Self-driving cars were a pipe dream not so long ago, but today, several companies are on the cusp of deploying them in the real world. They could create major financial opportunities for investors in the coming years, and one of them is in the ride-hailing business.
Cathie Wood's Ark Investment Management estimates autonomous ride-sharing will generate $4 trillion in revenue over the next five years. Considering it's starting from practically zero today, the firm clearly expects rapid adoption from consumers and businesses.
Uber Technologies (UBER -0.38%) is currently the undisputed leader in human-driven ride-hailing, though it has been working on driverless technology for years. But when self-driving cars eventually do go mainstream, Uber will have to compete with Tesla (TSLA -1.11%), which has hinted at plans to build its own ride-sharing network once its full self-driving (FSD) technology is released to the public.
Healthy competition tends to create enormous value as companies push one another to the limit, so here's why I think Uber will become and Tesla will remain one of the most valuable companies in the world by 2035.
Image source: Getty Images.
1. Uber already has the largest ride-hailing network in the world
Uber operates three core businesses, all centered around its marketplace technology, which connects consumers, businesses, and drivers. Ride-sharing (mobility) is the company's largest segment, followed by food delivery and then commercial freight. Uber's single largest expense is the 6 million drivers who operate in its network, so autonomous vehicles could transform the company's economics.
Uber was developing its own self-driving platform under a subsidiary called Advanced Technologies Group (ATG). But after a series of mishaps between 2018 and 2020, the company sold ATG to a self-driving tech start-up called Aurora for $4 billion. Uber has also acquired a 30% stake in Aurora, with the hope that its technology will eventually bring autonomous vehicles to Uber's business.
But it isn't betting everything on one start-up. In 2022, the company signed a 10-year deal with Motional, a joint venture between autonomous technology developer Aptiv and South Korean automaker Hyundai. Aptiv has installed its self-driving hardware and software into Hyundai's Ioniq 5 electric vehicle (EV), and Uber will contribute perhaps the most important piece of the puzzle: Its ride-hailing platform with 137 million monthly active members.
Again, that's not all. Earlier this year, Uber signed yet another deal with Alphabet subsidiary Waymo, which already has driverless vehicles on the road in Phoenix. Uber intends to add Waymo's autonomous vehicles to its platform by the end of 2023, in what could blossom into another lucrative partnership.
How impactful could autonomous vehicles be for Uber's financials? In the recent second quarter (ended June 30), it generated $33.6 billion in gross bookings across its three segments, and $15.1 billion of that was paid to drivers. If drivers are removed from the equation, two things could happen:
- The cost per ride or delivery would fall, so the company might capture more customers and process more volume, leading to even more gross bookings.
- If it chooses not to pass along all the cost savings from driverless services to its customers, more of its gross bookings will flow to its top and bottom lines.
Uber has a global market share of 25% in the human-driven ride-hailing industry at the moment. If it maintains that share as the transition to autonomous ride-sharing ramps up, it could collect $1 trillion in revenue between now and 2028, based on the estimate by Ark Invest.
Personally, I think the timeline for Ark's prediction is extremely ambitious. But if investors extend it to 2035 instead of 2028, that will still translate to an additional $83 billion in revenue annually over the next 12 years (on average, likely backloaded toward the latter years).
After adding on Uber's expected 2023 revenue of $37.5 billion, the company could grow its revenue to somewhere around $120 billion per year as autonomous ride-hailing ramps up.The stock trades at a price-to-sales (P/S) ratio of 2.5 right now, but it has traded as high as 9. Using the midpoint of the two numbers, 5.7, an annual revenue number of $120 billion would value the company at $690 billion.
Over the longer term, there will likely be upside to the autonomous ride-hailing industry as it becomes more accessible, and Ark's recent estimates might even look conservative by that point.
2. Tesla's autonomous driving software is the most advanced in the industry
Tesla is the world's leading manufacturer of EVs. It plans to produce 1.8 million units this year alone, with growth of 50% per year expected as far as the eye can see. And all of those cars could eventually become vessels for Tesla's full self-driving technology, which is set to be an even bigger opportunity.
Software products can be developed once and sold an unlimited number of times, hence they carry gross profit margins as high as 80%. That trounces the 18.4% gross margin Tesla earns for manufacturing each EV, so CEO Elon Musk has previously told investors that the company could theoretically sell cars at cost and still make substantial profits thanks to FSD adoption.
However, selling the software to customers is just one potential revenue stream. In an interview with CNBC's David Faber, Musk talked about the underutilization of passenger vehicles, which spend only about 12 hours per week on the road.
In their downtime, he says Tesla customers could lend their vehicles to an autonomous ride-hailing network to earn additional income, which would be split between the owner of the vehicle and Tesla, making his company a platform technology provider just like Uber.
Tesla would be entering the ride-sharing industry on the back foot since Uber is already the leader and has more than a decade of experience, but it does have a few advantages. First, Ark Invest says Tesla has about 10 times more vehicles on the road that are testing its self-driving software than its closest competitor does. Those cars are collecting data to train its autonomous driving models, and Musk says they've completed over 300 million miles so far.That's why it's regarded as the most advanced technology in the industry.
Second, the company already has a network of vehicles (through owners), whereas Uber will rely on third parties to provide the cars. That gives it full control over the service it provides, and it's immune to partners creating liabilities in its network, whether through technological faults or withdrawing altogether and leaving customers with fewer options.
Musk estimates the combination of software sales and ride-hailing could drive Tesla's blended gross margin from each vehicle to a whopping 70% over time. That would make the company a cash-generating machine.
It's difficult to determine how much market share Tesla could eventually win in the ride-hailing business, but it's already the seventh most valuable company in the world with a valuation of $800 billion. Ark Invest thinks that number is set for much higher ground over the next four years: The firm has issued a projection that would give Tesla a valuation of $6.1 trillion by 2027 based on its continued dominance in EV sales and its entry into the robotaxi business.
Ark's timeline might be a little ambitious in this case, too. But Tesla does have the potential to hit that mark eventually, and it's very likely to remain one of the world's most valuable companies when 2035 rolls around.
