Originally published 2021-10-24
Uber’s business model is flawed. I am sure you’ve heard that there is an ever-growing number of tech companies that have yet to make a yearly profit, this is the case for Uber, but it goes much deeper.
The only two levers Uber currently has to pull in the mission to achieve positive adjusted EBITDA (earnings before interest, taxes, debt, and amortization) are capturing more of the cost of each ride (i.e. take rate) or increasing prices. Numerous other one-time events allow them to have positive EPS for a quarter, for example, selling of their self-driving unit late last year or recognizing gains from the DiDi IPO. But if they are to consistently drive margin improvement it will always come at the expense of the individual driver.
Labor will eternally be at odds with management. This can be said for many industries, but with Uber, it will be an even more formidable challenge. Uber bulls need to take a serious look at exactly how they see this firm scaling into the future in the face of powerful headwinds that I will outline ahead.
Regulation
Labor wins in several international markets will continue to weigh on Uber’s bottom line. The UK’s highest court has ruled that drivers must be classified as workers instead of private contractors. This has serious implications for the industry at large in the near to medium term, but as of right now Uber is taking the brunt of the pain in the country. Management has even gone so far as to say that it wants other rideshare companies to be held to this standard. Uber’s regional manager of the region, Jamie Heywood, has come out in favor of industry-wide adoption of this most recent pension scheme that Uber has been pulled into by the ruling. It is plain to see that if Uber is the only rideshare firm held to this standard they will not be able to price as competitively as other firms.
Even moving past the UK’s ruling for the moment there are other rulings that have come down against Uber in recent months. The Amsterdam District court sided with unions against Uber in a case that classifies their drivers as employees. Although Uber intends to fight the ruling it is yet another domino falling in favor of drivers worldwide. The UK and the Netherlands may seem like minuscule markets when it comes to Uber’s global market dominance, but rulings like this are showing that rideshare drivers have a strong argument for being classified as employees. 
The rulings mentioned above are relatively easy for Uber bulls to brush off as they are in relatively small markets; Uber’s core revenue drivers are outside of EMEA, but even local governments and courts in the States have become sympathetic to drivers.
Prop 22, a ballot measure that passed last November in California, allowed Uber to continue to operate in the state under the notion that drivers would be classified as independent contractors was overturned by the California Supreme Court. Uber, Lyft, and Doordash collectively spent $200 million to get this bill passed. And it worked, up until this most recent ruling. An overturning of prop 22 sets the stage for similar fights country-wide.
Certain city governments across the country have begun attacking the eats business model as well. NYC has placed a cap on delivery and marketing fees on food delivery companies. Doordash and Uber are fighting this bill, but as it has already taken effect, each day that passes these firms are missing out on significant revenues.
Labor Market
As wages continue to inflate across the board Uber drivers seem to be noticing that even upon the return of pre-pandemic rideshare demand there are significantly better options to earn a living. Employers are offering a slew of benefits to attract new employees, especially coming into the holiday season. Several low-wage employers are offering tuition benefits, increased base wages, and one-time signing bonuses to attract unskilled labor. Uber definitely has the appeal of working on your own schedule, but as federal unemployment benefits run out Uber will have to continually shell out driver bonuses to keep up with the current explosion in rideshare demand.
Outside of this tight labor market Uber also needs to worry about competing with itself for drivers. Uber Eats became a much more attractive option for gig workers during the pandemic; even as demand for food delivery levels off drivers may be hesitant to return to driving. New York City has rolled out protections for delivery workers that do not include any stipulations for rideshare drivers. Not to mention food delivery can be much more lucrative when done in a city without a car–this could potentially serve to increase wait times for rides within some cities.
AV Adoption
Many Uber bulls seem to believe that autonomous driving technology will be the saving grace of the firm. I am quite skeptical about Uber’s ability to roll out this technology at scale when we reach that point. Obviously, the margins of operating an AV fleet will be much more lucrative than a driver-operated fleet, but how exactly will Uber be financing this fleet? 
Uber’s current debt load tells me that even with the projected EBITDA profitability expected this coming quarter they will not have the funds to finance a fleet capable of competing with the litany of other AV players. Yes, Uber has a significant stake in Aurora–one of the few pure-play self-driving names. Aurora may partner with Uber in creating an AV fleet for their platform, but how exactly does Dara plan on financing this fleet? The competition in this space has players with both extremely deep pockets and manufacturing expertise. Alphabet, GM, and Intel Mobileye have all struck up partnerships with cities to begin rolling out the very beginning of their future autonomous dream. Alphabet, parent company of AV leader Waymo, has a $135 Billion cash stack; not to mention partnerships with numerous large auto manufacturers. GM sold 6.83 million automobiles in 2020, even in a challenging auto market and a chip shortage. Cruise and Waymo have begun rolling out fleets in San Francisco and Cruise has a deal to begin operations of a fleet in Dubai in 2023.
I understand that Uber has a significant moat in the rideshare space at present, but I do not understand why when these fleets begin to spread city to city Uber will be able to capture significant market share against competing firms.
Investments
The pandemic caused Uber to shed its most unprofitable units and focus wholly on profitability. Late in 2020, they sold off both their self-driving unit to Aurora as well as their flying taxi unit to Joby Aviation. Both of these deals allowed for Uber to build large stakes in both companies; not to mention two seats on Aurora’s board. 
Uber’s equity portfolio has significant risks as well. For one, the largest holding is DiDi, Uber’s consolation prize for backing out of the Chinese ride-share market. DiDi shares many business model risks with Uber, but with Beijing looking into taking control of DiDi there is a chance that their position in the company may lose significant value in the future.
Many of Uber’s portfolio companies could potentially grow into large companies one day. If we are to assume Uber will continue burning cash these positions will likely be trimmed when Uber inevitably requires fresh capital.
Why I might be wrong
Uber’s incredibly strong brand keeps it top of mind for anyone looking to get anywhere. If they are able to execute on growing the business sustainably (i.e profitably) they will be an enduring brand in mobility.
Despite immense and growing regulatory pressure, it seems that the gig economy is still in its early innings of growth. If Uber is able to sustain itself through the current tight labor market and gig work opportunities continue to increase, I can see Uber being able to traverse the hazardous regulatory environment they are currently in.
Uber has been developing a SaaS offering for pubic transit agencies. If they can successfully roll out this platform to cities nationwide we could see Uber developing what could be analogized to Amazon’s AWS. Uber has ungodly amounts of transportation data that could be used to optimize public transportation in cities around the world. Compared to Uber’s other business units (Mobility, Eats, and Freight) this business would have a much more attractive margin profile and be much more easily scalable. Time will tell how well this product succeeds, as of now it is too early to make any kind of sweeping predictions.
Uber has a near $15 Billion equity portfolio. If these companies continue to grow and fetch higher and higher valuations the portfolio could end up becoming an even larger percentage of Uber’s cap table. Unlikely I know, but there are a number of very exciting companies on this list. Singaporean super-app, Grab, has a massive runway for growth in Southeast Asia. Joby Aviation is the industry leader in EVTOL technology(Electric Vertical Take-Off and Landing) and could potentially revolutionize the mobility space.
Dara Khosrowshahi is a talented manager and his experience growing Expedia through M&A is worth noting when analyzing whether or not he will succeed as Uber’s CEO. He has weathered the pandemic admirably; building Eats into an almost $4 Billion revenue business in 2020 is no small feat. If ride-sharing and delivery continue to consolidate into winner-take-all businesses–Dara’s abilities as a deal maker could work in Uber’s favor. Although if these acquisitions simply increase Uber’s market share without firming up their bottom line, I do not see this as being a sustainable path for generating shareholder value.
Final Thoughts
When it really comes down to it I just do not see Uber’s business model as attractive. Each dollar that gets pulled to the bottom line is a dollar not going into the pocket of a driver. Uber will likely be able to generate EBITDA (earnings before interest, taxes, depreciation, and amortization) profitability in the coming quarters, but I fail to see this as a worthwhile point for a bull-case.
AV adoption, however far away it may be, presents an existential risk to Uber. In the next decade, autonomous ride-hailing will be a highly cost-competitive business. Deep-pocketed players are in the game and they have significantly more resources than Uber does.
I am not the stick-in-the-mud investor who cares strictly about near-term profits. When we think about high-growth tech names we have to consider factors outside of profitability. With Uber, the lack of near-term profitability would be easily bearable if we were able to look forward to a time when Uber can generate consistent earnings and margin growth. Alas, due to the firm’s dependence on drivers it will likely never have an attractive margin profile or a path to consistent year-on-year EPS growth.
Trying to Understand 