Uber As a Strategic Investor (NYSE: UBER)

🎧 You can listen to Fresh Capital on Spotify, Apple Podcasts or Google Podcasts.

Hello!

We’ve got a hot take for you to start your Monday. This week we analysed Uber Technologies, the Transport as a Service (TaaS) company that operates Uber, UberEats and its associated rideshare brands. The company has become ‘verbified’ in recent years with users describing how they use the platform as part of their everday vernacular (e.g. I’ll Uber there).

As always, we’ve released two podcasts this week:

In today’s newsletter:

  1. An introduction to ‘Jobs to be Done’
  2. Competing to Complete the ‘Job to be Done’
  3. The Future of Uber
image

Uber and ‘Jobs to be Done’

Before discussing Uber, it’s important to quickly outline a theory called ‘jobs to be done’. This theory developed by renowned innovator Clayton Christensen and states that:

When we buy a product, we essentially “hire” it to help us do a job. If it does the job well, the next time we’re confronted with the same job, we tend to hire that product again. And if it does a crummy job, we “fire” it and look for an alternative.

For Uber, the ‘job’ that they do for users to transport users / objects from Point A to Point B. They do this through a number of ways:

  • Uber Ride - The ‘job to be done’ is to transport users from Point A to Point B
  • Uber Eats - The ‘job to be done’ is to bring users food or groceries from Point A to Point B
  • Uber Freight - The ‘job to be done’ is to transport bulky items from Point A to Point B
  • And the myriad of ways that Uber enables users to go from A to B, including doing it themselves through Lime Bikes, scooters, and even through public transport

It’s important to understand ‘jobs to be done’ when discussing Uber because it paints a picture of what Uber is trying to achieve and who else is competing to do the same job for users.

Competing to Complete the Job to be Done

Source: Fresh Capital analysis

image

Uber competes in a highly competitive market - it’s competing to be the product that takes you from Point A to Point B. As you can see, there’s a number of ways to do this:

  • Driver does the job for you - this includes taxis, ride share and food deliver apps. This is one of the most expensive ways to get you from A to B as you’re paying for a driver, a car, insurance and connivence
  • You drive yourself - you take your own car and drive there, or you rent a car. This is also pretty expensive depending on whether you own a car or not, you’ll need to pay for fuel, registration costs as well as the cost of upkeep and maintenance of your car (or membership fee to GoGet or Car Next Door)
  • Public transport - Slower and less efficient than getting a driver or driving yourself, but cheaper and is often an option for many users due to the lower costs
  • Micro mobility - This includes bikes and scooters, this can be slower (generally) for longer distances but sometimes faster and more efficient in cities and high density areas
  • Taking yourself there - If you can get there yourself without the use of a vehicle or mode of transportation, you’re also completing the ‘job to be done’. This is free but the slowest and most inefficient option (generally)

So what does this mean for Uber?

We’re illustrating the intense competition that Uber faces every single day, both for users and customers (customers are the drivers and merchants on their platform). As more competitors move into the market, this will no doubt impact Uber’s future profitability. This is already slowing playing out:

  • While revenue growth historically for Uber has been strong, since FY18 Uber has only growth by 3.3% (Lyft grew up 4.5% over the same period and the US GDP growth was 2.2% in 2019, Uber has only grown 1pp faster than GDP)
  • Uber has a high churn of drivers (~4% of drivers stay after a year), which means they constantly have to spend to acquire new drivers
  • Growth of micro-mobility has been up 26% since the start of 2020, indicating the shift to bikes and scooters to do the ‘job to be done’

This increase competition will no doubt lead to a price war - when there are multiple competitors offering the same service with limited differentiation, users and customers are going to choose the product that offers them the best price. This means:

  • Customers (drivers and merchants) will pick the platform that offers the best payment for their service
  • Users will pick the platform that is the cheapest

Both these are naturally at tension with Uber’s business model - the higher the payment that customers get to take, the lower Uber’s margin will be for facilitating the transaction. As Uber is already incredibly unprofitable, a reduced take rate for Uber will further impact its ability to become profitable in the future.

This leads us to our hot take about Uber …

Uber’s future is to become a strategic investor

The common future takes on Uber comes in two forms:

Our ‘fresh take’ on Uber is that they’re going to cut their presence to key markets where they’re profitable and become a holding company that invests in other ride-share companies that exist in other markets. By leveraging their expertise and lessons learned, Uber can focus on their portfolio companies in different geographies and markets, rather than trying to execute and win in these markets.

  • Five cities make up a quarter of all of Uber’s bookings (NYC, SF Bay Area, LA, Chicago, and London), by focusing on these cities where parking and car ownership isn’t a realistic or preferred option, Uber can quickly become profitable
  • Uber already has minority investments in its competitors in other markets such as Didi (China), Yandex (Russia), Grab (South East Asia), as well as ownership of Careem (EMEA), and investments in other mobility companies such as Lime (on-demand scooters)

By cutting ‘the tail’ where Uber is competing in cities and geographies that are unprofitable and focusing on several key cities, while remaining a strategic investor in other companies, Uber can slowly reposition a company that is haemorrhaging cash and into one that can use its balance sheet strategically.

🎙️ Want more detail on Uber and its red and green flags? Listen to this week’s podcast here!

💬 Want to give us feedback? Take our survey here!

❤ Like what we do? Hit that subscribe button and follow our podcast on SpotifyApple Podcasts or wherever you listen to your podcasts.