There are rumors swirling that the incoming administration will look to implement a more lax federal framework for autonomous vehicle (AV) regulation. If that transpires, it could expedite Tesla and other players’ paths to broad-scaled AV legalization. Considering Tesla is gunning for full autonomous driving, rather than mapping one city at a time like Waymo and Zoox, that’s great for that company. It potentially removes issues like stopping rides at county lines due to different rules and makes for broader AV use cases. As Tesla and Uber are not (yet) partners, this pushed Uber lower on rising uncertainty surrounding its positioning in the AV revolution. I wanted to share my thoughts on this today.

There are two pieces of the AV transition — the bridge & the full embrace. Throughout what will be a several-year bridge, AV fleets will be complemented by drivers. Firms will not be able to build capacity to meet peak hours immediately as preferences slowly shift. Doing so would mean hefty cash burn for this expensive hardware during all other non-peak times. Uber is the perfect demand aggregator. I’ve said it before and I will say it again.

Autonomous ubiquity won’t happen overnight just because deregulation (maybe) makes the process a bit less complex. And if deregulation does pave the way for quicker approvals, fleets will still take years to ramp to meet demand. For these reasons, I believe Uber’s dominant category position is safe, at least for the next couple of years as the status quo remains intact.

But what about the full embrace? What about when AV fleets make up a more dominant proportion of ride-sharing? That’s all-but-inevitable and must be considered. If sentiment sours and investors begin to believe that Uber’s positioning here is un-compelling (i.e. Tesla builds its own Uber), that would surely affect valuation multiples and potentially Uber’s financial success.

It is the uncertainty and potential threat of Tesla’s direction that is weighing on Uber’s stock. If a new partnership between the two was announced tomorrow, that would pretty much take care of this anxiety. For now, whether we agree or not, investors consider Tesla’s shot at owning this entire market as higher than anyone else. If that happens (I don’t think it will), then Uber’s network affect becomes unneeded. If competition is more fierce (like I expect), that unmatched network affect will continue to matter dearly in the years and decades ahead. Competitors will need to find demand wherever they can to win… and they’ll flock to Uber to do so.

And luckily, the competitive landscape is anything but easy for anyone to fully conquer.

Consider Waymo and its early lead in AV rides, as well as miles per intervention. Uber has demonstrated a materially positive ability to raise fleet utilization rates and sharply improve overall unit economics for Waymo. And that’s important. Alphabet certainly has its own network effects to leverage… including multiple Maps products with billions of users… but it doesn’t seem interested in doing so. Notably, in its newest expansion cities, Waymo even made the decision to exclusively offer rides through Uber.  Uber also handles all fleet management work for them, which further tightens the relationship.

Alphabet… with its fortress balance sheet, large external Waymo funding appetite, world-class large language models (LLMs) and giant consumer networks… is deciding they should be partnering with Uber rather than supplanting it. That bodes well for everyone else arriving at that same conclusion. Toyota, Hyundai, Arora, Wayve, BYD and Cruise already have. Uber leadership says there are many, many more partnerships in the works. 

While I remain optimistic, we must respect the fact that none of us have ever lived through an AV transformation. I have my opinions and my reasoning for them, but at the end of the day, there is no case study to pull from. There are no prior learnings to glean insight from. This is the Wild West. And when a company moves from all but guaranteed leadership in a massive market to a lower probability of leading the next wave, I’m forced to take notice. That’s why I’ve trimmed so much in recent months and took this from 8% of holdings to under 4%.  I began buying in the low $30s in February 2023 and trimmed about half in the $80s. I love having (as always) time-stamped, primary source receipts to show it. Rising uncertainty paired with triple-digit returns in a little over a year made that the right decision in my mind. I did add a little bit of that back following a great earnings report and multiple contraction… but just a bit.

I want this as a smaller holding today, just like I wanted it as a smaller holding early in 2023. At that point, Uber had to prove the model could attractively compound profits. It proved that and then some, and so I let the position become one of my largest with the stock’s rise. As this new risk becomes a bit more pressing, I will take the exact same approach. If Uber weathers the transition like I think that it will, the upside is immense and I will again let it grow to an anchor holding. It’s one of the cheapest names that I cover, despite the consistently excellent financial results. For context, it trades for 30x forward GAAP EBIT, with 58% EBIT compounding expected through 2025 and 2026. When weighing all of this, I think owning what I currently own strikes the right balance of responsible exposure. I am not pausing adding here, but I am going to widen the multiple contraction bands needed to justify buying more shares.

I did a little adding today as well:

Here are my updated holdings & performance vs. the S&P 500. Please note that I do not expect the return CAGR to remain this elevated or for outperformance vs. the S&P 500 to remain this sharp. There will always be periods of outperformance & underperformance… for everyone. I’ve enjoyed a period of large outperformance lately, so return data looks especially good right now. That will not always be the case. With that said, I am quite pleased with how things are currently looking.