Uber: Will Tesla Disrupt It?

Q2 2024 Update

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Edited by Brian Birnbaum

Tesla and Uber are set to collide over the coming decade. The question is, which one will come out on top?

Tesla can potentially disrupt Uber’s supply side, via the deployment of hailable autonomous vehicles. If Tesla were to be the only provider of autonomous vehicles in the future, or one of few, this would likely lead to Tesla’s robotaxi network outcompeting Uber’s in terms of cost, since Uber would still have to employ human drivers. 

Over time, Tesla’s success would degrade Uber’s competitive position. 

In the market for autonomous vehicles, we may see anything from a highly fragmented market to winner-takes-all. To avoid disruption across the spectrum, Uber must maximize asset utilization over time; i.e. competitors choosing not to plug into Uber’s AV (autonomous vehicle) network must result in treacherous losses–regardless of the market’s structure on the supply side. 

This requires maximizing two variables over time: audience size and frequency. The former represents Uber’s market share while the latter refers to how often customers engage with the Uber network. The more they engage, the higher their asset utilization will be, and the more supply side participants stand to lose by not plugging in. In order to protect itself from a future in which Tesla takes all of the AV market, Uber must saturate the market.

By saturation I refer to Uber customers engaging with the platform so frequently and for such a broad range of essential daily activities (grocery, transportation, traveling and more) that they do not conceive of migrating to an alternative network. In practice, this should take the form of Uber having a cost advantage across a broad spectrum of services and thus counteracting Tesla’s lower cost in (initially) one specific area.

For instance, Tesla may provide lower cost urban trips, but Uber customers would still feel reluctant to let go of their Uber One membership because this would ultimately imply a higher overall cost of living. This would incentivise Tesla to plug their AVs into Uber’s network, spurring further growth by incrementally decreasing the cost of living for its customers across the board.

I suspect that the above dynamic would be analogous to a Netflix-versus-Disney-Plus kind of situation. Since Netflix stock bottomed, we have now learned that profitably operating a streaming operation is not as easy as the market thought in May 2022. Netflix has demonstrated a superior ability to manage the complexities of doing so, and I believe that Uber will do the same for rideshare and transport. Especially so if the autonomy space trends to a more fragment nature. 

Going back to frequency, Uber One members spend 3.4 times more than non members, as they engage in multi-product consumption. Thus, Uber’s number one KPI (key performance indicator), other than MAPC (monthly platform consumers), is what percentage of gross bookings Uber One accounts for. The metric has gone from 30% in Q4 2023 to 50% in Q2 2024. By including more services in the membership, Uber can gradually lower the cost of living for its members as described above. 

In the February 2024 investor update, Uber disclosed that more than a third of monthly consumers were multi-product, as you can see in the graph below. This metric is up from 21% in Q1 2021, demonstrating Uber is capable of increasing frequency over time. However, one third comes up very short of total saturation–as of Q2 2024, penetration is less than 20% in Uber’s top ten countries and half of riders take only one or two trips per month.

In the same period Uber has managed to grow MAPCs considerably. They accomplished this by introducing adjacent mobility verticals, which have enabled Uber to both tap into new audiences and drive further frequency. One example is Moto, which in Q4 2023 accounted for 13% of consumer first trips and 19% of vehicle first trips. The combination of increased frequency and larger audience has yielded a rapidly growing EBITDA–particularly, as seen in the graph below, on the mobility side.

Here’s what CEO Dara Khosrowshahi said about this matter, during the Q2 earnings call: 

John, in terms of mobility frequency, while we’re not going to disclose specifically what frequency looks like, I would say that when we look at lower cost products, when you look at UberX Share, hailables, two-wheelers, three-wheelers, the frequency of some of the newer products is significantly higher than the frequency of, call it the X product, etc. 

When you look at the overall frequency numbers for both mobility and delivery, they’re up on a year-on-year basis.

It is absolutely helped by multi-product usage, it is absolutely helped by membership as well, so whether you look at cohorts, whether you look at new customers, high income, low income, the frequency numbers for us in both mobility and delivery are very, very constructive.

To date Uber has demonstrated an ability to deploy adjacent verticals and thereby drive operating leverage over time. In Q2 2024 management announced that the advertising business is now at a $1B annual run rate. This is interesting because advertising is beyond Uber’s traditional circle of competence, and the business was only launched in October 2022. Advertising thus further demonstrates Uber’s ability to deploy profitable verticals at scale.

While I‘m unable to quantify what saturation looks like, I would at present be comfortable betting on Uber’s ability to drive audience and frequency growth. The ultimate testimony of their ability to drive frequency and bring the revenue to the bottom line is the growing net income and cash from operations, as depicted in the graph below. Both metrics have risen steadily since 2020.

$UBER Net Income (Left Axis) and Cash from Operations (Right Axis), $.

Putting the Tesla versus Uber debate aside, it seems that further audience and frequency growth will be highly accretive to Uber’s financials. In the past few years, Uber has managed to increase ARPU (average revenue per user) while containing costs, as demonstrated by the rising net income and cash from operations. Uber CFO Prasanth Mahendra explained it very clearly in the Q2 earnings call: 

I think a good frame of reference, or an example to help you with that TAM, if the United States was to move to the TAM penetration that we are seeing in the U.K., that’s worth another $13 billion in gross bookings, so call it 8% or so of our current run rate, just by moving the U.S. to the U.K.

I’ll be watching the situation closely going forward because I believe there is a valuable lesson to be learned. The Netflix example I cited earlier elucidated how investors can give up on a company after tremendous returns, only to then see it produce exponentially greater returns once they’ve abandoned ship. Netflix is a company with great vitality as defined by Harrison Moot, and I believe Uber is as well.

Companies of this sort have a remarkable ability to carry on expanding their top line and bring more of it down to the bottom line. Uber has not quite faced a formidable adversary yet and thus the (likely) battle with Tesla will be a great case study in pursuit of improving our ability to identify companies with high vitality.

Until next time!

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