In 2020, comparing Tesla to Uber is like comparing apples to oranges. But as a long-term investor, I’m looking further down the road. There’s a good chance Tesla is going to eat Uber’s lunch… and dinner as well.
I have many concerns with Uber as an investment, although, one problem comes in well above the rest. And many investors have overlooked it, even I did for many years. That’s why I’m sharing my research today.
I’ve been following – and using – Uber well before it traded publicly. I’ve watched its valuation climb and fall over the years. It went public in May of 2019 at $45 a share, which valued the company at $82 billion. Since, Uber’s share price has dropped below $15… but over the last two months, it’s climbed back above $30 per share.
It’s trading at a discount compared to its IPO price. Although, even at this level, I won’t touch the company with a 10-foot pole. That’s from a long-term investment point-of-view. As a customer, I still plan on hailing the occasional Uber ride, or Lyft, whichever is more cost effective at the time.
As a customer, I clearly find value in Uber’s services today. So, for some, that begs the question, why won’t I invest in Uber? As a general piece of investing wisdom, just because you like a company’s product doesn’t mean that the company’s stock is a good investment. It might, or might not be. It really depends on the company’s current valuation and future cashflows.
Uber’s Stock Valuation is Lofty
So, with that in mind, one of the first big concerns that investors bring up is Uber’s unprofitability. As you can see, revenue has climbed over the last two years, up until recent events.
And earnings per share have been volatile but dropped lower…
It’s not a great sign for investors. Although, this alone doesn’t worry me too much. Other tech giants have proven sustained short-term losses can lead to long-term profitability. To compete and grow into more sustainable businesses, they need to invest aggressively.
Now, for years, I’ve been saying Uber’s best path to profitability is by replacing drivers. At the end of 2018 – the most recent stats I could find on its website – Uber reported having 3.9 million drivers. Now, there’s an active debate online about how much of the cost of a ride goes to drivers. But after digging around online, as well as talking to Uber drivers, I’d say easily over 50% on average goes to the drivers.
So, even with some variability, that’s a huge cost for Uber. And it doesn’t even factor in hiring costs, related-taxes and legal fees. For example, Uber paid $20 million to settle a lawsuit over how it classifies its drivers.
As a result, Uber is banking on self-driving cars lowering these costs. The company is spending top dollar to build its own self driving car hardware and software. Before going public, Uber announced a $1 billion investment going into its self-driving car group. A good chunk of that came from Toyota. And on top of that, Uber has also built partnerships with Volvo and other big brands.
This sounds great for the company, right?
Uber is making some good moves… but I don’t think it’ll be enough. I see the future of self-driving cars further out than many “experts” have proclaimed. Five years ago, in one of my old reports, I predicted wide adoption of driverless cars was at least 30 years away. Now, even with new data in the door, I still stand behind that prediction.
The timeline is far out and Uber is burning through cash. The road to profitability isn’t looking good. And to make things more challenging, other big companies have ramped up their self-driving research and development.
Competition is becoming fierce. Some leaders in the space include, Google’s Waymo, GM Cruise, Argo AI, Lyft and my favorite… Tesla!
Tesla’s Big Competitive Advantage
Love him or hate him, Elon Musk has a proven track record. I’m personally a fanboy of what he’s accomplishing for humanity. And have I invested in Tesla? That’s a question for another time. Drop a comment below if you’re interested in finding out.
Elon Musk has already disrupted a few industries but he isn’t resting on his laurels. Tesla has recently achieved a few profitable quarters. That’s a major feat due to high barriers to entry and low margins in the car manufacturing industry.
Tesla has become vertically integrated and has valuable driving data. This is giving the company a huge edge over its competitors. Unless some big tail risks come to fruition, I believe Tesla will dominate the self-driving space down the road.
Still, an important question to consider, what does Uber have that sets it apart? In my mind, the number one moat is its well-recognized brand, along with its big userbase.
That’s valuable, no doubt. But getting down to the brass tacks, Uber is mainly an app that connects drivers to riders. And ultimately, the riders are cost conscious.
With Tesla’s vertical integration and growing userbase, it’s better positioned to become more cost effective. And Tesla already has a nice mobile app for its drivers. Adding functionality to connect drivers – and eventually self-driving cars – to riders wouldn’t be rocket science.
With my overall thesis on Uber, I could easily be wrong. Uber might succeed. Maybe some big partnerships will assist in its path to profitability. But I’m not willing to put money on it.
What are your thoughts? Please share down below…