If Uber Is Worth $100 Billion, What Is Waymo Worth

Michael E. McGrath

Originally Published in Seeking Alpha on Apr. 16, 2019

Summary

Uber will not be very profitable, if at all, in the next few years.
Autonomous ride services will have a significant cost advantage over ridesharing.
Autonomous ride services will begin to displace ridesharing in 3-5 years.
So, Uber should be evaluated based on its autonomous driving strategy.
Waymo as the leader in autonomous ride services should be worth more than Uber.

With Uber (UBER) set to go public at a valuation that may approach $100 billion, it is important for potential investors to understand why the current ridesharing model is unprofitable, and that it eventually will be displaced by a more profitable model. Autonomous ride services (NYSE:ARS) will eventually displace ridesharing. Uber's recent S-1 supports this statement.

Investors in Uber either need to be comfortable that it can be profitable enough before ARS begins to displace ridesharing or be comfortable with Uber's strategy and competitive advantages for ARS. In this context, it's also useful to ask the question: If Uber is worth $100 billion, then how much is Waymo (GOOGL) worth?

Why is ARS a Lower Cost Model Than Ridesharing?

In my recent article on Lyft (Is Lyft The Next Blockbuster Or Blockbuster Video?), I presented a comparison of the business models for autonomous ride services (ARS) compared to ridesharing. I won't go through that model again in this article. Instead, I will just summarize it and add Uber's own statements about the advantages provided by autonomous driving.

The cost per mile of ridesharing is more than $2 per mile. In my previous model, I estimated that it was approximately $2.50 for Lyft and $2.40 for Uber. Using Uber's own aggregate financial information in its S-1 it is approximately $2.05 per mile worldwide, and most likely higher than that in the U.S. In 2018, it paid $38.5 billion to drivers and incurred another $14.3 billion in operating expenses, for a total cost to deliver its ridesharing services of $52.9 billion. It also estimated that its drivers drove 26 billion miles in that year. Uber paid its drivers 77.5% of its bookings. It's important to note that Uber's numbers are global (about 40% outside of the U.S.) and that it includes Uber Eats.

I estimate that the cost per mile of autonomous ride services will be approximately $1.25 per mile and will get even lower over time. Reference my previous articles for more discussion on the economics of ARS. Fundamentally the cost difference is the elimination of a driver. The cost of ridesharing cannot possibly compete with the eventual cost of ARS. It's the fundamental fact that a capital and technology intensive model will always replace a labor-intensive model.

Uber acknowledges the eventual advantage of autonomous ride services in its S-1. It states the threat of new competitors, including Waymo (GOOGL), Cruise Automation (GM), and Apple (AAPL) in its market. It also states that the use of autonomous vehicles could substantially reduce the cost of providing ridesharing, meal delivery, or logistics services, which could allow competitors to offer such services at a substantially lower price compared to the price available to consumers on its platform. (The emphasis in bold is mine.)

we believe that autonomous vehicle technologies may have the ability to meaningfully impact the industries in which we compete. Several other companies, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto ai, Aurora, and Nuro, are also developing autonomous vehicle technologies, either alone or through collaborations with car manufacturers, and we expect that they will use such technology to further compete with us in the personal mobility, meal delivery, or logistics industries. We expect certain competitors to commercialize autonomous vehicle technologies at scale before we do. Waymo has already introduced a commercialized ridehailing fleet of autonomous vehicles, and it is possible that other of our competitors could introduce autonomous vehicle offerings earlier than we will. In the event that our competitors bring autonomous vehicles to market before we do, or their technology is or is perceived to be superior to ours, they may be able to leverage such technology to compete more effectively with us, which would adversely impact our financial performance and our prospects. For example, use of autonomous vehicles could substantially reduce the cost of providing ridesharing, meal delivery, or logistics services, which could allow competitors to offer such services at a substantially lower price as compared to the price available to consumers on our platform. If a significant number of consumers choose to use our competitors’ offerings over ours, our financial performance and prospects would be adversely impacted.

It's very likely that ARS will have significant competitive advantages over ridesharing. So the questions then are: (1) Will it make enough money before the transition to ARS?, (2) What is Uber's strategy for ARS?, (3) Will it have competitive advantages?, and (4)

Will Ridesharing Ever Be Profitable?

Most likely, ridesharing, as it is today will never be very profitable, no matter how big the revenue opportunity. We just discussed the cost of more than $2 per mile. There is very little leverage to reduce this with increased volume.

Drivers currently take more than 75% of the booking. It's unlikely they will work for less. In fact, there is some feeling that they are not paid enough. They provide their own cars. Using the AAA and Uber's estimate for cost per mile of driving, it costs the driver $0.75 per mile for the car. There is also mileage incurred in getting the car to the passenger. Let's say that is only a third of the miles billed, so it costs the driver about $1 per mile. At $2, that leaves drivers with $1 per mile for their time, which isn't very much.

Lyft discussed reducing its operating expenses, particularly insurance expense, to reduce its losses. In its S-1, Uber presents an analysis that it could reduce driver incentives by $3 for a $10-trip. This would enable it to earn $1 per $10-trip instead of losing $2. Again, how likely is it that drivers will work for less.

That leaves price increases as the most likely option to reduce losses. The strategy of investing to create a leadership position in a large market and then increasing prices has worked well. Except, in this case, much lower priced autonomous ride services are on the horizon.

What Is Uber's Autonomous Driving Strategy?

Uber's has a three-pronged strategy for autonomous driving. It is investing in developing its own autonomous technology. It plans to integrate this technology into purpose-built Toyota vehicles, and it is working with Volvo to develop a fleet of autonomous cars to be deployed on its network. It is also expecting Daimler to use its own fleet of autonomous vehicles on Uber's network. Here is how it summarizes its strategy in the S-1:

We are investing in technology to power the next generation of transportation. Our Advanced Technologies Group (“ATG”) focuses on developing autonomous vehicle technologies, which we believe have the long-term potential to provide safer and more efficient rides and deliveries to consumers as well as lower prices.

We believe that we have three attractive options with various levels of integration incorporating autonomous vehicle technologies into our network, as demonstrated by our existing partnerships with original equipment manufacturers (“OEMs”):

Toyota. Announced in August 2018, we expect to integrate our autonomous vehicle technologies into purpose-built Toyota vehicles to be deployed on our network.
Volvo. Announced in August 2016, we are working with Volvo to develop and build our own fleet of autonomous cars to be deployed on our network.
Daimler. Announced in January 2017, we expect to enable Daimler to introduce a fleet of their owned-and-operated autonomous vehicles onto our network

The first two alternatives rely on its success in developing its own autonomous technology. So far, it is behind competitors and may not be investing as much. Uber also will be challenged to come up with the capital required to finance its own ARS fleet. This investment will require tens of billions of dollars. Expected competitors like Waymo (GOOGL) and Apple (AAPL) have easy access to the necessary cash. Uber will need to sell more stock or incur debt to finance competitive ARS fleets, as will GM and Ford.

The third alternative is similar to Lyft's strategy of using its network to deploy a fleet of autonomous vehicles owned by others. The success of this strategy depends on how ARS revenue is split. Will Uber get a fee of 10%-20% per trip (which is less than it currently gets) or will it give the autonomous vehicle fleet provider something like $0.50 per mile and keep the bulk of the profit? Differences over how to split the ARS revenue is probably why those developing autonomous technology plan to deploy their own ARS instead of partnering.

Will Uber Have A Competitive Advantage During the Period of "Hybrid Autonomy"

Uber believes that it will have a competitive advantage during what it refers to as the period of "hybrid autonomy".

Along the way to a potential future autonomous vehicle world, we believe that there will be a long period of hybrid autonomy, in which autonomous vehicles will be deployed gradually against specific use cases while Drivers continue to serve most consumer demand. As we solve specific autonomous use cases, we will deploy autonomous vehicles against them. Such situations may include trips along a standard, well-mapped route in a predictable environment in good weather. In other situations, such as those that involve substantial traffic, complex routes, or unusual weather conditions, we will continue to rely on Drivers. Deciding which trip receives a vehicle driven by a Driver and which receives an autonomous vehicle, and deploying both in real time while maintaining liquidity in all situations, is a dynamic that we believe is imperative for the success of an autonomous vehicle future. Accordingly, we believe that we will be uniquely suited for this dynamic during the expected long hybrid period of co-existence of Drivers and autonomous vehicles.

The success of this competitive advantage is questionable. First, will users go first to the Uber app to find the appropriate driver-based or AV-based ride? If they do, then Uber could have an advantage. But if they go first to the Waymo One or Cruise Anywhere app or the potential Apple app on their iPhones, then there is no competitive advantage. If they can't get an ARS route on one of these apps then they will go to the Uber app for a driver-based ride.

Second, as Uber describes this hybrid process, the ARS trips will "cherry pick" the best trips. Uber drivers will be left with the trips in "substantial traffic, complex routes and unusual weather conditions. I doubt that Uber drivers will find this attractive enough to continue driving.

How Long Will It Take Until the Next Generation Displaces Ridesharing?

Uber is correct that there will be a gradual transition from ridesharing to ARS. In fact, it could take a decade or maybe more for the transition to be fully completed. Initially, ARS will be offered only in selected metropolitan areas. Most of these will be warm weather climates in the southern or western parts of the country. So, the erosion of market share will happen first in those areas, and the market share for ridesharing will begin to erode there. Ridesharing will continue to be the primary solution in the Northern part of the country for a longer period of time.

ARS will also provide rides for certain routes initially. These routes will be the easier high-volume routes, such as from hotels to airports, from residential to commercial areas, etc. While it's easy to say this will limit the penetration of ARS, the 80/20 rule will apply. It will serve 20% of the routes that provide 80% of the trips.

It took almost a decade for streaming to replace CDs and DVDs, but during that period their sales continually declined. Similarly, it will probably take a decade for ARS to displace ridesharing, but during that decade ridesharing revenue will decline. I expect the ramp-up of ARS will start in 2021 (refer to some of my previous Seeking Alpha articles for a more detailed discussion of this). It will take a while, possibly until the mid-2020s, for the erosion of ridesharing to become significant. But it is coming, so investors need to consider it.

Is Waymo Worth More Than Uber?

Back to the initial questions. Is Uber worth as much as $100 billion? To justify this you either need to see it making enough money in the next 3-5 years before the erosion of the ridesharing market, or believe that it will have sufficient competitive advantages in autonomous ride services (ARS). Alternatively, you can also bet that autonomous driving will never be feasible. This is not a bet I would take based on the progress being made, the vast amount of money being invested in it, and its dramatic benefits.

Is Waymo (GOOGL) worth more than Uber? For that matter, is GM's (GM) Cruise Automation business, and Apple's (AAPL) potential entry into autonomous ride services worth more too? It is almost inevitable that ARS will replace ridesharing, at least major portions of the ridesharing market. The new competitors in this next generation market inevitably will receive the value and more that is given to ridesharing companies today.

Waymo is the leader in introducing autonomous ride services (ARS) and therefore it may be logical to assume it will be worth much more than Uber at some point in the future. Waymo is part of Alphabet (GOOGL). It doesn't carry its own valuation, so it's impossible to determine the value attributed to it. Alphabet is valued at a little over $350 billion with almost all of its current valuation based on its core business.

Will Alphabet spin-off Waymo? There is a good chance of that. The auto companies, Ford and GM, are positioning themselves to spin-off their ARS businesses. Although it is still too early to be sure, there are several good reasons for this, and it is likely that the others will do this as well.

Conclusion

Ridesharing may never be very profitable. It seems clear, to me at least, that autonomous ride services will eventually displace ridesharing as it is today. Uber's S-1 filing tends to agree with that. Investors in Uber are advised to assess its longer-term strategy for autonomous ride services as much, if not more, than its growth prospects for ridesharing. When they do that, it raises the legitimate question: Is Waymo, and the others investing in ARS, worth more than Uber?