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- [00:00]
Drew Cohen
Foreign.
- [00:06]
Alex
Welcome to the Synopsis, a business podcast for professional investors, or I always like to say any type of investors. And today we are talking about one of Drew's recent videos about Uber. And Drew, let me tell you, you have been pumping out these videos recently, and you know, they're high quality, they're good to listen to. But, you know, one thing that I've noticed about is the different hairstyles in each of the thumbnails. And I kind of want to create a collage of the various hairstyles that are featured in the thumbnail. What do you have to say about that?
- [00:34]
Drew Cohen
I was not expecting this question. I feel off guard right now.
- [00:38]
Alex
Well, listen, the host, the host can take it in any direction they want. And today we're talking hairstyles. But I kid we're going to get into Uber. But before we get into that, a quick kind of housekeeping about the various episodes that the podcast will be doing over 2026. So, Drew, I'll let you take it away with that very exciting psa.
- [00:57]
Drew Cohen
Yeah. So I just wanted to really quickly kind of talk about how we're thinking about the podcast and the different episode formats because we have had a lot of new listeners and we've also kind of changed it a little bit. So right now the way we think about it is we're going to have these four different episode formats and it's going to correspond to the first word of the podcast feed. So these are going to stay as dialogue podcast. Whenever Alex is on the podcast, it will be a dialogue podcast. The second is going to be company episodes. If you're newer, you might not have seen one of these because we haven't done these in a couple months. But these are really, really in depth podcast on a single business that Speedwell Research, my investment research firm, wrote an investment report on. So these are very, very detailed in depth. You can go to the podcast feed, scroll for anything where the first word is company. Those are still evergreen. Think of it as like a very good primer, deep dive into the business. And then when we do updates on them, sometimes we'll do dialogue updates where it'll be me and Alex talking about it. But in the future, because I want to be a little more timely with the updates and because Alex is a little fickle with time commitment, he says free isn't enough to get him to commit to a time every week. And so I'm going to roll out a new format called Monologue, which is just going to be me talking about it. So if there's a business update out. You won't need to wait that long for it. I'll just roll out a monologue podcast and me talking about the business with, of course, some of, you know, the valuation reverse DCF stuff still kept behind the paywall for Speedwell Research members. And then the fourth episode format is going to be interviews. And with that we actually have a lot of exciting interviews coming up. I'm kind of scheduling it all to start in March and so come around there, you'll start to see more interviews. And I'm not going to name any names yet, but we have some really good investment managers, CEOs of companies we covered and so really excited about that.
- [02:39]
Alex
Well, I like you preempting my cancellation of our weekly meeting because it is inevitable. It's just inevitable. But I do think that when we get together, it's always a good time, but nice to have some additional things in the pipeline, take the pressure off.
- [02:53]
Drew Cohen
Well, yeah, and the other kind of corollary thing is that when we do the dialogues, I think the feedback we got is that they're more fun when we talk about kind of these other topics than just like me reading the business updates. But then people still want that. So that's why I think it makes sense those will be the monologue podcast dialogues will be a little funner, a little, little more loose.
- [03:12]
Alex
You know, it's. And I like the format. I think it's, you know, again, the kind of base content that you have with the videos and then as well as the five minute money, which you kind of also is usually the foundation for the videos, I think gives people a great base understanding. But it's nice to be able to flush out a lot of the ideas you have and get some additional commentary outside those videos and kind of hear how you think about businesses, which I think a lot of people are interested in. So without further ado, let's get into Uber. And to me, it's funny about why it took Uber so long to be a good business. I mean, it took many decades. And you can talk about, I mean, there's so much fascinating lore with Uber. I mean, you have all the kind of stories of Travis Kalanick and all kind of, if I'm pronouncing his last name right, but all the outrageous kind of parties, all that whole history and how he got pushed out and kind of a very dramatic storyline that a lot of people have covered. But to me, this business always seemed very simple, right? You have a platform and theoretically it's supposed to Be a low cost. You're taking a percentage of the transaction volume. It should have been pretty cash flow generative from the beginning. And yet this was a business that lost, I think you mentioned $30 billion, which again today is a drop in the AI bucket. And you allude to that too. It's like 30 billion that's open. AI is losing that a week, I bet. So not really a big deal in this day and age in the grand scheme of things. A lot of money that was lost by a company. That should be pretty simple. So before we kind of get into Uber's current status, why don't we get into a little bit of just the history of Uber? Like, well, why was it so hard for this business to work for a little bit? Or what was going wrong in the beginning?
- [04:43]
Drew Cohen
Yeah, and I really, I love this direction because I think if you were to start prima facie without actually knowing what would happen and someone to pitch You Uber in 2009, you would say, yeah, this totally makes sense. You know, it's an asset light marketplace. No incremental cost to bookings. You know, profitability should come easily. It's just an app that exists on people's phones. You're just a middleman and you're taking commission of each ride. And of course, that's not what happened. You know, it took eBay three years to become profitable after founding, and instead it took Uber 14 years. And so for a very long time, for me, at least, it was a question mark of why this wasn't a better business. And not that I ever invested in it, but I always kind of thought that this should have, in theory, have been a better business because they do have kind of this duopolistic structure. And Uber was kind of the bigger player there. But what was happening was basically just the existence of a single competitor was ruining the economics of the business for everyone, basically. And it ultimately came down to subsidies. And it was subsidies on both sides. It was subsidies on the consumer side as well as the driver side that was really wrecking their economics. And I have a couple stats in the 5 Minute Money newsletter, which is kind of wild that in 2019, so this is not that long ago, sales and marketing was $4.6 billion. That same year, they did $13 billion in revenue, which means they spent 35% of all of their revenues on sales and marketing. And that's actually understated because whenever they do driver subsidies, those usually count as a contra revenue account. So they don't even show up on the P and L so the number is actually higher. But the crazy thing is that 4.6 billion in sales and marketing in 2019, do you know what it was in the last year?
- [06:21]
Alex
I do know because I watched your video, but pretty much the same 4.9 or something, right?
- [06:27]
Drew Cohen
4.8 billion. Yeah, yeah. So it's almost the same number, despite the fact that, you know, revenues, that's
- [06:32]
Alex
what the kids like to call operating leverage, right?
- [06:36]
Drew Cohen
That's right. That's right. So it's the same number of sales and marketing, despite the fact that revenues went from 13 billion to 50 billion. That is that operating leverage that you are talking about. And so the question of kind of what allowed them to all of a sudden and quite quickly to become a vastly better business model was really interesting. And I don't think a lot of people have quite really got into it because I think it ultimately comes down to Covid changing the competitive landscape as well as kind of the free money era ending and really crippling Lyft in the process. Because what kind of ended up happening during COVID is the first thing that happens is as a ride hail platform, people are not taking rides and drivers are leaving. Uber at that time really starts emphasizing Uber Eats. And at the same time, you know, they buy Postmates for $2.6 billion. Now they have kind of an actual, you know, food delivery business with Uber Eats. They're investing a lot into it. People are ordering delivery a lot during COVID and at the same time, money is pretty cheap. So they have a lot of money to invest to acquire customers and all that. And what ended up happening though, was at the end of COVID kind of came alongside the end of this free money era and both of stock prices getting basically decimated in the process. Lyft especially so was down almost, you know, 90% and Uber didn't fare much better. And so what the market was communicating to kind of both these companies at the time is stop spending money on, on promotions and subsidies and become profitable. That disproportionately benefited Uber. That disproportionately benefited them because they had Uber Eats, which helped retain a lot of users in the Uber ecosystem, if you will, and also help retain, you know, giga workers, basically. So people that were drivers, people that were food delivery people, can now become drivers. And Lyft in the process, lost a lot of drivers and weren't able to get them back quick enough, basically. And because of, you know, the math of if you are a driver, even if you're making a little bit more on Lyft because they tend to pay out a little bit more than Uber does. If you have a higher wait time to get that ride, your earnings are going to be less. So then people just go to Uber. And then once that kind of flywheel kept going, it just really allowed Uber to take off in terms of more drivers and as well as more users on the platform. And both of them kind of being a little bit neutered in their ability to offer subsidies. And so all of that kind of came together at the same time and is what has allowed Uber to really, really lift off. And there's two other factors with the loyalty program and advertising, but we could touch back on that.
- [08:54]
Alex
Well, first of all, I love the contra revenue, you know, morphing or kind of disguising some of the actual promotional activity that went on here. And again, there's a couple of interesting accounting things that's happening in Uber that I think are overlooked. But you know, you have this great slide that Uber has in their presentation, which again, a two sided marketplace. It's the classic flywheel of like, okay, well, you need a lot of drivers that way, you know, ride times are short, but to get a lot of drivers you need a lot of users. And then it's kind of, you know, you can take away with that. And I think what was happening in the beginning of the Uber and Lyft wars was the notion that both of these companies kind of knew that for each market they were in, they wanted to reach that kind of, you know, critical escape velocity first, which was, okay, well Lyft has more drivers in this market and they have more users. And now Uber can't really get the same amount of drivers and this given market. And so Lyft is going to win. And I think that that was really the driving force behind the losing nature of, you know, kind of the losses that were driving both of these companies forward. And again, I think Covid hit right. And if you look at really the trajectory of Uber, that is when Uber kind of pulled away from Lyft. Is that a fair kind of depiction, Drew?
- [09:58]
Drew Cohen
Yeah, that's what I said. You're, you're listening. I like it. No, I like it.
- [10:04]
Alex
I like surviving. Like a little summary here. You're right. So, you know, yeah, and again they really leaned into your right like food delivery, which was allow them to keep those drivers. Lyft drivers I think lost a lot of loyalty and then it just kind of fell behind and now even myself, because, you know, a dollar saved is a dollar Earned. Benjamin Franklin, classic, you know, perfect, perfect sentence. So I'm always checking both apps, but at this point, I can't really even. Lift is cheaper. It's 10, 15 minutes away versus an Uber. And so for me, Uber, especially in the L A area and some of the areas that we're in, it just kind of ran away. And it's just not that the density of driver on Lyft has depreciated so much that it makes it, you know, it used to be very like, okay, Uber's three minutes away, lifts three minutes away. Lyft's $8 cheaper. I'm going Lyft or Uber's $8 cheaper. So I was like the worst customer they ever had. But that has segregated because now Lyft is just not really a service that I can use in a lot of marketplaces. Sometimes it's the same and sometimes I'll use Lyft, but it's probably 8 to 1. And then again, now Uber's got me on their Uber 1 program where I'm Uber eating, I'm Ubering, I'm getting rewards. And now it's just like, Lyft's kind of lost me. And that's kind of the flywheel that Uber's built up over time. And we're going to get into a little bit more of the revenue share. But I just want to say this is kind of what segregated them on this trajectory.
- [11:13]
Drew Cohen
Yeah. And it's interesting because you only need one competitor to ruin the economics for everyone. And I think we saw this with Alibaba and Pinduoduo in China, in the E commerce landscape where Pinduoduo came out and they had a lower commission rate, sometimes it was free on a lot of the product listings and they would monetize through advertising, which. Whereas even though, you know, Alibaba technically did something similar on the Taobao platform, their monetization rate was very high because of how much people needed to advertise to show up. And so having another player come in that was cheaper was enough to basically, you know, stop their growth or severely slow it for some period of time. And so it is really interesting that a lot of times we talk about competitive landscape. Maybe we're thinking about, like, TV streamers. You know, I got something coming out on Netflix soon, so I was just kind of thinking about that there. But. But we're kind of looking at all these different competitors, thinking we need all these competitors in order for there to be high competition. That's usually not the case. It's Usually competition comes from just one bad competitor. And I don't mean bad. I mean, I guess good in this, this respect, but it's bad for that one business. And so I think that's what we saw here with Lyft Uber. It was just Lyft was enough to suck out all of the excess economics of the industry. Yeah.
- [12:25]
Alex
And again, I think that that stat is just staggering. The fact that again was that a 4x increase in revenue and marketing and expenses pretty much stayed the same. Right. Promotional stay the same. I mean, it's a crazy stat. And again, it's demonstrating that that kind of thesis in which they were driving a lot of that promotional activities at the lifetime value of the customer, you know, is long. And there will be some loyalty to some platform. I really don't know if it was because those promotions in 2019, I think they got a little lucky in that they just kind of played Covid better. Right. And I think they got a lot of kind of habit built in.
- [12:56]
Drew Cohen
Yeah, yeah. I mean, played Covid better. But then it's also just the free money disappeared and all of a sudden investors are demanding you cut expenses and your hands are tied. They didn't want to play that game anymore, burning cash against each other. And the person who already had the leg up was just going to continue to build that leg more and more. And that's what happened.
- [13:13]
Alex
And I mean, to what credit do you give kind of the current Uber CEO? I mean, I think he's kind of overseen this. I mean, you know, what, what are your thoughts on him as he as a leader?
- [13:24]
Drew Cohen
I actually like Dara a lot. I actually got to meet him and hear him speak at an investor meeting back when I was in San Francis Capital Group. And he, you know, seemed to have a good strategy and all that, but it was just a tougher business when that was the competitive landscape. I think a couple things that really helped them was when they did build out that Uber Eats business and they were able to unify the services into the same app. I mean, I know they still have the Uber Eats app, but now they try to push just like the Uber app, that really has helped retention a lot. And then also the Uber 1 loyalty program, which, you know, was pioneered under him, that also has helped more. You know, they have 30 million members and they spend 3.4 times more than non members and that just gives you a lot more loyalty to one, you know, food delivery, ride, hail service. And in response, you know, Lyft tried partnering with DoorDash, but it's just not as unified of an experience. And the dual brands loses kind of marketing messaging there. And so that's kind of one big aspect of it. The other thing is also upfront pricing. So this is kind of a newer thing they are rolling out. Whereas before the driver would see kind of the price of the ride and they'd get a percent of that. Now what's basically happening is they depaired the sort of revenue, take rate, if you will, that the driver gets from what the consumer is paying. So in short, they're basically able to play more games where now maybe a ride costs $25 and before the driver was getting 17, now the ride still cost 25. And they found out the driver was willing to accept 15 or 14. And so they're just kind of increasing de facto their take rate that way. And that shows up in the numbers too that their take rates have been increasing. And you might hear them talk about it, they'll be like, oh, that's inflation. That doesn't make any sense because it's a percentage. So percentage doesn't have anything to do with inflation. If you're looking at in dollar terms, that can make sense. And so that's what it is. It's the upfront pricing which does make them a more profitable business. It could feel a little icky in a way if you think about like taking an extra dollar or two from the driver. But that's, you know, that's their willingness to basically pay is what they're, they're charging people now or paying them now. And so that was another kind aspect of that. And then the last thing is the advertising. And so that's, you know, one and a half billion run rate business, pretty high margin. They're putting ads, it's not just sponsored ads and Uber eats. But even if you order an Uber now, you probably notice there's a little bit of an ad below the map when they show up. So you figuring out these other ways to like monetize the app and also just increasing loyalty, engagement within the app is really kind of been a big aspect of this too.
- [15:47]
Alex
Yeah, And I think that's a good segue. And again, everyone loves the ads business. You look at any marketplace, Etsy, Amazon, I mean the ads business is just great. It's a high margin, incremental revenue source that again just, you know, pretty much falls to the bottom line. You already have the app, the users there. I mean, how hard is it to put an ad in there? Maybe you have an ads team or something. But again, that's going to get a lot of leverage. So, you know, pretty compelling. I'm surprised it works. I mean, even sometimes when I'm waiting for the Uber, it starts playing a movie trailer or something, and I'm kind of, oh, that I didn't know about that movie. You know, it gets me sometimes, I got to say. Not that I'm trying to scroll around, but it pops up and you start looking at it. So one thing about Uber and its current valuation, we're going to talk valuation here, but you need a lot of revenue growth drivers here. I mean, it's trading at over 40 times, depending on how you want to calculate. And we're going to get into the details there. So why don't we look at what the opportunity is? For me, I feel, again, especially in the US I feel like Uber has, and again, this is someone who hasn't looked at the company very much, but just feels like they have a lot of, I don't know, market share. I don't know where they go domestically in the U.S. maybe it's just keep extracting additional pricing. Hey, Alex is going to pay $5 more than this guy for the Uber and we'll kind of stick it to him here, whatever it is, maybe that's a growth driver. But where do you kind of see them going from here?
- [16:58]
Drew Cohen
Yeah, so it's a mix of a few things. So the easy ones to talk about are category expansion, trying to get more into retail, and grocery. Grocery, you know, it makes a little more sense. You know, you have Uber Eats and their Instacart exists, so basically take that business from them because they're ready in the Uber ecosystem, you know, be able to kind of flex their larger amount of giga workers and all that to make that kind of work. And so that's, that's kind of one aspect. And the way they'll look at that is they'll say, you know, users go to the grocery store four to eight times a month and, you know, they'll ride maybe two to three times a month. And so this is a huge opportunity to increase frequency. Grocery is a little tough because you have a lot of items and you have to substitute items that don't exist and all that. But you know, that that's something they could figure out and all that. So that's the one aspect is grocery. And then as a corollary to that is retail, where the kind of framing there is, you know, you have Amazon that continues to get quicker and quicker and fast delivery. So what are all of these local stores. What is their solution against Amazon who is now getting not just a one day delivery, but sometimes quicker? Use Uber. You know, if you could do delivery with Uber, then you could get your order in a couple hours or an hour even less sometimes. And so the idea is that they're going to be kind of an enabler of a lot of these local retail businesses who do want a fast delivery solution. And so that's kind of this other category opportunity there. And they talk about how they're doing about 12 and a half billion in transactions in that category currently. That's gross transaction value.
- [18:24]
Alex
Yeah, the grocery business I'm skeptical on. I mean you've had Instacart trying to be this anti Amazon alliance for all these other grocery stores. I mean they're sitting at about $11 billion market cap against Uber's 170. Again, maybe they can execute on it a lot better. I, you know, I don't know about you anecdotally, I don't think delivery, grocery delivery has taken off as what it was supposed to be. Just feels like every time I do it I have a poor experience. They're getting the wrong thing. They're picking a weird avocado. I don't know, whatever it is, it doesn't usually go well. So again, I'm a little skeptical on the groc entry delivery aspect of the business.
- [18:57]
Drew Cohen
Yeah, I mean Instacart is, you know, had its own struggles and I think that's also part of being like a standalone player, having your own customer acquisition cost in that. But you know, they're profitable today. It just, you know, they're doing about $550 million in operating profit, 15% margin. So nothing, you know, too impressive. But it's, it's a viable business at least. And I think in theory it makes sense that, you know, you maybe spend a few hours going to the grocery store a week and if you can, you know, just pay someone a little bit of money to do that for you, there's enough, you know, wealthy high income people out there that that's actually worth their time in order to do that. I don't know that it's ever like a mass consumer adoption product, but it makes sense that there's more opportunity there. But I'm also with you. Then it kind of becomes you didn't really get the right item. Like, you know, this really didn't look the way I wanted it to. And if I have to interact with you in the app, it's like maybe I'd Rather just do it myself. And also, I don't know, you know, everyone lives in different areas, but, but, you know, I have several grocery stores within, you know, six minutes of me. And so it's not, you know, that much of a hassle compared to, you know, getting food delivery from someplace like 20 minutes out. And it's also usually at a time where you're like, kind of lazy and you really want the food now. And whereas when you're with grocery shopping, you could kind of buy it at any time, you know, worth, you know, within a couple day window. And it's not a big deal. It's not as like imminent of a thing that you need to do.
- [20:16]
Alex
Yeah. So for me, I don't. I mean, where, where do you think most of the growth is going to come from? Is it going to be just kind of continuing to penetra take market share from other food delivery services? I mean, internationally, you look at kind of Didi Grab, which I know you've done some research on. I mean, internationally, that's not like a greenfield. Right. And I know they've been at it for a while and they've spent a lot of money, but I just don't really see where this, you know, long Runway revenue growth is coming from.
- [20:41]
Drew Cohen
Where do you. I don't think it's an international story. And a lot of those markets, they either capitulated them or, you know, partnered with them by like taking a stake in them and basically left it. So I think it's the markets are already dictated the ones that they're going to be in. And that's not what the story is about. I think it is still a frequency story. You know, people are riding on Uber, you know, two to three times a month. I don't see why that can't go up a little bit more. It doesn't need to go up a lot. You know, pricing doesn't feel like there's huge room to really continue to grow there. Category expansion does make sense to me. I don't know that it's ever going to like, replace an Amazon habit, but if they could get you to buy, you know, one more thing a month through there, then that's, you know, a big unlock for them. And so there's those arguments to be made. And I do think some people will adopt the grocery habit. I don't know that will ever be mainstream. But that's, that's just the category expansion advertising, it's hard to throw numbers on this. But, you know, the more kind of surface space you have within the app. The more engagement you have, the more time spent in the app, the more advertising opportunity you have. And so that's another kind of lever that they can continue to pull. But I kind of think the big ones are probably really just going to be, you know, continuing to grow users. There's still some users they could mop up from, you know, both Lyft as well as, you know, potentially some other food delivery competitors. A little bit on pricing, but I wouldn't be that optimistic about it, at least at this moment in time. You know, at least anecdotally, it kind of feels like Uber pricing is pretty full. But then, yeah, I do think Frequency also has some legs to run and we'll talk a little bit more about kind of the growth assumptions I laid out. But yeah, that's something an investor is going to have to be confident with, you know, if they are interested in investing in Uber.
- [22:18]
Alex
Yeah. And I'm going to let you touch a bit on freight. I don't. I think it's a bit of a throwaway business line. They don't seem super focused on it. I don't really quite understand. I mean, you have a lot of very competent players and the freight space, so I don't really see where they're fitting into that. But let's talk about that when we go into av. So what's the freight story here for Uber?
- [22:36]
Drew Cohen
Yeah, I'm not going to disagree with you. It kind of feels like, oh, you know, Uber, so great, let's also do this for trucks. And that's kind of, you know, what the business feels like to me. A lot of it was acquired. They did a two and a quarter billion dollars acquisition of something called Trans Place. They got Craft as a customer through that. They're doing a bunch of different things. They have a logistics platform. It's kind of like they have a SaaS aspect to it too. They don't talk about it that much because it's not going that well, doesn't grow revenues. It's 5 billion in revenues now, but losing money and not growing. So I'm not going to really dispute that. But hey, it's a big tam.
- [23:09]
Alex
It's a big tam. That's always a good management story. So, yeah, we're going to just kind of let the freight thing go. I mean, you guys can include that in the thesis or not. I don't really put a lot of weight on it. But why don't we get into autonomous vehicles? And it's funny, you kind of put this in the growth drivers section and it's kind of a risk section. I mean, to me it seems like it's all downside autonomous vehicles for Uber. I'm not really, I'm trying to struggle to see the upside story here for AV with Uber.
- [23:33]
Drew Cohen
So I mean, we could start with the upside. So the upside would be there's a lot of different autonomous vehicle players and people don't want to independently download a bunch of different apps. And so you need an aggregator of some sort to aggregate all of the supply. And Uber is the one who is able to do that. And then it also means that when you don't have a driver who, you know, they're paying out some 80% of the economics to, sure, a lot of those economics are going to still go to the asset holder, to the AV owner, but it's also more incremental in a way. And so if there's a lot of these AV cars, this a very blue sky scenario where you have a bunch of Teslas that now get rented out in their free time and the owner decides to rent it out on Uber. They don't care about pricing in, you know, oh, I need to get, you know, $20 an hour as a driver at least, because that's what I can make at McDonald's. That's not how they're think. It's all incremental profit and there could be a lot of supply competing for drivers. And so in that scenario, you have a lot of supply. They're the ones that aggregates all that supply and they have all the demand to serve. And since there's a lot of supply, pricing actually drops, usage actually increases, and they're actually able to take more commission in the process too. Maybe not, you know, that full 80%, but even if they could take their take rate up just a little bit, that could be a good win for them.
- [24:49]
Alex
I don't buy that. I don't buy that narrative. Again, I guess the argument is, oh, wow, there's such an increase of supply of av, so then maybe the pricing goes down and Waymo cannot demand whatever it is that I guess Waymo, because they're already out and maybe it's incremental, then maybe they're going to make it cheaper for the driver, but then what kind of cost savings does the consumer. And in a world where there's so many AV Ubers around or AV taxi drivers around that I don't know, am I checking my Uber app? Am I checking my Tesla app? Am I checking my Waymo app?
- [25:19]
Drew Cohen
It feels like in this Blue sky scenario, these other apps don't get used that much because there are too many of them. Basically, like, people don't want to download Waymo plus, Robotaxi plus, Zoosk plus, you know, whatever AV apps come out. And so they all either partner or they just decide to go into the Uber network. So this is, you know, why it's also a Blue sky scenario. So we can. We can argue against it, but. But this is not.
- [25:44]
Alex
Yeah, I mean, so I guess Blue sky scenario, they are the platform that sits on top and essentially modularizes all the AV companies. And then because they don't have to pay drivers and it's a higher margin, maybe some of that goes consumer, some of it goes to Waymo, but essentially, you know, drivers are. Whatever, machines are always going to be cheaper than drivers, is the thesis. How does that actually materialize in margin in this? I don't know. But again, I think when we get to the DCF portion, I would argue that as a platform, you know, they should be able to achieve some type of margin that's much higher than what they're currently doing. But again, you have this kind of, I don't know, very real future coming that is very unclear for Uber. And so we kind of allude to the negatives, but why don't we talk about the negatives going on? And I think Waymo is a really good example of an app that has had success. For example, you know, you and I live in la. We love Waymo ing around. You know, you got the Waymo app. The car comes in, it's a new Jaguar. It's leathery, it's nice, it's. It comes up, it plays classical music for you, and it's a really great experience. And then you have separately the Uber app. But then, of course, you alluded to in Phoenix that Waymo and Uber have partnered. There's no independent Waymo app you call an UberX. It might be a Waymo, it might be a regular driver. So what is Waymo's strategy with that? You know, one standalone app and then one kind of joint working with Uber when their competitors. It's kind of a weird situation they got going right now.
- [27:04]
Drew Cohen
Yeah. So it makes sense if you think about it from, you know, like a density perspective, where they're saying Los Angeles is, you know, a very valuable market. We want to put a lot of our car assets in just a couple select cities. So one of them we'll do is, you know, Los Angeles and San Francisco. We're going to put as many of you know, Waymos as we can in those cities. Since we have so many Waymos there, it makes sense for us to invest in an app and kind of spin that up. But I think a couple other things I want to talk about are going here that are kind of less mentioned because they're a little obvious, but they're worth talking about. One is that all these Waymos are new, so they're pretty nice. And so it's like just getting a nicer car delivered to you and it's consistent. It's not like with Uber Black, where you don't actually know what the car is. And it could still be a nice car, but kind of old. And so I think that's one aspect of it. Two, I think it's still really novel. People like this idea of the av. It's kind of cool. And some of that's going to, like, always last, where it's like, nice being alone or not having a driver in the car, you know, a stranger, basically. But there is an aspect where it's novel and people want to try it because they've never done it before and it's just a cool thing to do and they're, you know, they're throwing it up on their Instagram story. So I think those are two of the reasons also why it's get such high premium pricing right now. And so that's, you know, two things worth pointing out. But as you were saying, they're only in select cities. So I think right now the strategy is to, you know, test it in select cities that are very valuable, like Los Angeles in San Francisco, and we're going to see if we can make it as a standalone app. At the same time, we need to get more scale and more countries and, and more training data and approved in different cities, so we could grow this. So, you know, in these two other cities, like Atlanta and Austin, we're going to just partner with Uber, we're going to plug into their app, we're going to see how that goes, in part as an experiment, in part because then we don't need to put as many assets in the area to get that, like, critical density, that it's worth downloading an app that, you know, people aren't downloading it and there's only 20 cars on it or something.
- [28:57]
Alex
Right. And again, so right now, yeah, you see that this kind of, of two worlds, right, which is where Waymo competing kind of aggressively for rides. I think for me now in la, rather than checking Uber and Lyft, I'M kind of checking Uber and Waymo, and my preference is always Waymo. But of course, in Atlanta and Austin, Uber's kind of achieved their Goldilocks scenario, which is sitting on top. So to me, the big elephant in this room, which is, you know, Elon Musk and Tesla, which I guarantee you there will never be a Tesla offered on an Uber app, given that I can't get CarPlay in my Uber. Oh, you disagree? I mean, I can't get CarPlay in my Uber, so I mean my CarPlay in my Tesla. So.
- [29:34]
Drew Cohen
Well, I don't know whose decision will be like, if you buy the Tesla outright, is it going to be that you are locked into using a robo taxi app, or will you have the right to pick whatever app you want to lock into? I don't know that answer. He could make it. It's restricted, so it has to be only Robotaxi.
- [29:51]
Alex
I don't have the right to choose my car interface right now and I would love nothing more than to have Apple Car CarPlay in my Tesla. That's like the biggest gripe I have about Tesla, you know, So I don't know. I mean, I do think he spent all these billions of dollars, kind of like, you know, not billions, like hundreds of billions of dollars trying to get to av, especially the way that he did it, which is just camera based. It'd be surprising. It'd be surprising. And that's definitely not the vision he's articulated. Right.
- [30:14]
Drew Cohen
I agree with you. But at the same time, like, what if you do have a Tesla and it's in this small little city and they, you know, have no one downloading the app and Uber's just killing them in that city. Will he maybe make a capitulation for these smaller cities where they just don't have enough density of Teslas that people are going to bother downloading an app? Or will they forego the whole city and say whatever? I don't know. I'm sure he does kind of have, you know, the mentality more that he wants to make it all in house, fully integrated and everyone on their app. But I think there could potentially be pushback if that is a difference between them buying one AV versus another AV car in the future because there is still other players and maybe they get there first. But I think over time I kind of do think the technology could be commoditized. And so if you have options of who's going to be your AV provider, having the option to list on whatever app you want could be a Selling point. And so if that is a selling point, because Robotaxi app isn't that popular in some areas and it is influencing consumer purchase decisions, maybe they decide, well, I would rather sell the car than not sell the car. I don't know. This is all very speculative, but that's my pushback. There's.
- [31:20]
Alex
That's fair. And again, maybe he does let you open up the choice, but then your margins, my opportunity. What is Tesla's real cost of spinning this up? If they already have an autonomous vehicle, they already have great brand recognition. Elon Musk can go to X. He probably get a billion users on this thing tomorrow. It seems a little concerning. They could just do a traditional, oh, we're going to take 3% rate cut or whatever it is, or some type of dynamic pricing and maybe they can always offer a cheaper ride than Uber. I don't know. Then is it a race to the bottom on rides like they were experiencing with Lyft? Again, it's a version of that.
- [31:52]
Drew Cohen
I get what you're saying. I get what you're saying. My point was more that in some cities, they may be subscale to have the same app distribution that Uber has and Waymo may also have that problem. And so in those select cities, they may be more willing to open up onto, you know, an open network. But I hear what you're saying too.
- [32:09]
Alex
Yeah. So Uber will dominate Fargo, North Dakota, but LA will be a little more of a dominant battleground. Right.
- [32:15]
Drew Cohen
And, well, the problem too is that a lot of of Uber's profitability does come from these big cities which, you know, Waymo shown they want to pick off. They went to LA and SF2. I don't know for sure, but I'm going to guess that, you know, that's a large portion of their profitability in, you know, California is those two cities. And so that is going to be a problem for them if Waymo decides to go into their most profitable cities and then says, hey, Uber, you know, you could go ahead and handle the rest of it. That does not put them in a better position. That actually soaks up a lot of the profitability of the business. And they already lost 10% market share by some metrics, and in a single year in ss.
- [32:48]
Alex
Yeah. And again, I have a little bit of cognitive dissonance on the AV situation and I've actually reconciled it. But to me, like, Uber's kind of personally in a too hard pile for to try to predict these market dynamics. I think it's a little challenging. But again, Then I look at kind of our, you know, Copart and I go, well, you know, we know AV is going to be a problem from them when they eradicate car accidents, but again, for them to kind of flip over the entire fleet into, you know, eradicating car accidents from humanity, I think we're not there, you know, in the next decade. I think we're probably three, you know, two to four decades away from that. But again, Uber could maybe have this be an existential crisis a little sooner because it's not that every fleet, you know, we're eradicate car accidents, but it's just enough of these Waymos out there, it's just enough of these Tesla AVs out there to essentially kind of get into a subsidy war again, which we've seen that they don't do very well. Maybe they have. And again, we talk about their Uber Eats business. I was going to say, well, they still have that. Well, it's like, well, my car can go pick up the food and bring it. Maybe it can't. Well, that's maybe a challenge.
- [33:45]
Drew Cohen
Yeah, yeah. You throw a robot in it or something.
- [33:47]
Alex
Yeah, yeah, I guess you're right. I mean, someone just runs it out to the car, puts it in the car, and then, I don't know, maybe it's got like a seatbelt for it. They'll figure it out. It's not that complicated. But anyway, that's kind of the dynamic investors have to wrestle with. And of course, what price do you have to pay currently? I mean, how certain do you have to be to kind of take these risks on? And I think this is where we can get. I mean, I don't know, anything left on the AV discussion or kind of get into some of the valuations stuff.
- [34:11]
Drew Cohen
I. I would just say that the more successful autonomous vehicle players there are, and the more people that get to AV as soon as possible, and the more fragmented the supply base, the better position Uber is in. The worst position Uber can be in is it's just Waymo that gets it and maybe just Tesla, then that sucks. But if they could get Zoosk and Cruise and, you know, maybe some other Chinese players and all that, and now everyone has av, then there's just not going to be unlimited apps that people use. Like, we saw that with Uber Lyft, they only, you know, would use two apps. Having said that, and as I mentioned at the intro, one, you know, vicious competitor can be enough to ruin the economics. And so could we go back to that cycle of, you know, maybe it is a Tesla saying, I'm going to now subsidize all of these new consumers again, and I'm going to build up a bunch of people in apps by giving them free rides. It also doesn't cost me as much to give away free rides because they're autonomous, they don't have a driver in them. And that is a way I'm going to build up my app. And by time I do that, Uber is either going to have to respond with subsidies, but they can't do it as effectively because they're. Their network has drivers in it. And so that is kind of a scary situation for them.
- [35:16]
Alex
And again, one kind of. When we're talking an AV AI world here, another risk you kind of allude to is agentic AI. How does that. You know, again, the idea that you've got a Super Alexa or Siri actually knows what she's talking about and can actually do things for you, which is yet to be borne out. But eventually, how does that kind of play in with Uber?
- [35:35]
Drew Cohen
Yeah, and this is something we've been talking about for a couple of years now. We even, like, mentioned it with CoStar, because it's going to be a risk for a lot of, of businesses. And that is basically you're going to an AI agent and you're asking them to do something for you, and they don't have the same sort of restrictions, laziness that a typical human does. And so in the case of ordering, let's say, a car, if you tell an AI agent to do it, they can check, theoretically, you know, an unlimited amount of APIs in just a couple seconds, find the cheapest one, the closest car, and just call it for you all without you ever opening an app. And so this is kind of now the caveat to what I was saying earlier, why I said, if there's a very fragmented supply base, Uber wins. Well, you know, the exception here is that if an AI agent can check all of these apps very quickly and go into them and check all the pricing and all that, then you never even touch the app. And it doesn't matter that, you know, Uber has the most demand and all that, because you're fine checking 20 different APIs, maybe even local APIs, and only have, you know, five cars on the network, but it's free for it to check. And so it's moving basically what is kind of the traditional competitive advantage of Uber, which is having the consumer touchpoint and aggregating demand, it's basically adding a layer on top of that. And so it's Getting rid of kind of their traditional advantage there, which could create a lot of interesting distortions.
- [36:52]
Alex
Another kind of toss up for Uber. So, you know, put that in a little challenging category, right?
- [36:59]
Drew Cohen
Yeah. And look on top of that, you know who has one of the biggest eyes right now? It's Google. So is Google going to work with Waymo? Yeah, I would imagine they would.
- [37:08]
Alex
And so, and talk about a subsidy war you don't want to get into.
- [37:13]
Drew Cohen
And then, you know, okay, maybe Google says, all right, well Uber, you don't want to play ball, I'll go to Lyft. So Lyft can pick up kind of the Slack capacity as we built out the Waymo network. And then maybe some of these other players like, you know, Cruise or something is fine, plugging into it. And that could be one way this goes down. And. Or, you know, alternatively maybe they go to Uber and they say you'll be our exclusive network partner, but you can't work with any other AI agents. I don't know about that. But there's all sorts of kind of different competitive dynamics that get introduced if you're all of a sudden changing the interface that people have with these apps.
- [37:46]
Alex
Agreed. And so with all this kind of hanging around, let's get into valuation. I mean, how much is an investor needing to assume to get a, you know, a market return? And of course, you know, we're doing kind of quick multiple math here, which, you know, depending on how you're thinking about it, can either be a pricing or a shorthanded dcf, depending on kind of what your thought process is. But why don't we get into a little bit of the assumptions? And again, another pretty interesting accounting thing that you uncovered, which I think a lot of people could easily overlook and is probably, if I had to guess, misquoted across every sell side report. Maybe not. I don't know. What do you think?
- [38:23]
Drew Cohen
It's misquoted a lot on Twitter, that's for sure. Because this is in part why I was kind of interested in it, because I'll just get into it. So at a stock price of $82, a market cap is 170 billion and it trades at 47 times earnings. Okay, like that's a pretty high multiple. But then on a free cash flow basis, it trades at 25 times free cash flow. That's starting to get interesting. 25 times free cash flow. And so I dived into that and I saw that $6.8 billion in cash flow after backing out stock based comp. That still is the 25 times multiple, by the way. And I was looking at it, it just didn't sound right. But apparently there is a big impact from accrual insurance premiums, which are currently a large source of cash flow, about $2.7 billion over last year. And so if you back that out, that's a 41 times multiple. And just to expl quickly, basically what ends up happening is as they're growing, they have to reserve more money for potential accidents, payouts in the future, but the money that they're putting into the insurance reserve as they continue to grow. Actually, when you're looking at the cash flow statement perspective, it's cash that they're collecting. Right. And so as they're growing quickly, the insurance reserves are growing, they're collecting more cash. It looks like it's a source of cash flow. The reason why we want to back this out, though, is that, that once they stop growing so much, it's not going to be there anymore. I'm not saying that the insurance reserves aren't, you know, over underinflated. It has nothing to do with that. It's just strictly the dynamic of it on cash flow. Looking like this is cash flow that'll exist indefinitely when it could disappear, you know, next year, when it stops growing is so quickly. And so that is a very important thing because if you're putting a multiple on that, you're kind of assuming that's going to last, you know, indefinitely, which it's not. And so that is why you should back that out. Now. There's some value in having, you know, the reserves. And if you really want to, you could say, what are the values of the reserves and kind of value it, like an insurance company or a bank. That's fine if you want to do that, but you certainly shouldn't put a tech multiple on insurance premiums.
- [40:21]
Alex
Yeah, it's funny, similar thing happened at Airbnb where again, they just had so much cash sitting on their balance sheet, and then obviously the deposits from the Airbnb and then, you know, interest rates went up and all of a sudden 25% of their cash flow was, you know, interest income. And now you're slapping a 40 times multiple on that.
- [40:37]
Drew Cohen
Yeah. And it was even more for them because they have, I don't know, 13 billion in cash or something like that. At that time we looked at it and so it was a big number, but it was the same issue where the cash flow looked higher than it really should be. Because you don't want to put a tech multiple or you know, this normalized business earnings multiple on an interest income stream or insurance premiums, because these are not high quality streams of earnings. They're at risk of going away very quickly, right?
- [41:00]
Alex
Yeah. Get into a couple of wrong car accidents there and yeah, that's going to get, that's going to get paid out, so.
- [41:05]
Drew Cohen
No, no, not even. Not even. It's just if they stop grow, then it's going to disappear. The more kind of accidents they have, they're going to be, you know, accruing more insurance reserves against that. It's just that because of the mismatch of when they're paying them out, they'll pay them out, you know, two years later after they're collecting it. So it looks like a cash flow as it continues to grow.
- [41:24]
Alex
I see. Right. And that dynamic will balance out. And again, they do. Do they have some like insurance reserves on their balance sheet or something?
- [41:29]
Drew Cohen
Oh, yeah.
- [41:30]
Alex
Cash that they have. Yeah. Yeah, good distinction there. I, you know, your host was getting a little confused there, so I appreciate the clarity on that. But again, something that can easily be missed. And you're right. I don't know if the sell side is getting confused on that and they're quoting, but at least the Twitter sphere is. So there you go, I guess, however you want to take that. So, okay, now that we've made that adjustment, why don't you kind of take us through those valuation numbers and keep it going?
- [41:54]
Drew Cohen
Yeah, so for the valuation math I do here, I just, you know, want to throw out some numbers. Look at it one way. It's very different than when we do with Speedwell research, the full reverse dcf, want to look at all the opportunities. And so I'm a little more cavalier basically with, you know, this kind of quote valuation that we're doing, but basically they're growing 18%. And if you expect them to continue to do that for the next few years and then you get a little bit of operating margin expansion, especially with advertising, which is pretty high margin, and then, you know, maybe you're comfortable assuming 20% cash flow growth for the next three years. And so that'd be $7 billion in, you know, quote real cash flow in three years from now. And so if you're comfortable with those assumptions at a 25 times multiple, which would be fair, you know, sort of intrinsic value multiple if they're still growing low double digits. And the reason why I'm calling it an intrinsic value multiple and not a pricing is because if they're still growing, you know, low double digits that could still map out to, you know, a pretty adequate return on the DCF. But of course, they have to still grow in three years from now, you know, 10% to 15% for several more years thereafter. That math, which is again, the 7 billion in real cash flow times the 25 times multiple, that's about 50% upside from here, but a lot of risk, as we talked about that. And you have to be comfortable with that assumption, which, you know, it's a little, I'm not going to say it's unaggressive.
- [43:11]
Alex
Yeah. And again, one thing I want to touch on a little bit is the like, you know, kind of, we'll call it steady state or mature margins for this marketplace business. Right now they're at 9%. And again, structurally, you would think a marketplace, especially one of this size, would have a lot more operating leverage. At the end of the day, yes, you have the tech infrastructure, you have stuff going on that you have to constantly pay for, but you would think it could get to, I don't know, 20, 30% operating margin like some other marketplace businesses. Do you think Uber just has structurally higher costs than, you know, maybe in a mature Etsy or Coinbase or, I don't know, some other marketplaces?
- [43:45]
Drew Cohen
I think honestly with the existing dynamic, to me it seems plausible that they should be able to hit, you know, the 20% plus, something like that. Mark. I mean, even Instacart is, I believe, higher than that, that. So it makes sense to me that they would be able to. I think the tricky part here right now, again, it's AV and kind of maybe even agentic AI too. I think we'll never see that kind of steady state mature scenario because the landscape is changing so quickly. But as things kind of stand and, you know, provided if you don't have another inflection of competitive intensity with, you know, cheap money and Lyft promoting a lot again for growth, I think that it makes sense. You could see 20% plus margins. I don't see why that model couldn't sustain that. But again, I don't think that we're going to have quite enough time for them to really get there before things get shook up again.
- [44:33]
Alex
So a lot of influx, not a cheap business by any times, at 40 times earnings, however you want to cut it. I think an investor really has to be confident that either this AV revolution is further out and Uber is going to kind of be this dominant force, or perhaps that their stronghold on the consumer is going to put them in a big place of value and Waymo and other kind of AV marketplaces won't be able to supersede them. So I don't know. I mean, that seems to be the major kind of crux at this point. Drew, I mean, what do you think?
- [45:03]
Drew Cohen
Yeah, I mean, look, again, it's like kind of back to like blank sheet of paper. I would think it'd be a more profitable business at this point in time. I think they still have that opportunity. I think they're going to continue to grow. I think it's, you know, it's still a value add service. They're pretty good at extracting a lot of that consumer surplus though, in terms of pricing. So, you know, all of that together, it's, it's a good business. It's just some of these assumptions, you know, I've never been one to be very comfortable assuming a lot of growth and kind of just throwing AV in the mix. Even if, you know, they only knock out a few of their big cities, it could really weigh on profitability. So it's tough. I think you were right in saying it's tough earlier. And so you can read though the full newsletter on Drew Cohen money.com We have all the newsletters there. And then also I'll link the YouTube video. We talk more in detail, more of a background on Uber and all that in the YouTube video. So we'll link that below. And we also have a lot more content on YouTube. YouTube that is all these different businesses. We just did Novo Nordisk, we're going to do Netflix soon. Constellation software will be out pretty soon too as well. So go ahead and subscribe to the YouTube channel. I'll link to it below.
- [46:08]
Alex
I like it. And I think on the next horizon we will be doing Shift four, the long form company episode about that. So we'll leave you with that. And until next time.
- [46:18]
Drew Cohen
Until next time.