Often found at the center of controversy, Uber has still got one very strong bull case going for it that investors cannot ignore.
Uber Technologies Inc (NYSE: UBER) is an American technology company. Its services include ride-hailing, food delivery (Uber eats), package delivery, and freight transportation. UberEats became their largest revenue source during the coronavirus pandemic but that title looks set to revert to their ride-hailing business in our post-pandemic world.
The profitability problem
The chief case against Uber is their lack of profitability. Lawsuits over having to treat drivers as employees, rather than gig workers, threaten to raise costs significantly and is one of the most cited blockers on their road to profitability. Drivers have historically been the thorn in the side of Uber’s business model, currently representing the single largest expense in ride-sharing at 80% of the total cost per mile.
The long term vision
But what if we were to remove the driver from Uber’s business model altogether? That is the future we are staring down, and it is coming for us quicker than we might think. Autonomous Vehicle (AV) technology has had its well-documented setbacks, but the technology is getting close and widespread adoption is an inevitability. Last month, for example, an AV truck traversed the US east to west 10 hours faster than a human driver.
In the future, people will hail an electric autonomous vehicle to pick them up, in a business model known as Transport as a Service (TaaS). By 2030, it is estimated that 95% of U.S. passenger miles will be served by these on-demand autonomous vehicles owned by fleets, not individuals. This is estimated to be 10x cheaper for consumers than owning a car, the prime driver for the inevitability of its adoption once the technology is perfected. Car ownership will be rendered obsolete, except in the most rural of areas. The TaaS market could be worth 9 trillion dollars by 2030 and it is easy to envision how much of a presence it will have in our daily lives once it takes off.
The question then becomes, how much of this market can Uber capture? They operate in a near duopoly right now with Lyft, but Uber might be better primed to take advantage of the TaaS opportunity. Uber were first movers in ridesharing and have overhauled their negative company culture under ousted CEO Travis Kalanick. Sitting on over 7 billion of cash reserves, they also have the deep pockets necessary to make the large investments needed to establish themselves in this market.
Uber recently sold their AV business arm (ATG) to AV company Aurora in late 2020 and while this worried investors, Uber said it didn’t change its plans for TaaS adoption. Aurora will benefit from ATG’s progress thus far and Uber will adopt Aurora’s technology once it’s perfected. Notably, Lyft also recently sold its AV business as it appears clear that outsourcing the development of AVs is the path forward for ridesharing companies. Network effects will also be a powerful force within the TaaS industry, with consumers valuing convenience and car availability. This allows for a highly plausible scenario where Uber could grow to control the TaaS market. They would become a mainstay in our daily lives and one of the largest companies in the world if they were successful in this.
Predicting the future can be a futile endeavor at the best of times, but it appears clear that the 2020s are poised for technological disruption on an unprecedented scale. Electric AVs will be a major feature of this revolution and the way we travel looks set to change forever. Uber will be a fascinating company to follow over the next decade.
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