[By Titan]
Oh, how quickly the tables have turned.
Ride-sharing stocks Uber Technologies UBER 5.18% and Lyft Inc (NASDAQ: LYFT) were highly criticized by investors last year, as both stocks stumbled out of their IPO gates. The general consensus was, disruptive as they were, that the duo would struggle to one day turn a profit.
It all goes back to that old saying: “In a gold rush, sell shovels.”
The fact that the two companies essentially created new business models gave many investors pause. Were Uber and Lyft shiny gold objects, or were they shovels? Shiny gold objects eventually lose their luster. Shovels last a long time, are critical to getting a job done, and, importantly for our purposes, make for great investments.
For example, each of the following tasks has a company that provides the shovels for a job:
“I need to look up something” > Google (Alphabet Inc GOOGL 0.89% GOOG 0.79%)
“I need to text my friends” > Apple Inc AAPL 1.45%
“I need to watch something” > Netflix Inc NFLX 1.89%
So is Uber a shovel, or the gold? After about a year in the public markets, it appears investors are starting to make up their minds.
Last week, Uber was added to the Titan flagship portfolio, which is partially determined by the holdings of top hedge fund managers. In other words, some of the top hedge funds on Wall Street are buying Uber, and so are we. We believe this signals a massive paradigm shift in the investing community.
The perception appears to have changed from “Uber the Unprofitable” to “Uber the Shovel.” What’s the job that Uber provides a shovel for?
“I need to go from point A to point B”
Uber has become the undisputed global leader in ridesharing, and we think it is now undergoing a transformation to be a profitable tech platform. Here are the three legs of the thesis:
1. Scale. Uber’s network effects and barriers to entry are enormous yet underappreciated, especially at today’s depressed valuation vs. the IPO.
2. Rational competition. A rational duopoly is proving out with Uber and Lyft. Both are raising ride prices and cutting rider/driver incentives, accelerating profitability.
3. Margin of safety. Uber Eats, Freight, and other bets provide a large margin of safety for us as investors, while the core Rides business re-rates.
Uber still has many skeptics, and we hear them. “Uber? Seriously? Weren’t hedge funds hating on this stock? An over-hyped, growth-at-all-costs startup with an absurd valuation? It’ll never get profitable, especially if it has to classify drivers as employees.”
Here’s our response: Several events have occurred that demonstrate a rational, profitable duopoly is now emerging with much more certainty than before. The key pillar of why Uber could become an investable business has now played out.
We believe Uber has built out an incredible, industry-leading consumer platform and is on the verge of transforming itself into a mature, sustainably growing compounder. A rare breed in investing.
In the gold rush of using our mobile phones to get from point A to point B, sell the shovel.
