Uber Stock: Autonomous Driving Future (NYSE:UBER)

Introduction and Thesis

Uber (NYSE:UBER) has been known for many things in the past. One of which was for the unprofitable operation of the company. Even before the pandemic, Uber has been losing billions of dollars a year putting growth over profitability, but since the start of the pandemic, the massive volume in the company’s delivery business has allowed the company to finally stress profitability. Thus, given this crucial turning point in the company’s strategy, as Uber strives to achieve profitability, I believe Uber is a long-term buy. Further, the autonomous driving revolution is, in my opinion, on the brink of getting commercialized. I think it is likely that autonomous driving technology will be available for the public in the next few years toward 2025 creating a significant long-term catalyst for Uber. All in all, given Uber’s improving operational efficiency through scale and the potential benefit from the upcoming autonomous driving revolution, I believe Uber is a buy.

Earnings Report

Every day Uber is getting one step closer to reporting positive net income from growing and improving operations. Looking at Uber’s 2021Q4 earnings report, Uber reported gross bookings growth of 51% to $25.9 billion with revenue growth of 83% to $5.8 billion. The revenue was able to grow at a faster pace than the gross bookings due to the dramatically increased take rate for Uber. The delivery business’s take rate increased from 13.5% to 18% showing 33% growth while the mobility business had a slight decrease in its take rate from 21.7% to 20.1%. It is expected for these take rates to improve further over the coming quarters as promotions and incentives ease as the delivery market starts to mature and drivers return back to work aiding the mobility business. As a result of this growth and improving take rate, the company was able to report an EBITDA of $86 million, which was a $540 million improvement year-over-year. All in all, I believe it is clear that Uber is starting to put heavy emphasis on profitability as the company already commands a sizeable market share in all of its operating regions making growth less important. Therefore, as operational efficiencies improve along with revenue growth, I believe Uber will continue to move closer to sustainable profitability.

Autonomous Driving and Uber’s Opportunity

I believe that the autonomous driving future is fast impending. In fact, autonomous driving future will most likely be available for commercial service around 2024~2025, and I believe that Uber will be one of the biggest beneficiaries of this technological innovation.

The idea is fairly simple. Uber reported gross bookings of $25.9 billion for 2021Q4. However, the company reported a revenue of $5.8 billion. The massive discrepancy of about $20.1 billion comes from the biggest expense for the company: its drivers. It’s ironic that Uber completely relies on its driver for the company’s business model, but at the same time, these drivers represent the biggest expense for the company. They are a vital part of Uber today, but if Uber can reduce their reliance on these drivers through autonomous vehicles, I believe the potential profits will be immense as Uber can start capitalizing on the $20.1 billion opportunities presented every quarter.

The only problem with my bullish thesis in regards to the autonomous revolution is that most investors believe that this technology is still a decade or even decades away from commercial operation. Further, if it is possible for autonomous driving to be commercialized in the near future, some investors argue that Uber cannot be the winner as the company is currently not as competitive in developing this technology. However, I believe otherwise.

First, autonomous vehicle commercialization may come in a few years. Google’s (GOOG) Waymo has been operating a commercial robotaxi service in Phonix since 2020. Further, GM (GM) Cruise has recently received approval for commercial testing in February 2022 with a plan to start producing fully autonomous vehicles in 2023 without a driver seat. Uber Eats, in partnership with Hyundai (OTCPK:HYMTF), is expected to start autonomous food delivery in California in 2022. As such, the pace of limited regulatory approval for commercial testing is increasingly setting up a strong foundation for full regulatory approval in the coming years. Not only is the market and the testing progress heating up, some companies including GM are starting to lay out a detailed timeline for full self-driving adoption. Thus, as the technology matures and regulations are created, the adoption of the technology will make gradual but meaningful progress toward the commercialization of fully self-driving vehicles.

Even if Uber is not one of the first few companies to develop this technology, the company will likely win. Uber can leverage its massive platform and its user base to entice other companies to use its platform. For example, if company A first gets approval for commercial operations of autonomous vehicles, they can list those services on Uber for monetary gains instead of spending significant time and capital to build a robotaxi service platform. Uber’s key advantage is not that it is the most popular and used service, it is the software that runs behind the company’s platform that actively and most efficiently connects drivers to passengers and couriers to customers at home. Thus, it will be hard for another competitor to start competing with Uber which already commands the market. This industry is not a winner-takes-all market, so I think it is reasonable to assume that the creator of the autonomous driving technology licenses the rights of operation to Uber even if they build out their own platform.

Further, even if other companies do not agree to list their fleet on Uber, Uber can continue to leverage its massive platform as consumers start purchasing autonomous vehicles. Car is not considered an asset today as they depreciate over time, and once a consumer purchases a car, it usually does not make money for the everyday consumer. However, an autonomous vehicle can be an asset for consumers.

Most cars spend more time sitting idle doing nothing during their lifetime. Drivers only drive cars a few times a day excluding a few special occasions. Thus, if the car is fully autonomous, the car can be put to work while the owner is not using it. For example, the car can be serviced under Uber’s platform by performing ride-hailing tasks to create passive income for the owner while the owner is at work, sleeping, or on a vacation. This will ultimately change the view of car ownership and potentially turn cars into passive income-generating machines while reducing driver takes rate for Uber.

Overall, in one form or the other, the autonomous revolution is likely to benefit Uber whether the company develops it or not.

Risks

If an investor does not take into account the potential of Uber’s autonomous driving revolution opportunity, an investment in Uber will most likely not make sense. A growth rate in the company’s take rate will be eventually limited as no drivers will work if the company starts to significant underpay them from current levels. As such, the majority of my bullish thesis resides within the autonomous vehicle revolution. I believe the opportunity for Uber rest within this unfinished technology, which creates risk. Although I am speculating the 2025 timeline for the commercial launch of autonomous driving services, no one knows for sure how the regulators and the public will view these services potentially delaying the commercialization. Further, the technology may not even be close to being perfectly ready as some of these companies claim. Therefore, because a significant portion of the bullish thesis resides in the currently unfinished technology, an investment in Uber comes with tremendous risks.

Summary

Uber’s operations are scaling and improving bringing the company closer and closer to reporting a positive net income. This trend is likely to continue even after the pandemic. Delivery services are being ingrained in our lives and ride-hailing services are recovering fast from pandemic lows as the world recovers from the pandemic signaling a turnaround in Uber’s business. Further, with the potential of the autonomous driving revolution impending in the next few years, Uber is buy-in anticipation of this technology as it will eliminate the biggest expense for the company. Therefore, as the business reaches profitability and eyes an autonomous driving future, I believe Uber is a buy.