Uber needs autonomous driving technology to reshape the economics of its core business, and the company is competing on that front with numerous heavyweights with deep pockets. Considering the hype around Uber's IPO, it could be prudent to wait on the sidelines to see how the market reacts. At the same time, Uber has a troubled past that it's still trying to reckon with.
In this segment, host Dylan Lewis talks Uber with Fool contributor Evan Niu. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on May 3, 2019.
Dylan Lewis: I think long-term, this is a somewhat interesting business just because it is basically benefiting from a huge tailwind, especially in a lot of urban areas where people don't own cars at the same rates that they did. One of the things that comes with that, though, is, what happens when we start getting autonomous cars on the roads? That really changes the economics of the business because you're not paying the driver; you're creating the car, or maybe licensing software, and then maybe only paying out a small fixed cost, enjoying all the usage on top of the fixed costs rather than having a variable cost that you have to pay out with each ride. But Uber isn't even necessarily in the front of the pack when it comes to that.
Evan Niu: Right. Alphabet, Waymo, are up top. Tesla is coming; but of course, no one knows what to expect from Tesla, because you can never believe what Elon Musk says, and the timing of whatever he says is always off by years. [laughs] But conceptually, Tesla's out there wanting to create this Tesla Network of ridesharing, where people can rent out their autonomous cars. He's saying robo-taxis on the road, a million by next year, which is probably not going to happen. But, Waymo's already out there right now, delivering autonomous rides to very limited markets. So yeah, Uber and Lyft are certainly way behind in terms of the technology in my opinion. And it's so core to their business, because again, these are pure-play companies and the core economics around the core businesses are so terrible that you need this big, revolutionary type of technology to really make these businesses attractive.
Lewis: And you're competing with companies that have a ton of cash on hand. Alphabet, Google parent, isn't really struggling. They had maybe a rough earnings report, but they're still doing just fine when it comes to cash in the bank. They've got plenty they can plow in to R&D to try to make that happen. All to say, a lot of what Uber and a lot of what Lyft are trying to do, a lot of the markets they're trying to play in, it's just hard. What you ultimately want is something that's relatively easy and something that's somewhat predictable. If you're looking at a software-as-a-service company, and you see that they're adding consumers onto their platform and they're getting people that they've had as customers to pay more for their product, add stuff on over the course of time, you know that business is going to keep growing. There are a lot more question marks, a lot more step changes in the technology, that these two companies are going to have to navigate. I think it makes it a little bit tougher to make a bull case for them because of that.
That said, if Freight becomes a much larger part of the top line; if Uber Eats has very different economics than the core ridesharing business, maybe there's something there. But with 80% being in the ridesharing world, it's kind of hard to imagine that it meaningfully impacts the financials anytime soon.
Niu: Exactly. I just don't see the point in investing in Uber at this point because of all the points you just mentioned. The core mobility stuff is terrible. If you're interested in local food delivery, go buy Grubhub, they're a pure-play, they seem to be doing pretty well. Their numbers look strong. The Freight is such a tiny part of the business. You're not going to buy Uber for Freight. So what's the point?
Lewis: Yeah. And to buy a share, you're going to be paying a hefty premium. We talked about the valuation that it'll be going live at. Not profitable, you're still paying a hefty multiple on sales there. And they're going to have to live up to that. I'm sure there's going to be a pop day one. So I will just say, if even after all this conversation, you are still dead set on buying Uber shares, just wait a couple of days, maybe wait a couple of months. Let it settle in, let some of the demand die down, and let them put out a couple of earnings reports and get exposure. We might see that over time, the business starts to materialize, especially as some of the technology that they're really relying on starts to come a little bit more into the mainstream. But nothing wrong with holding your horses here and watching this business for a little while, especially because we have a fairly new CEO at the helm, trying to refurbish this company's image.
Niu: Right. I think that's another point, too, the matter of all this moral and ethical baggage that Uber has. This company has done so many terrible things throughout its history. Even though they kicked out Travis Kalanick a few years back and brought in Dara Khosrowshahi, I'm probably butchering the pronunciation, he's definitely making a lot of positive changes in terms of internal corporate culture, but a lot of the fallout from Uber's past is still there. Kalanick still owns about 9% of this company. This IPO's going to make him worth $9 billion. Many drivers even today still struggle to make a living wage as a result of how Uber has historically underpriced its fares. There's this long-term effect that affects consumers' value perception of how much right is supposed to cost. It's easy to bring that number down, but it's really hard to push that number back up. They've pushed back against so many basic safety regulations over time that have resulted in bad things happening to riders. I mean, there's just so much going on there. For me, ethically, I don't use Uber, ever. If I need to use ridesharing, I call a Lyft. It's just a lot for me to really be OK with.
