Uber's (UBER) IPO is generating a lot of excitement and equal parts anxiety on Friday, but the real race for long term value appears to be the push to autonomous driving.
Shares of Uber slid quickly off the starting line, well below the already conservative $45 per share expected.
However, the short term move pales in comparison to what the company intends to unlock in the long term, namely through the expectation of a self-driving revolution that would eliminate the debt-laden company's largest cost.
According to Manhattan Venture Partners, 70 cents on each dollar that ride-sharing companies make goes back to the drivers. As such, the current lack of profitability seen in Uber, which has been raised as a major concern among more cautious investors, could be reversed with a single breakthrough.
That is not even to speak of the litigation risk that employing its horde of drivers poses to the company and the tenuous "independent contractor" employment status that drivers have recently challenged.
"If, as a result of legislation or judicial decisions, we are required to classify Drivers as employees we would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws, employee benefits, social security contributions, taxes, and penalties," an S-1 filing acknowledges. "Further, any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition."
The company has not been shy about pursuing this potentially profitable venture, citing the effort as a key investment strategy for the company's future.
"We have made substantial investments to develop new offerings and technologies, including autonomous vehicle technologies, dockless e-bikes and e-scooters, Uber Freight, and Uber Elevate, and we intend to continue investing significant resources in developing new technologies, tools, features, services, products and offerings," the company's S-1 filing states. "We believe that autonomous vehicles will be an important part of our offerings over the long term, and in 2018, we incurred $457 million of research and development expenses for our ATG and Other Technology Programs initiatives. We expect to increase our investments in these new initiatives in the near term."
The investments could be worthwhile given the market for autonomous driving.
For a key comparison, Morgan Stanley recently valued Alphabet's (GOOGL) self-driving effort Waymo at up to $175 billion, over twice the value of Uber upon its IPO.
"Waymo could address roughly 80% of the $3.1 trillion global freight transportation market and evolve into a logistics player for long-haul and last-mile delivery," Morgan Stanley analyst Brian Nowak said earlier this year. This assumption could work in Uber's favor if it can upend Waymo in the race to fully functional autonomous driving.
However, the pumping of capital into the project could put a near term overhang on the stock as the company races with these key competitors, which it readily recognizes.
"While we believe that autonomous vehicles present substantial opportunities, the development of such technology is expensive and time-consuming and may not be successful," the company acknowledged. "Several other companies, including Waymo, [General Motors (GM) ] Cruise Automation, Tesla (TSLA) , Apple (AAPL) , Zoox, Aptiv (APTV) , 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."
The filing cites Waymo as a key competitor, noting that the Alphabet venture has already commercialized a ride hailing service.
"The focus has been to launch the commercial rider program in Phoenix that we've talked about, looking to do that by year-end," Alphabet CFO Ruth Porat said during the company's earnings call in July 2018. "We do view that as a first step in building a more fully rolled out rider program in the future."
If Alphabet can indeed accelerate its program, beating Uber to the punch would spell big upside for Alphabet and big downside for Uber, as former CEO Travis Kalanick said that the race to self-driving is essentially an existential issue.
"'Look, this is the way the world is going,'" he told the audience at the 2014 Code Conference. "If Uber doesn't go there, it's not going to exist either way."
As such, if you're betting on Uber as a long term investment, you're essentially making a bet on self-driving. You have to believe they can be first.
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