Summary
News and Thesis Update
UBER’s CEO Dara Khosrowshahi once sold UBER as the next Amazon, promising that “cars are to us what books are to Amazon.” Link here. Khosrowshahi, who was Barry Diller’s top salesman for a decade, pitched the taxi-hailing app, repackaged as “rideshare”, as simply the first step on a journey to global domination. UBER would enter and dominate “food delivery, freight, autonomous vehicles, and even buses and bikes”. Later, he added flying cars. By 2023, Khosrowshahi continued, UBER could run the entire transportation network for a city! As recently as UBER’s latest 10-K, filed in February, UBER characterized its Freight business as “revolutionizing” the freight industry. And now they are simply going to shut it down? None of these promises have ever happened, of course, and with this week’s forced retrenchment, likely never will.
Severe and unsustainable cash losses have forced UBER to ratchet back its strategic ambitions; to raise another $1.0BN of junk bonds at a steep 7.5%, and reduce on-the-books headcount by at least 25%. UBER will likely cut its “non-core” businesses, including freight, autonomous vehicles, flying cars, artificial intelligence, and job matching. These businesses, together, were the secret sauce that was to turn a simple and old-fashioned taxi-hailing app into the next big thing, rivaling Amazon in the scope and reach of its operations. These promises were what drew investors as big as Texas Pacific Group and Softbank in at valuations north of $70BN and even promised to approach $100BN – for a business that, in the here and now, is only able to generate revenues of $14BN, with growth slowing sharply, while margins remain massively negative, and billions of cash losses pile up – and that best case was pre-COVID!
Now, UBER faces a sharply diminished TAM, or total addressable market, as it gives up its ambitions to expand beyond taxi-hailing and food delivery, and major American and international corporations in various industries, including technology, media, real estate, airlines, hotels, and entertainment destinations all prepare us for a world of sharply diminished transportation needs. Where workers will shift to permanently working from home; where international travel will be diminished for years; where even domestic destination travel will face diminished capacity and utilization.
None of this has yet sunk into the minds of equity market investors.
THESIS
Diminution of Total Addressable Market. Uber is likely abandoning its ambitions to be a leader and create a revenue generating business in nearly every area besides its core taxi-hail and food delivery business. These early-non-core businesses, while inchoate and pre-revenue, gave investors hope that UBER was not just an old-fashioned transportation company making use of the latest technology – smartphone apps – but an actual technology company, with the same opportunity for horizontal expansion as Amazon. This hope was among the reasons why a negative cash burn of several billion dollars for a seemingly mundane business could turn into a $59 BN valuation. That hope is gone.
For its remaining core business, taxi-hail, the world has changed:
Negative Secular Changes to UBER’s Core Business
First, we start with the massive secular change we are witnessing in the American workplace. Then, we move on to the lengthy and even semi-permanent changes to restaurants and travel.
We are witnessing a generational acceleration in work-from-home, in which commuting to and from work is facing the biggest and fastest change in its history. Companies such as Google, Square, and Twitter are preparing for a future in which employees may work remotely – forever. Others such as Facebook, JP Morgan, Citibank, American Express and Microsoft have taken steps in this direction. Employees who commuted to these workplace jobs were often customers of UBER. Many of these customers and their “rideshare” business won’t come back.
*via SeekingAlpha*
