A friend of mine did something
recently that he’d never done before: he used Lyft instead of Uber on a
business trip.
recently that he’d never done before: he used Lyft instead of Uber on a
business trip.
He did this because he needed a
ride, and the Lyft driver was going to get to him faster than Uber. While he had never actually used Lyft before, he had downloaded the app and figured why not? After all, the Ubers that he (and everyone else we
know) has ridden lately have been not-much-better
than a cab, which is quite a come-down from the early days of Uber, when the
driver had a bottle of water ready for you and the car smelled like a car,
instead of a dorm room, and the worst you could say was that the drivers were
too reliant on Waze to get around.
ride, and the Lyft driver was going to get to him faster than Uber. While he had never actually used Lyft before, he had downloaded the app and figured why not? After all, the Ubers that he (and everyone else we
know) has ridden lately have been not-much-better
than a cab, which is quite a come-down from the early days of Uber, when the
driver had a bottle of water ready for you and the car smelled like a car,
instead of a dorm room, and the worst you could say was that the drivers were
too reliant on Waze to get around.
In brief, Uber has become what the haters
always sniffed: it’s a taxi app.
always sniffed: it’s a taxi app.
So why not try Lyft?
Now, for the record, we’re not
haters. Uber seemed as transformational
as anything we’ve ever seen: you didn’t have to leave your office or apartment
and wander around outside in the rain/snow/hot/cold trying to guess on which
street the empty cabs would appear. You no longer needed to rent a car in most cities, eliminating the wasted time driving and the parking, not to mention the overnight garage fees. You could cut
it closer leaving one meeting for the next, because you could see where the
driver was and you had a good idea when the car would be downstairs before you even
had to leave the building. And the
driver you got was generally pleasant or at least not surly, and motivated to
provide good service because you could rate him or her. And when you got to where you were going, you
just got out and left—no fumbling with the credit card machine and waiting for
that goofy little ticker to print out an illegible receipt on curly little
paper that you never could find later anyway…
haters. Uber seemed as transformational
as anything we’ve ever seen: you didn’t have to leave your office or apartment
and wander around outside in the rain/snow/hot/cold trying to guess on which
street the empty cabs would appear. You no longer needed to rent a car in most cities, eliminating the wasted time driving and the parking, not to mention the overnight garage fees. You could cut
it closer leaving one meeting for the next, because you could see where the
driver was and you had a good idea when the car would be downstairs before you even
had to leave the building. And the
driver you got was generally pleasant or at least not surly, and motivated to
provide good service because you could rate him or her. And when you got to where you were going, you
just got out and left—no fumbling with the credit card machine and waiting for
that goofy little ticker to print out an illegible receipt on curly little
paper that you never could find later anyway…
And when that network effect kicked
in—wow: all of a sudden you could get to JFK for a hundred bucks instead of the
$225 charged by livery services.
in—wow: all of a sudden you could get to JFK for a hundred bucks instead of the
$225 charged by livery services.
Truly transformational.
Yes, there were cracks in the model. Drivers who really had no idea where they
were going if the Waze wasn’t working (I had one guy try to take me to JFK
through Manhattan—turned out he’d set his map to “no tolls” by mistake);
drivers who complained about what they cleared after gasoline, insurance and
the vig to Uber; and that slip in standards that’s made Uber almost
indistinguishable from a cab—a slip that happened like Hemingway’s character
who went bankrupt “gradually, and then suddenly.”
were going if the Waze wasn’t working (I had one guy try to take me to JFK
through Manhattan—turned out he’d set his map to “no tolls” by mistake);
drivers who complained about what they cleared after gasoline, insurance and
the vig to Uber; and that slip in standards that’s made Uber almost
indistinguishable from a cab—a slip that happened like Hemingway’s character
who went bankrupt “gradually, and then suddenly.”
By way of example, out of the 26 Uber rides I’ve taken
year-to-date, maybe two or three stand out for having nice, personable (but not
too personable, if you get my drift),
and conscientious drivers. The rest
could have been cab rides, some in dumpy cars, some in unsafe cars, some with drivers who left the
music on way too loud…and then there was the
driver who suddenly stopped at a gas station on the Hutch—to use the bathroom,
not to get gas—without saying why until he got back in.
year-to-date, maybe two or three stand out for having nice, personable (but not
too personable, if you get my drift),
and conscientious drivers. The rest
could have been cab rides, some in dumpy cars, some in unsafe cars, some with drivers who left the
music on way too loud…and then there was the
driver who suddenly stopped at a gas station on the Hutch—to use the bathroom,
not to get gas—without saying why until he got back in.
Oh, and there was the creep who took our
daughter on a roundabout route without her being aware—we were watching on the
Uber app, another extremely cool feature—and when we complained afterwards we only
got half the inflated fare back.
daughter on a roundabout route without her being aware—we were watching on the
Uber app, another extremely cool feature—and when we complained afterwards we only
got half the inflated fare back.
And I haven’t even gotten to the stuff
that’s been in the papers lately—founder Kalanick’s argument with an Uber
driver (watch it here) in which he (Kalanick) comes off like your least
favorite Princeton legacy nephew; Kalanick getting fired
for the kind of behavior that came as no surprise to anyone who had watched
that YouTube video, which the Uber board members apparently did not; the car leasing business that was so ineptly conceived and
poorly managed it makes you wonder what the Uber board members have been doing
the last few years besides counting the endless markups on their investment
(see here); and a most recent report in the New York Times (here) that at least one of Uber’s original and truly
brilliant investors, Benchmark, is trying to sell stock to others, including SoftBank, at a
discount to the $69 billion valuation everyone tosses around as if—and this, we
think, is a mammoth ‘if’—that valuation has any bearing on reality today.
that’s been in the papers lately—founder Kalanick’s argument with an Uber
driver (watch it here) in which he (Kalanick) comes off like your least
favorite Princeton legacy nephew; Kalanick getting fired
for the kind of behavior that came as no surprise to anyone who had watched
that YouTube video, which the Uber board members apparently did not; the car leasing business that was so ineptly conceived and
poorly managed it makes you wonder what the Uber board members have been doing
the last few years besides counting the endless markups on their investment
(see here); and a most recent report in the New York Times (here) that at least one of Uber’s original and truly
brilliant investors, Benchmark, is trying to sell stock to others, including SoftBank, at a
discount to the $69 billion valuation everyone tosses around as if—and this, we
think, is a mammoth ‘if’—that valuation has any bearing on reality today.
For our part, we think a rational look at
where Uber stands today makes that valuation the biggest top-tick since AOL merged with Time Warner during the
previous dot-com bubble.
where Uber stands today makes that valuation the biggest top-tick since AOL merged with Time Warner during the
previous dot-com bubble.
That look is informed by only a
few data points, unfortunately, because they’re all we have, but it includes a Wall Street Journal
report that Uber has “burned through at least $8 billion” during its short,
happy life and has $7 billion in cash on hand and “an untapped $2.3 billion
credit facility.”
few data points, unfortunately, because they’re all we have, but it includes a Wall Street Journal
report that Uber has “burned through at least $8 billion” during its short,
happy life and has $7 billion in cash on hand and “an untapped $2.3 billion
credit facility.”
Furthermore, according to Bloomberg Uber lost $2.8 billion
in 2016, excluding a billion dollar loss in China, which is now gone from the Uber dare-to-dream scenario of world domination. And while “gross bookings” grew 126% that year (we have no idea if
this includes China or not), that looks like a mighty big slowdown after
tripling in 2015, if the following chart of gross bookings is accurate:
in 2016, excluding a billion dollar loss in China, which is now gone from the Uber dare-to-dream scenario of world domination. And while “gross bookings” grew 126% that year (we have no idea if
this includes China or not), that looks like a mighty big slowdown after
tripling in 2015, if the following chart of gross bookings is accurate:
Worse, the loss didn’t shrink appreciably despite the
revenue growth—meaning the business does not appear to be scaling, as Google
did when it was young and growing like Uber: Uber said it lost $708
million in the first quarter of 2017, and that excludes employee stock comp.
revenue growth—meaning the business does not appear to be scaling, as Google
did when it was young and growing like Uber: Uber said it lost $708
million in the first quarter of 2017, and that excludes employee stock comp.
So, what, we wonder, is this business
really worth?
really worth?
What’s a money-losing, growth-slowing,
CEO-self-destructing, board-of-directors-asleep-at-the-switch-looking business
worth?
CEO-self-destructing, board-of-directors-asleep-at-the-switch-looking business
worth?
Is it worth the $68.5 billion valuation
from last year?
from last year?
Some potential Uber investors reportedly
don’t appear to think so, otherwise why would the board be considering ways for some
existing investors sell at a lower valuation, as reported in that New York
Times article cited above?
don’t appear to think so, otherwise why would the board be considering ways for some
existing investors sell at a lower valuation, as reported in that New York
Times article cited above?
And while we have no idea where the next
trade in Uber will take place, price-wise, it would come as no surprise if the
next tick is down, and down a lot.
trade in Uber will take place, price-wise, it would come as no surprise if the
next tick is down, and down a lot.
Sure, we get that Uber transformed the nature of
human transportation, giving riders a life-changing ability to find affordable
rides on command while giving drivers a life-changing ability to add a flexible
source of income that could help pay for college or clothes or a new car, or just put extra spending money in their pocket.
human transportation, giving riders a life-changing ability to find affordable
rides on command while giving drivers a life-changing ability to add a flexible
source of income that could help pay for college or clothes or a new car, or just put extra spending money in their pocket.
We get how cool the app is.
We get why somebody thought Uber would be
worth investing in at a $68.5 billion valuation last year.
worth investing in at a $68.5 billion valuation last year.
But things are different now.
Uber didn’t conquer China, or Russia. Lyft didn’t go away—it got stronger. And more worrisome of all, we think, for the so-called
“gig economy” business model the company pioneered, is that good old-fashioned
labor tightness is coming back into the U.S.—the kind of labor tightness the US
economy hasn’t seen since Lehman Brothers went kablooey ten years ago and
companies began shedding workers like my dog Charles used to shed fur.
“gig economy” business model the company pioneered, is that good old-fashioned
labor tightness is coming back into the U.S.—the kind of labor tightness the US
economy hasn’t seen since Lehman Brothers went kablooey ten years ago and
companies began shedding workers like my dog Charles used to shed fur.
“Help Wanted” signs are everywhere—not just
San Francisco and NYC, but Northern Michigan and beachy Rhode Island; and not
just at cool tech companies but at Bob Evans restaurants and at Wal-Marts in a neighborhood near you.
San Francisco and NYC, but Northern Michigan and beachy Rhode Island; and not
just at cool tech companies but at Bob Evans restaurants and at Wal-Marts in a neighborhood near you.
And that kind of labor tightness, we believe, puts the Uber
model at no small risk of coming undone, whether by the
heavy hand of a corruptible government bureaucracy that never trusted the libertarian
two-sided model Uber pioneered (because it could not figure out how to profit by it); or by the invisible hand of Adam Smith.
model at no small risk of coming undone, whether by the
heavy hand of a corruptible government bureaucracy that never trusted the libertarian
two-sided model Uber pioneered (because it could not figure out how to profit by it); or by the invisible hand of Adam Smith.
And then there is that pesky competition from Lyft,
which, in years past, no business person we knew of had ever used because of
those silly pink moustaches on the cars, but which, as I pointed out at the top,
has made at least one convert in recent weeks. [Moreover, as one loyal reader pointed out after reading an early draft, many Uber drivers also drive for Lyft, and vice-versa, so what really is the key Uber asset underlying the Uber business model, anyway?]
which, in years past, no business person we knew of had ever used because of
those silly pink moustaches on the cars, but which, as I pointed out at the top,
has made at least one convert in recent weeks. [Moreover, as one loyal reader pointed out after reading an early draft, many Uber drivers also drive for Lyft, and vice-versa, so what really is the key Uber asset underlying the Uber business model, anyway?]
Okay, a reader might say, but what if Uber
develops a self-driving car? Wouldn’t
that solve the driver problem?
develops a self-driving car? Wouldn’t
that solve the driver problem?
To which we’d offer the observation that,
for starters, Uber acqui-hired a guy from Google to run its self-driving car
business who is accused of self-dealing while at Google—the article is here—that
would make Donald Trump blush. More
generally, it’s hard to fathom how a company that could run a simple
car-leasing business as ineptly as described in the Wall Street Journal would ever possibly be a better bet to develop those self-driving cars than Google, or
Apple, or Tesla.
for starters, Uber acqui-hired a guy from Google to run its self-driving car
business who is accused of self-dealing while at Google—the article is here—that
would make Donald Trump blush. More
generally, it’s hard to fathom how a company that could run a simple
car-leasing business as ineptly as described in the Wall Street Journal would ever possibly be a better bet to develop those self-driving cars than Google, or
Apple, or Tesla.
And if Google, for example, developed a
really great self-driving car, why not just offer a Google Driver app
themselves? Why give the vig to Uber?
really great self-driving car, why not just offer a Google Driver app
themselves? Why give the vig to Uber?
We don’t know what valuation somebody else
will decide Uber is worth if a piece of the business does trade, but here’s how
we’d look at it:
will decide Uber is worth if a piece of the business does trade, but here’s how
we’d look at it:
If
I’m a growth stock investor would I rather buy shares of Uber, with something
like 80% market share and a sort-of-global opportunity that is growing at a
slowing but undisclosed rate with operating margins that appear to be negative
and also has labor issues, management discontinuity and the potential for
disintermediation by Google, at $68.5 billion? Or would I rather buy something
in the public marketplace that’s been around for a couple decades and has 80%
market share but only 5% market penetration with a global opportunity growing
at a steady double-digit rate with 75% gross margins and 25% operation margins,
plus or minus, at a $14 billion valuation? I’d rather own the $14 billion valuation, which comes in the form of Align Technologies. I don’t own either right now, but, again, if I was a growth stock kind of investor, I would own ALGN at $14 billion, not Uber at $14 billion.
I’m a growth stock investor would I rather buy shares of Uber, with something
like 80% market share and a sort-of-global opportunity that is growing at a
slowing but undisclosed rate with operating margins that appear to be negative
and also has labor issues, management discontinuity and the potential for
disintermediation by Google, at $68.5 billion? Or would I rather buy something
in the public marketplace that’s been around for a couple decades and has 80%
market share but only 5% market penetration with a global opportunity growing
at a steady double-digit rate with 75% gross margins and 25% operation margins,
plus or minus, at a $14 billion valuation? I’d rather own the $14 billion valuation, which comes in the form of Align Technologies. I don’t own either right now, but, again, if I was a growth stock kind of investor, I would own ALGN at $14 billion, not Uber at $14 billion.
So I wouldn’t touch Uber at $68.5
billion, or $65.8 billion or whatever the “whisper number” might be.
billion, or $65.8 billion or whatever the “whisper number” might be.
In fact, if Uber had gone public already,
and if for some reason Mr. Market was still insisting it was worth $68.5
billion in the face of all the above, I’d be short it.
and if for some reason Mr. Market was still insisting it was worth $68.5
billion in the face of all the above, I’d be short it.
Call it The Gig Short.
JM
P.S. We love to hear from those who know more than
we do on the subject at hand because we hate to make anything up. Corrections, amplifications and examples are
welcome, with complete anonymity, of course.
we do on the subject at hand because we hate to make anything up. Corrections, amplifications and examples are
welcome, with complete anonymity, of course.
Jeff Matthews
notmakingthisup@gmail.com
Author
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks
on Investing, 2015) Available at Amazon.com
on Investing, 2015) Available at Amazon.com
©
2017 NotMakingThisUp, LLC
2017 NotMakingThisUp, LLC
The content contained in this blog represents only
the opinions of Mr. Matthews, who may have a long or short position in shares
of the company discussed here, but this commentary in no way constitutes
investment advice, and should never be relied on in making an investment
decision, ever. The market ultimately decides
who’s right, not bloggers or company PR hacks.
Also, this blog is not a solicitation of business by Mr. Matthews: the
content herein is intended solely for the entertainment of the reader, and the
author.
the opinions of Mr. Matthews, who may have a long or short position in shares
of the company discussed here, but this commentary in no way constitutes
investment advice, and should never be relied on in making an investment
decision, ever. The market ultimately decides
who’s right, not bloggers or company PR hacks.
Also, this blog is not a solicitation of business by Mr. Matthews: the
content herein is intended solely for the entertainment of the reader, and the
author.
9 replies on “The Gig Short”
If you would short Uber, what do you think of Tesla who also has an insane valuation, major cash burn, no profit, and slowing growth. Of course they say the future is bright there, but then the future is always bright there. The present, not so much. I'd be interested to see your take on them one day.
Interesting question. Almost everything you say (insane valuation,major cash burn, no profit) is as true today as it was when the stock was $100, so it's dangerous to short valuation alone. Also, there's no comparison between Kalanick and Musk: one is a lucky punk and the other is a genius who has disrupted 3 businesses (SpaceX is especially impressive, in my view, and I've talked to their customers and suppliers–what Musk did there is astonishing). And Tesla's business has not started to break down, which I believe Uber's has. I never short a high valuation, I short a business with a high valuation that has already cracked. That said, one day Tesla will crack. Someday someone will come out with a better car with better range, or oil will go to $10 a barrel, or the credit markets will freeze up…and then it will be a better short at $200 than $350, because something will be wrong and plainly visible to the market. Just my opinion, since you asked, and I could change my mind before you read this. JM
The "bare bones" variable cost at Nissan, GM, etc on an auto is about 17% – with a ton of marketing, capital and design that may or may not be efficiently done comprising the other 83%. Potentially disruptible.
Hi Jeff, great post. The only thing I would say about your comment above is that I dont know if Kalanick is a "lucky punk". He's definitely a punk (I've watched the video as well, and punk might even be generous), but "lucky" feels a little cheap b/c for all the missteps, he did create a business out of thin air that truly was/is transformational, as you say. I mean, everyone who gets to a $69B valuation might get lucky to some extent, but its not like anyone else invented this in his absence.
Definitely a difference between him and Musk but I think Musk is even a bit much sometimes. He loves to throw big ideas out there (hyperloop, Boring Co, etc) and maybe he delivers, maybe he doesnt – no skin off his back, he's already a genius.
Another issue with Uber is that in some markets once they reduce the promotions to riders and/or incentives to drivers other competitors pop up. So whenever Uber tries to be less promotional and improve its margins (or rather narrow its losses) a competitor can easily undercut them a la "your margin is my opportunity." Here in Singapore we have seen it with Grab getting stronger and many drivers and riders now have both apps and they go with whoever is more promotional. The promotions here have got so out of control, I have so many invoices with a fare of under $2. In addition, there is a new app that compares the fares of Uber/Grab/Taxi/Other-competitors and then chooses the cheapest one for each ride you take. It is very difficult to make money like that even if robots were driving these cars.
Jeff – I have been a very happy owner of Amazon stock for quite some time, but there is a front page article in the WSJ today about how the company has hired 1,000 M.B.A. students in the past year. Signal that its time to sell?
It certainly smells that way, doesn't it? But I wouldn't try to be cute. As Charlie Munger says, "Ask yourself why you own it, and if you can't answer that question…"
Cheers.
JM
Hi Jeff – just curious if you have any thoughts on the recent mania in bitcoin? Seems worthy of a blog post from you at some point!
Jack, thanks for this, just not sure what's not been said about the bitcoin mania… it seems to me like it's set up to go to a lot higher, because there's a finite number and they get more costly to create–the marginal cost of production goes up, not down, as more get produced, exponentially. It ain't a currency, that's for sure. So, as long as nobody tries to sell them, how does the price not go a lot higher? The trick is, when somebody actually does try to sell them–then Katy bar the door. Also, who gets hurt when the price goes back to $10 or whatever? People throw around "the market value of bitcoins…" But what's the daily trading volume? How much is actually being bought by the same people who buy gold coins on TV? Informed opinions are welcome.