Uber - Stuck in Traffic
Robotaxis, opportunity or threat?
It is no longer an original thought to point to the threat from robotaxis as an overhang on Uber's stock. However, a possibly more inventive idea is to reference a past analogue and consider that the robotaxi threat is far from discounted in Uber's share price. In the long run autonomous vehicles are set to disrupt the global transportation sector and emerge as the ultimate AI killer app, accelerating the trend towards the displacement of personal vehicle ownership. Furthermore, the current outlook for the robotaxi market suggests a future industry structure with a reduced need for a third-party marketplace and where the economic leverage resides with the service providers.
A variety of factors influence stock prices. Some are short-term, while others are long-term. At times, shifts in near-term earnings growth expectations drive share price performance. At other times, the emergence of a new theme or narrative can impact a company's perceived long-term growth prospects and terminal value. This clash between short-term numbers and long-term narratives can create significant stock price volatility.
However, with the benefit of hindsight, this volatility often appears as a mere blip or a temporary pause in a company's growth trajectory. For example, consider the case of Netflix...
Netflix's stock price declined by over 70% from late 2021 to mid-2022. This decline was triggered by a slowdown in the company's crucial new subscriber growth metric and a corresponding slowdown in revenue growth, leading to a dramatic reassessment of Netflix's growth trajectory.
This slowdown resulted in a significant valuation de-rating, as investors reassessed Netflix's long-term prospects. Fast forward to today, and Netflix remains the king of streaming, and growth has reaccelerated, with the stock now trading at a meaningful valuation premium to the market.
The takeaway is to be wary of well-owned stocks at a premium valuation that are set to undergo a reassessment of their earnings power and growth prospects. Uber is one such stock.
The Cost of Disruption
Lower prices will be crucial for driving long-term growth in the robotaxi market. Beyond the initial novelty, consumers will ultimately choose robotaxi services based on their cost-effectiveness compared to traditional rideshare options.
This raises a critical question for Uber: how will the rise of robotaxis impact its market share? While growth in the rideshare and mobility market is generally positive for Uber, the company could face challenges if robotaxi services eventually undercut its pricing.
Early on, it's unclear whether increased rideshare volumes will fully offset any future risk of a decline in pricing. If robotaxis gain significant traction, Uber may also eventually need to lower its prices to remain competitive, impacting mobility revenue.
An Evolving Market Structure
In the past, I had the view that Uber would be a winner in the future world of autonomous vehicles and robotaxi services. I foresaw Uber becoming the Booking.com of autonomous services, as the high fixed cost structure of a robotaxi network would incentivize service providers to seek customers both directly and through two-sided marketplaces such as Uber.
Such a market dynamic would provide Uber with an expanded long-term growth opportunity as the rideshare market grew to a multiple of its current size. Over the long run, this still may be the case; however, there may be more pain for Uber's stock before there is any gain.
Both Uber and Booking's business success have relied on a market structure of highly fragmented supply, enhancing the utility of a marketplace and providing economic leverage to these marketplace platforms. However, given the technology and capital barriers to entry, the robotaxi market may evolve into a more concentrated market structure dominated by a handful of players, such as Tesla and Waymo, resulting in only a limited need for a third-party platform.
Uber is partnering with Waymo to launch services in Atlanta and Austin, but this may prove to be only a transitory tie up as Waymo currently seeks to accelerate its go-to-market strategy. As the business scales, the need to utilize Uber's marketplace may diminish, and it won't take much for investors to begin to speculate that Waymo will evolve from a partner to an Uber competitor.
Waymo's Exponential Growth
Initially, the robotaxi threat to Uber seemed to center on Tesla's Full Self-Driving efforts. However, Waymo has emerged as a more immediate challenger. Waymo is rapidly expanding its robotaxi service, with paid rides per week increasing from 100,000 in August 2024 to over 150,000 as of Google's latest earnings call in October.
Waymo’s rapid growth poses a direct challenge to Uber's market share. The company is aggressively rolling out its robotaxi services in new cities, including Atlanta, Austin, and Miami, and eventually will add longer-distance rides, such as to and from airports.
This expansion will fuel exponential growth in Waymo's weekly ride volumes. Depending on the pace of the launch of Waymo's robotaxi services in new cities and expansion in existing cities, one million rides per week by the end of 2026 is not outside the realm of possibility.
Early in Waymo's deployment of robotaxi services in a new city, the company is expected to be supply constrained. It will likely continue to price its service at a level comparable to or higher than Uber and Lyft. Hence, the initial absence of the impact of lower prices to stimulate rideshare market growth will likely lead to a shift in market share at the expense of Uber and Lyft. This is not good news for Uber's stock as the market becomes increasingly concerned that, in an autonomous world, the company is a net market share loser.
Is Uber's Growth Engine Stalling?
Uber's stock enjoyed a strong run from mid-2022 to early 2024. This performance was driven by several factors, including accelerating growth, improving profitability, and the company's inclusion in the S&P Index.
However, Uber's stock momentum has stalled. Since April, positive earnings estimate revisions have ceased, and the company's share price has stagnated. This lack of upside to earnings estimates is partly due to weaker than expected trends in Uber's mobility business. This was evident in Uber's 3Q24 results, where there was a deceleration in gross bookings growth, and projected 4Q24 gross bookings were below expectations. These developments have raised concerns about Uber's ability to sustain its previous growth trajectory.
Several factors heighten the risk of a more pronounced slowdown in mobility bookings growth and revenue expectations: the impact of negative price elasticity from higher rideshare rates, the possibility that the boost to mobility ride volumes from new products will begin to wane, and Lyft's recently announced partnership with DoorDash poses an incremental negative for Uber. This risk sets the stage for potential negative earnings revisions in 2025 and contraction in Uber's premium 2025 EV/EBITDA multiple of 18x.
Some companies can weather short-term setbacks and have the resilience to look past weaker-than-expected financial results. However, other companies are more vulnerable. When a long-term competitive threat looms, even minor disappointments can have a significant impact on their stock price.
Presently, Uber's stock is squarely in the camp of not having the capacity to disappoint. The company is facing a perceived long-term threat from autonomous vehicles and robotaxi services. This threat makes Uber's stock particularly susceptible to negative news or any indication of slower than expected growth.
Balancing Near Term Risk and Long-Term Potential
Although autonomy is a near term narrative challenge for Uber’s stock there is a path that leads to the proliferation of competing robotaxi services and expand Uber’s market opportunity.
The long-term success of third-party autonomous vehicle technology enablers and systems providers Nvidia and Mobileye will be a crucial variable behind the future robotaxi market structure. These companies’ success will determine whether the market is dominated by a small handful of players or enables a more competitive market.
A more fragmented market with numerous robotaxi players would be beneficial for Uber’s marketplace and strengthen Uber's position in the future autonomous transportation ecosystem.
Nevertheless, with the backdrop of the autonomous threat and the risk of missing mobility bookings sometime in the next couple of quarters, the share price risk reward skews to the downside. Although international mobility growth may partially offset a slowdown in US mobility growth, near term trends in the US mobility business are likely to dominate the narrative and weigh on the company’s perceived terminal value.