Uber's biggest issue is the 'seismic change' with autonomous vehicle uncertainty

Key Concepts

• Autonomous Vehicles (AVs): Self-driving cars that have the potential to disrupt the ride-hailing industry.
• Ride-Hailing Industry Disruption: The potential for AVs to fundamentally change how ride-hailing services operate and who benefits.
• Distribution: The role of platforms like Uber in connecting riders with drivers.
• Fragmentation vs. Concentration of Supply: Whether the supply of drivers (or AVs) will remain diverse or become dominated by a few large players.
• Middleman Model: The business strategy of platforms that connect buyers and sellers, relying on the fragmentation of supply for their value.
• Take Rate Risk: The risk that a platform's commission or fee (take rate) will decrease due to changes in market dynamics.
• Vertical Integration: A company controlling multiple stages of its production or service delivery, such as Tesla's control over vehicle manufacturing and AV technology.
• Regulatory Approval: The process by which government bodies permit the widespread use of new technologies, such as fully autonomous vehicles without human oversight.

Uber's Third Quarter Performance and Market Reaction

Uber's shares are experiencing a decline despite exceeding revenue expectations in the third quarter. Wall Street's concern appears to stem from future earnings prospects rather than current performance. Scott Devbush, Managing Director of Equity Research, suggests that the primary issue is not the income statement but a potential "seismic change" in the ride-hailing industry driven by the introduction of autonomous vehicles (AVs).

The Autonomous Vehicle Threat to Uber's Business Model

Devbush argues that if the "technology risk" associated with AVs were removed, Uber's stock would be a "clear buy." However, the uncertainty surrounding how AVs will impact Uber's business model creates significant investor apprehension.

• Uber's Stance: Uber and Lyft claim that AVs will be fragmented, similar to human drivers, and that their distribution network will remain essential.
• Counter-Argument: Devbush points to the scaling and technological advancements of companies like Waymo and Tesla, suggesting that supply could become highly concentrated. These dominant AV providers might not require distribution assistance from platforms like Uber, posing a significant problem for Uber's future.

Uber vs. Tesla: A Tale of Present Performance vs. Future Potential

The discussion draws a parallel between Uber and Tesla, highlighting a key difference in investor perception:

• Tesla: Currently, Tesla's core business might be considered "lousy" by some, but investors are drawn to its future potential in areas like autonomous vehicles and robotics.
• Uber: In contrast, Uber's current business is performing well, but investors are concerned about the "perils coming down the pike" related to AVs.

This difference in perception is reflected in their stock performance, with Tesla currently outperforming Uber. If Uber's assertions about the future of AVs prove correct, its stock could indeed be a buy. However, the current uncertainty is a major factor.

Fundamental Strengths and Historical Parallels

Despite the AV concerns, Uber's gross bookings are rising, with projections for fourth-quarter bookings to increase by 18-22%. This presents an argument for buying Uber based on its current solid fundamentals.

However, Devbush uses historical examples to illustrate how disruptive technologies can rapidly change established industries:

• BlackBerry: Thrived before the iPhone.
• Specialty Retail: Was strong before Amazon.
• Media Industry: Was robust before Netflix.

These industries experienced slow, almost imperceptible shifts that ultimately led to complete transformation. Devbush believes AVs have the potential to similarly revolutionize transportation.

The "Middleman" Model and its Vulnerability

The core of Uber's business relies on a "middleman" model, which thrives on the fragmentation of supply.

• Best-Case Scenario for Uber: Fragmentation of supply, where numerous small vendors (drivers) are on one side of the marketplace, gives power to the middleman.
• Risk of Supply Concentration: If supply becomes concentrated (e.g., a few dominant AV companies), the power shifts to the suppliers.
• Airline Industry Analogy: Online travel agencies earn less from selling airline tickets (highly concentrated supply) than hotel rooms (more fragmented supply).
• Impact on Uber: If AV companies like Tesla or Waymo become dominant and no longer need distribution help, Uber faces "take rate risk" (lower commissions) and the likelihood of losing volume from its marketplace.

The Autonomous Vehicle Landscape: Tesla and Waymo

The discussion delves into the current state of AV technology and its players:

• Waymo: Has a significant number of AVs operating on the road and is considered impressive. However, Waymo does not currently have its own ride-hailing platform.
• Tesla: Is vertically integrated, controlling both vehicle manufacturing and AV technology. While the technology is powerful and potentially "already there or very close to being there," regulatory approval for fully autonomous operation without human assistance is a bottleneck.

Regulatory Hurdles and Future Scaling

The pace of regulatory approval is crucial for the widespread adoption of AVs.

• Example: Austin: If regulators in cities like Austin allow for the removal of the human safety driver in AVs, Tesla's robo-taxi business could scale rapidly, potentially on an "S or J curve."
• Timeline: Elon Musk has suggested this could happen imminently, possibly within the next 6 to 9 months, even if his timing estimates are sometimes exaggerated. This rapid scaling would be a significant development.

Conclusion: A Wait-and-See Approach

The volatility in Uber's stock reflects the significant uncertainty surrounding the future of autonomous vehicles and their impact on the ride-hailing industry. Investors are likely adopting a "wait and see" approach over the next 6 to 18 months as AVs become a more prominent factor in transportation. The ultimate outcome depends on whether AV technology becomes commoditized, leading to a fragmented market where middlemen retain value, or if it concentrates power in the hands of a few dominant technology providers.