Uber and the Age of Autonomy

Written by Head of Research & Portfolio Manager, Jamie Murray, CFA.

We recently increased our investment in Uber to 3% in our Global Equity Growth Fund. On the surface, Uber looks expensive, trading at 75 times the US$0.96 in earnings per share the company generated in the past 12 months. However, we believe Uber is at the inflection point where its global scale, dominant market position and utility-like demand could create a half trillion-dollar company in a decade (from $150B market cap today). Figure 1 (below) highlights Uber’s projected free cash flow growth, per Morgan Stanley estimates. After several money losing years, the company has crossed the profitability threshold and appears to have a sustainable business model to build on this early success. Its long-term success rests in maintaining its leadership in public mobility as its markets mature and autonomous vehicle technology develops further.

Figure 1. Uber’s Projected Cash Flow

Uber Today and its Competitive Advantage.
Uber’s business model is a two-sided marketplace. On one side is the customer, looking for a product/service (such as a ride home from a holiday party or a sushi combo on Uber Eats). On the other side is the product/service provider (the driver and/or the sushi restaurant), looking for a customer. Uber earns its revenue by safely facilitating the procurement and payment of the above transactions in an ultra-convenient way for the customer and to the benefit of the product/service provider.

The success of a two-sided marketplace hinges on its ability to achieve “network effects” that come from a scaled operation. Imagine logging into the Uber app and finding that there were no drivers within five kilometres, or just a sole sushi restaurant with a measly 2-star review. One may simply close the app and resort to public transit options, or order Domino’s pizza.

On the flip side, enough supply built out on the app could mean conveniently acquiring a ride home or having your favourite food delivered right to your door. This would likely spur repeat app usage and frequency. As you (and others) increase your order frequency (demand side), more supply will gravitate to the platform. This can be augmented with elastic pricing to increase demand or supply. For example, Uber may implement higher prices after a sporting event to entice additional drivers to turn on the Uber app and earn higher than typical compensation.

This business model depends on local market dominance and explains why Uber and other competitors invested so heavily, creating such high losses, in the early days. Early market share dominance in individual cities was the only way to win. Post-pandemic, ridesharing and food delivery markets have witnessed consolidation and exits from unprofitable markets. This has created a much more rational marketplace for Uber.

Uber is now the largest rideshare and delivery company globally, and investors are now realizing the benefits of its scale. To start, data from Uber shows that drivers willing to do both food delivery and mobility earn more than drivers who focus on only one segment. Travel facilitates a large portion of demand and, in some cases, a Toronto Uber customer may become a Calgary or New York City or London, UK customer. Finally, Uber can leverage corporate spending such as marketing or research & development over a larger revenue base. This means Uber can both spend more absolute dollars than competitors and spend them more efficiently as new features can be rolled out faster to a larger number of users. This further enhances the referenced network effects by creating a strong flywheel effect.

These market dynamics are playing out in Uber’s financial results, where the company is larger than its next three competitors combined (Figure 2). Note also that its competitors are more narrowly focused on either ridesharing (Lyft) or food delivery (DoorDash/Just Eat Takeaway).

Figure 2. Uber is larger than its next three competitors combined and generates much higher profitability…

…Which allows Uber to greatly outspent its peers on research & development as well as sales & marketing.

Uber has grown its Gross Market Value (GMV – the total value of services ordered on Uber apps) by 20% per annum since 2019, to US$150 billion dollars in 2024. Growth is forecast to average 12% per annum over the next five years as the ridesharing and food delivery markets continue maturing but may be more durable given a strong demographic tailwind (Uber reports Gen Z users are the most active customers and are growing the fastest in numbers). As well, expanding use cases to its captive audience will provide new revenue sources down the line.

Take advertising. Uber is not for window shopping. Uber has 156 million monthly average users with very high purchase intent. The company is generating $1B per year from sponsored listings and merchant-funded offers (coupons/deals) just 18 months after rolling out its advertising platform. The company has identified grocery and personal care products as big spenders in this category and has noted high initial returns for restaurants that have adopted the platform. Advertising revenue is high margin and provides just one example of how Uber can generate profit off its large user base.

Uber and autonomous vehicles
Autonomous Vehicles (a.k.a. AVs, or self-driving cars) are defined by the five levels of autonomy, ranging from Level 0, no autonomy, to Level 5, a vehicle that would not require parts like a steering wheel or gas/brake pedals since there would be no need for a driver to operate it (Figure 2). Excitement surrounding AVs has been high since 2017, when billions of dollars flowed into autonomous programs. At the time, the first commercial vehicles were just reaching Level 3 autonomy but progress to Level 4 was slow. Companies like GM invested upwards of US$8B in its Cruise Autonomous division, with minor success. Uber itself has had a mixed history with autonomy, with safety concerns and financial losses, eventually selling its Advanced Technology Group to Aurora Innovation in 2020 and exiting its direct efforts in AV.
Currently, Level 4 autonomy has been achieved as evidenced by Alphabet’s Waymo division, which has autonomous taxis operating in four Southwestern cities in the United States. It’s logical to assume that Waymo and other players will eventually commercialize Level 4 autonomy in most major metro markets globally over the next decade.

Figure 3: 5 Levels of Autonomous Driving

This has the potential to significantly alter ridesharing and food delivery markets. The key question is whether Uber will be a benefactor or casualty of this rollout.

Figure 4. Autonomous Vehicle Commercialization is underway in the United States

Driver earnings are the largest financial factor in a ridesharing trip, equating to 60-65% of the fare (before tips) as well as a significant factor in food delivery at 12% of the check (remember most of the food delivery fares go to the restaurant/vendor).
As AVs rollout, replacing drivers with machines will lower the cost of service as AVs are able to operate more efficiently than human drivers, eliminating the “driver earnings” component. There is potential for longer-term efficiencies from reduced administrative, insurance and regulatory costs as well as scalability from fleetwide efficiency.

This lower cost will be split among in three wallets: the customer, the AV owner and the ridesharing/delivery platform (in this case Uber). How these cost savings are split will depend on competitive interplay between the three parties.

We believe it’s likely that multiple AV technology vendors reach commercialization, and, like many cutting-edge technologies, AVs become commoditized. This would lead to a market where AV vehicle fleet owners would look to maximize their utilization and profitability (representing the supply side of the market) and match up with customers in need of mobility (the demand side). This market would resemble the current ridesharing market.

Uber is in an enviable competitive position to benefit as it has the largest base of each of the following: active customers count, gross market value, revenue, operating cash flow, merchants, drivers, research & development budget, sales & marketing budget, and trips data. And like other markets with a high degree of price elasticity, lower prices from AVs should stimulate higher demand, resulting in a greater number of trips, shorter wait/delivery times, and faster trip times.

If only one company (for example, Waymo) is able to commercialize AV technology, most of the value will likely accrue to it. Waymo would have all the power, given its ability to decide how to monetize the technology. For example, Waymo could exclusively serve its own ridesharing app and attract riders away from Uber with lower priced fares. This is certainly the worst-case outcome for Uber.

This plays back into the flywheel dynamic discussed earlier, where higher demand is accompanied by a supply response leading to higher volumes on Uber’s platform. Full AV commercialization remains five-plus years away and is likely to be accompanied by a hybrid marketplace where AVs operate on some base level within geofenced areas, with human drivers supplementing peak demand and routes unavailable to AVs. Again, Uber is well positioned to serve as the marketplace leader.