're out and you know, you just want to have an uber and get home It's way better if you know if you're a woman you can also have a woman driver compared to a man and I think This is where we will 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 run way 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're very happy owning uber and may 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 Derra the CEO of uber to a financial times column Criticizing with us buybacks instead of using you know that capital should just invest in growth and let's listen to you Reading Darra's letter from last time

1:05:43I 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 So at that time the buyback was a seven billion dollar program and there was real concern that uber was either overestimating its growth prospects to wall trader Misallocating capital to conduct buybacks when it would be better spent on growth investments and well Thanks to the inflection and 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 authorize 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

1:06:45Incredibly 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 Decelerations 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 So this is maybe our most strongly held contrarian opinion I think the only other option is to peps be early to the party and that's you know part of why I like companies like Middle or the local that we've also covered on the show because I think you don't need a highly contrarian opinion on those companies Of course the market had its doubts for example if you talk about it in middly how profitable can that company actually be And I thought it was quite obvious that they can be very profitable

1:07:48So to some extent it's still a contrarian take but I don't have to bet against let's say the market on the term the risk question We're also technological process 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 Wamo So it seems like it's Wamo again stuber and who's winning and it's just pretty wide or black in this case But in reality Wamo is competing with all other AV players and if Wamo can't reach global scale before any of them expand It will be uber's markets to win and while Wamo has made tremendous progress I think the technology itself is just astonishing right but I don't think they have a chance at monopolizing AV demand globally which is probably what they would need to do to actually kill off uber So I guess that means 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

1:08:52And and hopefully that doesn't come back to to bite us But it's a close things out I think the quote really kind of picks 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 Bin Graham the father of value investing Warren Buffett's mentor told us I 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 And the long run this idea of being a weighing machine is about 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 Thanks for listening to TIP Follow the investors podcast on your favorite podcast app and visit the investors podcast.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

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