TIP741: The Intrinsic Value of Uber & Reddit w/ Shawn O'Malley

24:48That is very prime real estate. Except with Reddit, you can do that for a virtual convention of people that's convening daily across thousands of different types of community interests. And so almost anything you can imagine, there's a subreddit that exists for it. And it's probably a fairly active community too. And as a longtime user of the platform, I know that for a very long time, I would look at Reddit and I just couldn't understand how they make money. I wasn't seeing any ads or anything like that. I mean, up until a few years ago, there were never ads and they hardly ever seemed relevant.

25:19But just anecdotally, since they IPO'd, I've seen a dramatic improvement in how the ads are placed, the quality of the advertisers, the frequency of the ads, and all that goes toward better monetizing the company's potential earnings power. So when they say they're investing hundreds of millions of dollars into their technical advertising infrastructure, I feel like I can see that. And now the company is at this inflection point where the company has had its first full year of profitability, and the business is only accelerating by all measures. And that just makes me very excited. And now the stock has doubled since Daniel and I first bought it.

25:54And who knows where it goes from here. It is such a volatile stock, as you alluded to, Clay, but it was one of those things that was very obvious to me. I didn't really need to build a model, even though I did, because I just knew a company with 100 million plus users with such incredibly valuable advertising real estate that is now also profitable for the first time, and revenues are exploding and user growth is up and to the right. How could this thing not be worth more than$13 billion. So that's the market cap it was at when I first looked at the company seriously, which for context, Snapchat at that time had around the same market value.

26:30And that seemed absurd to me because Snapchat has never been profitable. It's not growing as fast. And it's a platform that's just structurally harder to show ads on. So in my opinion, intuitively, I just knew the stock should be worth much more than Snapchat. And so I kind viewed Snapchat as my worst case peer comp. And if things go worse than I expect, I felt like my downside was relatively capped because again, I could look at what the market was willing to pay for Snap over time relative to Reddit. And there wasn't a huge difference, despite the fact that I think Reddit was a dramatically better business.

27:04Reddit has compounded revenue at almost 40 % a year over the last three years, and its operating profit margin hit 12 % in Q4 2024, which would have been even higher if not for some of the effects of the stock-based comp that's still lingering out there from their IPO. And so for the record, that was a swing of 47 percentage points for them from the negative 35 % operating margins they had just two or three years ago. So the operating leverage here is just absolutely ridiculous as the business continues to scale up. I suspect margins probably have plenty of room to rise still too, because advertising tends to be a very high margin business.

27:42So I'm embarrassed to say that I did have the chance to participate in Reddit's IPO at$34 per share. And I think Clay remembers this because I messaged him about it at the time. And the company, what they had done was essentially they reserved a portion of the IPO for longtime users of the platform to participate in. And I thought that was great because I would never otherwise have the chance to participate directly in an IPO before since I'm not some institutional investor. But I didn't really feel like I knew anything about the company. At the time, I didn't have time to really dig into it that much.

28:11So I just sold it on day one when the shares bounced. And I had this bias against Reddit because I didn't think they could scale to be profitable. And I didn't really have the time to seriously vet the opportunity. So it was a gamble that was kind of just for fun. And then ironically, nine months later, I was back again, evaluating the stock at a three times higher price. But I actually found the opportunity at that point to be more compelling because they had showed in that time that they could, in fact, scale profitably. And when you think, wow, okay, they're not burning cash anymore. it's a lot easier to get excited about the growth prospects.

28:41So in a relatively short period of time, it was a dramatic turnaround. Robert Leonard Yeah, you guys have laid out the case really well on Reddit. And just for context, their most recent earnings report, they reported daily active users of 108 million users, and that's grown 31 % year over year. So not only have they figured out how to reach profitability, but they've done this in the midst of the user base continuing to grow very rapidly. And I was trying to find their monthly active user numbers because daily, of course, not every user is going to look daily, but they're estimated to have north of 1 billion monthly active users.

29:18That puts them up in the ranks of close to the metas of the world, which is just very, very impressive in my view. And market cap's around 26 billion. Meta is like a trillion dollar company, so significantly smaller than Meta. You mentioned the IPO. They IPO'd in March of 2024. And I'm always a little bit skeptical of IPOs because the insiders probably know when's the best time to sell and raise capital. And at that time, they typically want to make the business look as good as possible. But Reddit, it's been like the opposite case. I think it was 2022, 2023, their user growth wasn't really moving that much.

29:55But in the past couple of years, it's just taken off after they went public. So the share has opened at around$46 a share at the IPO. And here today, the stock's moving like crazy every week. It feels like the time of recording, we're at around$142 a share. And every business metric you look at is heading in the right direction. So despite the numbers looking so good, to play a little bit of devil's advocate, I've always thought that the ads were a bit hit and miss, at least not as good as what you'd see on Meta, for example. I think this is an area of improvement for them. And in preparation for this, I was just scrolling some random subreddits this morning.

30:34And I saw that Toyota, Monday.com and Bluehost are all running ads. And that tells me that these big brands that are spending on all sorts of advertising avenues, they're taking this platform seriously, or at least testing it out since Reddit's in the earlier stages of their monetization. And those companies I mentioned are all companies that are in the podcast advertising space as well. And oftentimes with advertisers, there's a lot of them that just want brand recognition. They aren't necessarily looking for conversions today, so they don't need to get an amazing bang for their buck advertising on Reddit.

31:07They just want exposure and Reddit can certainly serve them that. Yeah. And I was also just a bit surprised by just how many ads you'll come across nowadays scrolling through subreddits. You might see four posts or so and then see an ad see four more posts and see an ad. So they're definitely pulling that lever more than they did in past years. And if I put myself in the shoes of an advertiser, I'm spending dollars wherever I'm going to get a good return. So if Meta and Alphabet have the best models and the best data on users, then odds are they're going to get a good chunk of the digital advertising pie.

31:39Also in preparation for this, I actually looked on Reddit to see what people's feedback was for advertising on Reddit. And it was actually, I saw a number of negative reviews. Don't waste your money, stick to Google and Meta. Yeah. So that was interesting in itself. But Reddit can also be a bit of its own silo, a bit of its own echo chamber where you hear this one thing that might not be closely reflective of the truth necessarily. So talk a bit about your thoughts on the quality of their ads and their ability to capitalize on this massive digital advertising market. It's a big TAM, but also Meta and Google are really tough comps.

32:17So I'll be the first to say Reddit has a long way to go before it's seriously competing with those guys. But then on the other hand, these are trillion dollar, multi-trillion dollar companies, whereas the current market cap for Reddit is$20,$25 billion. So I don't think you have to believe that Reddit is going to be a superior advertising destination to Facebook or Instagram to believe that Reddit has plenty of room for growth. And for example, Meta's average revenue per active user is about four times Reddit. And I don't think Reddit will ever match Meta's ARPU because Meta is way bigger and has way more data.

32:51But could Reddit go from a fourth of Meta's ARPU to a third or maybe half while also continuing to just grow its user base at double digit rates? And so that's really the bull thesis being that A, Reddit has historically been under monetized and that this is just beginning to meaningfully change at this inflection point. And then B, the platform is continuing to grow quickly. So it's not just as concentrated in the US as it used to be. So there's been a ton of room for them to grow internationally. And they've had a lot of early success with that too. They're focused on France, Brazil, and Spain right now.

33:25And their growth rates in those three countries are twice that of their total growth rate outside of the US, which is also a very high number. And so part of what they've done is using machine learning to make all of the content on Reddit, which has historically mostly been in English, translatable into, I think, currently 13 different languages at this point and more are coming. So now you have this huge body of human interaction, book recommendations, career advice, financial advice, relationship advice, political debates, restaurant recommendations in a specific area, cooking tips, and all that kind of stuff.

33:58And that entire archive is increasingly accessible to the entire world and the rest of the world who doesn't speak English, which I think will move the needle a lot in making Reddit an international platform. Language will hopefully be less of a barrier than it has ever been. And that unlocks a whole new world of insight for people. So for example, I could now go into a Spanish speaking subreddit and read advice for how to make empanadas like someone's grandmother in Peru, maybe. And that community insight would have otherwise just been totally unavailable to me. And again, the results speak for themselves.

34:31Last quarter, year over year, Reddit's international user base grew 40%. So go back to your original question. I think the quality is getting better every day. And I think Reddit will increasingly compete with Google and Meta on the margins. The question isn't so much, will advertisers move their entire$10 million campaign to Reddit from Meta? But if they're already running a$10 million campaign across Meta, and they have an incremental million dollars allocate at the end of the quarter, will they decide to pour more of that back into meta? Or will they allocate maybe a growing chunk of that incremental money to Reddit as targeting on the platform gets better?

35:08And it's just literally more people use Reddit, giving them more impressions to bid on. And I see the latter as being very plausible. I don't think you have to even really take my word for it either. If you just look at Reddit's financials, they speak for themselves. For them to be growing the way that they are, it just clearly seems to show that this is what's happening. No one probably entirely relies on Reddit solely for their advertising budget. I doubt any marketing agencies do that, as they might in the same way with Meta or Google. But clearly, they're taking Reddit more and more seriously over time.

35:38And actually, there was this news recently that Reddit's AI licensing efforts are now paying dividends too for the company. Apparently, for anyone who knows about AI overviews on Google, you'll recognize that Google has been relying very heavily on these comment threads on Reddit. And as such, part of what has sent the stock up recently is this idea that advertisers will realize that by advertising on Reddit, they can shape the conversations there, which through AI data licensing and training will ripple back to shape the answers that people get from Google search and chat GBT. And again, anecdotally, I see this myself all the time.

36:15Every day I get answers from AI tools that cite Reddit comments as their sources for better or worse, because Reddit is home to some of the most authentic conversations anywhere on the internet. So as chatbots try to give people human-grade advice, I don't think there's a better place for them to do that than by referencing Reddit. And that's just one illustration of many as to why I see Reddit's platform as being so valuable with so much room left to grow and to further monetize it on a per-user level. But I should say that I think Reddit could be a somewhat speculative bet for many people. it is a higher risk stock pick in the sense that Reddit doesn't have some long established track record of profitability or dividends.

36:53This is not a utility company. It's an opportunity where I can envision a dramatic amount of upside if the Reddit story continues to unfold as it has, and as I think it can. But yeah, it's just fundamentally more speculative in terms of there being a wider range of plausible outcomes that could occur going forward. And so if you envision a Monte Carlo simulation, where you simulate a thousand different versions of reality to see what could happen with a potential investment, the distance from the top and the bottom of that range is going to be much, much wider for Reddit than what you might get from buying a more mature business.

37:30And that alone isn't necessarily a good or bad thing. It's just the reality of investing. And so this is actually how I think about every investment that we cover on the show, because no one knows what the future holds for certain. So we have to kind of think through a range of outcomes. And we can use price as a tool to tilt the range of outcomes in our favor. And on top of that, we can use position sizing to further reduce risk in investments where the uncertainty still remains very high at even an attractive price. And so there's a lot of uncertainty about Reddit's future. And because my co-host Daniel is actually a bit less familiar with personally using Reddit than I am, he couldn't get as comfortable with it.

38:08So we decided to go with a smaller relative allocation in our intrinsic value portfolio. And that's just the balance of building a joint portfolio. In contrast to Daniel, I probably have a uniquely high amount of conviction in Reddit after having used it for more than a decade, because I can just intuitively appreciate what they do well, why people like the platform, and how much more room there is to continue better monetizing it. What's really interesting to me about Reddit is it's like this just massive database of information that oftentimes just can't be found elsewhere. So I mentioned earlier that I'm a user.

38:45Earlier this year, I got golf lessons, for example. How did I find my golf instructor? I didn't look on Google. I went to Reddit. Yeah, I think there's just a lot of valuable information out there that Reddit is going to be able to capitalize on. And like I mentioned, it could also be an AI play, the ties to Sam Altman and all the data that they have. It'll be interesting to watch the Reddit story continue to play out. So today, advertising makes up around 90 % of Reddit's business. Do you think there's other levers they're going to be able to pull? Are there any that show promise as a potential revenue source for them going forward?

39:20Advertising is definitely the core of the thesis here. I suspect they can continue to license data to AI companies for probably many years to come, but I don't want to necessarily bank on that either as part of my investment decision. So, I mean, things can just change so quickly in the world of AI. And so to lean on that too heavily is your investment thesis. That just doesn't feel sustainable to me, but it is sort of like a cherry on top with this business. And what I did find interesting is kind of a testament to the value of Reddit's data. They signed a deal with Intercontinental Exchange to license their data to them.

39:53And that makes sense given how this whole Wall Street bets drama has unfolded and how they were able to move markets with this retail revolution in GameStop and AMC. I mean, there's literal Netflix documentaries about it now. So it's not just AI firms, but also financial firms that are interested in accessing real-time sentiment data on what stocks are being discussed the most and how retail traders are perceiving them so that they can actually try and predict and get ahead of trading inflows from retail. And so it's just another great illustration of how when you have millions of people gathered in one place with a shared interest in a topic, so like stock trading, there's just so many different ways you can monetize that.

40:36And not only is that valuable to advertisers, but it might also be valuable to financial data providers who then build tools and products based around tracking trends amongst retail investors. And Reddit is, again, uniquely positioned to capitalize on that since it owns all of that post data. And the other thing I'll mention that I have way less conviction in, but I think it's still kind of fun to talk about, is this idea that they can create commerce exchanges directly inside of Reddit. So sort of like integrating eBay into Reddit is how I would imagine it. So it was an interesting idea that I actually saw kind of funny enough from reading through a subreddit post about the company's earnings.

41:12And the idea is to monetize commerce that occurs within subreddits. For instance, there's a really popular community on Reddit called WatchExchange, but people have to leave the app to settle transactions on Venmo or PayPal. And if Reddit could create a marketplace for these transactions and charge them payment processing fees, that would be a great way for them to monetize Reddit's ecosystem beyond advertising. But it's not their core focus at this time. In an Ask Me Anything session on Reddit's investor relations subreddit, CEO Steve Huffman actually answered this exact question and alluded to the fact that this is why they've allowed users to access the company's developer platform historically, so they can contribute to building out these types of features within their communities.

41:59And he did also say that they're working on enabling paid subreddits, where you create paywalled content within Reddit. So it sounds like that could be on the way within the next year or so. And I'm sure Reddit would have a take rate on those earnings. And for that potentially paywalled content, there's just a lot on Reddit that could probably fit into that kind of category. So whether it's from paid groups for accessing more content from your favorite content creators to premium job boards, or maybe even groups who are having some sort of office hours with experts where you get direct insights from doctors or lawyers or consultants, anything like that.

42:33And I can't believe we've gone this far into the conversation about Reddit without me actually mentioning this. And so I should say, the other most compelling part of Reddit from an investment perspective is that every subreddit is managed by a group of moderators. So they have, I think there's something like 40 ,000 moderators that keep Reddit going. They set the rules of engagement for the communities, they filter out content. And so just structurally, I think that gives them a huge advantage in their operating margin potential because where meta and Google, you're paying for building the technical infrastructure to filter out a lot of content.

43:10And Reddit has an army of people that work for free because they're so passionate about the communities that they're involved in who do all that work for them. So that is, again, kind of another tailwind that structurally supports the profitability of the business and why I think that long-term they could be as profitable or more profitable than some of these other big tech company peers that you look at. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast.

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47:03I recall I was out on a walk listening to your episode and you and Daniel were talking about how even the users in the Reddit communities can even have pushback against them. So if Reddit, if they abuse their ads and their monetization, then they could have a lot of these moderators and users turn against them. So they certainly have a balancing act they're going against here. So let's turn here to another one, which I was also initially a little bit skeptical of, and this is Uber. Buffett shared the wise words of avoiding industries that are going through a massive change. And if there's any industry I felt like is going to go through a lot of change in the next decade, it's going to be ride sharing with the rise of autonomous vehicles, otherwise known as AVs.

47:44Bill Ackman has also been very public about his recent$2 billion investment in Uber. He referred to Uber as one of the best managed and highest quality businesses in the world. So today, Uber has a 75 % share in the ride hailing market here in the US, while Lyft has the remaining 25%. And of course, Uber is a global player. It's a key part of their thesis, the investment thesis there. We can just leave it to Ackman to making these very big, bold bets and being very public about them. So you and Daniel also decided to hop along for the Uber ride and making it a position in the portfolio. What do you think attracted Ackman to the stock?

48:24Well, I hate to go get any advice from Buffett about avoiding industries facing disruption. But the thing with Uber, which I think probably caught Ackman's attention, is that the market has so clearly soured on what is, at least at the moment, an incredible and rapidly improving business. For so long, people thought Uber's business model could never work. And over the last year or so, kind of like Reddit, everything has just finally clicked into gear and validated all those investors who advocated for the company for years. And no one could argue that Uber now isn't a profitable company, and that profitability is only likely to continue growing.

49:02So you would think that the market should be celebrating Uber's successes right now. But when the market looks to the future, as you pointed out, it sees a lot to be worried about. Uber is kind of the prime candidate to be the next blockbuster in a lot of people's minds. And that's the only way I can explain how a company that has grown revenues by 28 % per year for the last five years, while almost tripling its operating margins in just the last year and a half, while also being expected to continue to grow its top line at double-digit rates for years to come, how it can trade at just 18 times expected free cash flows.

49:35That does not make any sense to me. And especially in 2025, when you have people happily paying 100 times sales for a company like Palantir, where no one even actually really knows what they actually do. And so I'm being maybe a little misleading with the valuation because Uber's free cash flow is a bit inflated by the fact that they do a lot of stock-based comp. So if you account for that dilution, the free cash flow number is a little bit lower, but still, this is the world's biggest ride-hailing company with a major food delivery business in Uber Eats that has dramatically swung toward profitability as the business has scaled.

50:07And now they're continuing to find ways to make that business better at every turn. And Uber One is their membership program that leverages both eats and rides. It gives people discounts and credits that basically encourage them to either use ride hailing more often or food delivery more often and vice versa. And it turns out that cross-selling to your existing customers via a low-cost membership program is a much more effective way to get people who use one service but not the other frequently to adopt both. And it's much cheaper than trying to add new users cold with paid marketing. So this cross-selling potential and the growth prospects globally, it just gives me a lot to love about the current business, where if you didn't have this autonomous vehicle stuff kind of lingering over it, I would say with certainty that the stock should be trading much, much higher than it is.

50:56And Ackman is, I think, making a bold bet that self-driving vehicles won't be the disruption the market thinks it is, or at least it'll be a disruption that ends up being more neutral for Uber or actually maybe even boosts Uber's business, which might come as a surprise for some people to hear me say that. Yeah, let's actually get into that. Uber is, of course, the dominant business globally in ride hailing, but most people are questioning what is going to happen with the rise of autonomous vehicles. You and I were just in Austin recently, and everywhere you look, there are Waymos driving around with no one in the driver's seat.

51:34So instead of developing their own autonomous vehicle segment, Uber decided to partner with several autonomous vehicle providers, companies like Waymo and others. So I think a lot of people are looking at this and they're saying Uber has a 25 % take rate, Waymo and others are going to be eating their lunch, wanting to tap into that. So what do you think is stopping companies like Waymo, Tesla, and others from creating their own ride-sharing app and just bypassing Uber in their high take rate? So the first time I listened to Uber CEO talk about how excited he was for the autonomous vehicle revolution.

52:12I couldn't believe at all what I was hearing. I was like, give me a break. Tesla and Waymo are coming for Uber and everyone knows it, or at least that's what I thought at the time. And for the record, I came into my original research on Uber, kind of like Reddit, being very, very pessimistic. I had this strong bias against Uber, just thinking that historically it was a terrible business that was now going to be irrelevant in a few years. But then as I thought about it some more, something just clicked for me. There was an aha moment for me where I realized, okay, wait, maybe this isn't total nonsense from a management team that, given their track record of success that has become clear in the last few years, maybe does deserve to be taken more seriously.

52:49And for me, it was syncing through the logistics of an AV company actually building a network effect like Uber's that really sold me on Uber. The amazing thing about Uber and why it works is that supply is so flexible. And for context, demand for ride hailing is not linear. It peaks at the beginning of the workday and at the end of the workday. There are a lot of people who use Uber to get to work, and then also around big events like concerts and sporting events. And so with Uber, drivers can just go about living their normal lives. And if they see a surge in Uber demand, they can just go online and alleviate that surge by immediately starting to pick up riders.

53:24And so it's an incredibly reflexive demand response function they have built into their platform. And so to me, that's the competitive advantage of having millions of drivers all around the world who are ready to jump online as needed. Pretty much wherever you are, it's going to be cheaper and faster to take an Uber probably over the competition in ride hailing. And the Waymos of the world can never match that because where Uber has this asset light variable cost model where drivers only get paid when they're online and Uber doesn't actually own driver's vehicles on their balance sheet, Waymo instead is, well, it's a car technology company first and foremost.

53:59And also, it's just really capital and efficient for them to try and recreate Uber's flexible network themselves. And so like I mentioned, ride hailing demand can jump by an order of magnitude suddenly. So if you're Waymo and you're trying to displace Uber, your service needs to be faster, more reliable, and much cheaper. But to do that, you need to have enough self-driving vehicles stationed in a city at all times to meet surges in demand, essentially. And otherwise, in a Waymo-only ride-hailing world, when you need a ride the most, prices might surge even more than on Uber because the company can't possibly pay to have enough vehicles to meet peak demand in every city around the world they compete in at all times.

54:39And so that is the dilemma in a nutshell. If you have this fixed asset base in a vehicle fleet, how do you square that circle with these huge spikes in demand for rides that occur throughout the day and the week. And so on average, you'd probably have 90 % too many vehicles for a given city that are just sitting idly by, burning cash for times between the peaks during the day, or you wouldn't have anywhere close to enough vehicles to actually meet peak demand if you went with a smaller fleet, meaning your service would end up being more expensive and less reliable than just using Uber, especially at the times you need it most.

55:13And this is why Uber's management, and I'm sure Bill Ackman, actually sees autonomous vehicles as a massive opportunity for Uber. It's far likelier, in my opinion, that Waymo decides that it is, after all, a self-driving car company. And there is enough competition to worry about there before trying to also take on Uber as the world's biggest two-sided ride-hailing marketplace, which is what Uber is solely focused on being the best at. And as we've seen, Waymo would rather just plug its fleet into Uber's app such that you can order a Waymo through Uber. And the metaphor I like to use is to compare it to an energy grid.

55:52Instead of Waymo trying to be a baseload power source for the entire grid, I see them as being more like a renewable energy source. That sort of rounds out the grid on the margins as the wind and the sun fluctuate. And that ends up being a win-win because Uber gets more supply on its network and doesn't have to pay drivers and Waymos, which are its biggest expense by far. And Waymo gets access to the tens of millions of riders who trust Uber and are used to using it without trying to build its own network effect entirely from scratch. And that helps them monetize their operations as really what they're most focused on doing is collecting driving data to better optimize their systems.

56:29And so they're trying to minimize losses until this technology can really become scalable and commercially viable. And Uber can help them with that. And even down the line, I think Uber has more power than people give it credit for to avoid being displaced by Waymo or Tesla for that matter, which I don't know how you feel about it. But to me, it seems like they're lagging pretty far behind Waymo in terms of AV technology. And so I'm sure people are thinking, okay, but maybe as an alternative, what if Tesla owners can sign up their vehicles to be robo-taxis when they're not using them? This was a point you made to me offline, Clay.

57:04And that might be a solution that blends the Waymo approach with what makes the Uber network so special and having flexible supply. And again, I would like to see Tesla first actually build a self-driving car that's viable nationwide before I start to worry about them displacing Uber's massive network at scale. And we've seen with Uber that people are willing to drive strangers around in their car while they're in it. But the question is, are people willing to send their cars off as robo-taxis to drive strangers around without them being there to supervise? I'm not so sure about that. What if you need to run an unexpected errand or there's an emergency, but your Tesla is on the other side of town taxing people?

57:46There's just a lot of practical questions that need to be answered before I get really worried about that as a legitimate alternative to Uber. And so the reality is that there are just only so many Tesla vehicle owners anyways. I mean, the set of potential Tesla robo-taxis is very limited. And even if every Tesla owner wanted to use their car as a robo-taxi, how could that possibly compete with the tens of millions of drivers that Uber has on its network who drive all types of cars, including Waymos? So a ride-hailing network is defined by how quickly users can hail a ride and at what price and how long the wait times are.

58:21And so there just needs to be a lot of supply to keep the costs low and the wait times low. You need many drivers and robo-taxis. And I can't imagine a world where there are enough Teslas out there, even combined with Waymo, to meaningfully displace Uber's much more established, much more robust and diverse network. And so I'll be the first to say though, that you never want to be too confident about how these things will unfold. This is an industry that's objectively facing major changes. And so my current thinking is that the market sees self-driving vehicles as this existential threat to Uber, well, I actually see an opportunity for them to improve their business, which is how I get excited about Uber.

58:59But it's a company I have to watch closely. This is not something I'm just going to buy and hold and totally forget about. I need to monitor that my understanding of what's most likely to occur actually aligns with what continues to happen on the ground. And if I had reason to believe that Uber at some point was actually significantly losing market share to Waymo or Tesla in ride hailing, then I would have to reassess the entire investment. And maybe the last thing I'll mention here is that protecting your downside to some extent, assuming I'm totally wrong about how AVs will impact Uber, is the fact that roughly half the business comes from Uber Eats and food delivery.

59:34And I suspect it'll be much, much longer before humans are fully removed from the food delivery process unless we suddenly have millions of drones flying around the country, picking up and delivering all of our orders. So maybe that'll happen someday, but I'm not holding my breath. Yeah, it just goes to show how powerful it can be to have the platform that people are accustomed to using. Perhaps Waymo and Tesla are able to capture some share on the margins. The other thing that's just interesting to think about is just sometimes perception is everything. If people perceive that a business is about to be disrupted, then a stock can almost be inherently undervalued for quite a long time.

1:00:11Even Tesla, for example, people just assumed that Elon was going to be able to do whatever he wanted with this business, which led to it being, we can call it overvalued for so long, just the perception the market had for so long. And what also really surprised me about Uber is this is an advertising business and it could be a potential huge profit driver for them going forward. So their current advertising run rates around$1.5 billion a year. and that's up 60 % year over year. It's just insane. Who even talks about Uber running ads? It's not something I've personally seen as someone who just uses the ride hailing service.

1:00:50And there are a few ways that they do deliver ads. The first is restaurants or businesses paying to appear at the top of the search results for Uber Eats. And then they also have a homepage banner ads on Uber Eats. And then you have in-ride ads while you're in an Uber. So let's say you're in an Uber in New York City, and you're about to get dropped off in Midtown, then a local restaurant might want to showcase a special that they're running for the weekend. Or maybe a local comedy club might advertise the shows that they have that evening. So it just goes to show that Uber is yet another example of the value that these tech businesses can have at scale, where they have all this data that they can then monetize for advertisers.

1:01:34Daniel and I have this joke that every consumer-facing tech company is ultimately an advertising business. And once again, Uber is kind of proving that. With Uber's advertising, I kind of think it's like Reddit earlier. You just don't need to overthink things. You don't need to have a warden MBA to see that, yeah, this makes sense. This is a really great opportunity because just intuitively, I know two things to be true. First is that Uber is clearly just the beginning of building its ad business. You can just see that in the numbers. And secondly, this ad business is very powerful because it's incredibly valuable to know where people are and where they're going in real time.

1:02:07And so the examples you use, I think, perfectly illustrate why advertisers might want to tap into Uber's network to reach riders while they're on their way to a certain destination. And that situational and that geographical data is clearly very valuable and under monetized. And on the Uber Eats side of things, which is also scaling its advertising business, there is sort of a self-reinforcing effect on the supply side that spins Uber's flywheel. And so for example, if you're a sandwich restaurant in town and your competition starts running ads to rank first on Uber Eats searches, that's going to draw you to probably start running your own ads on Uber Eats to protect your market share.

1:02:48And now you can extrapolate that game theory across tens of thousands of restaurants across the country and really across the world. And once the cat is out of the bag and you have a certain scale, which Uber Eats has, it just becomes inevitable to an extent that demand and supply will keep compounding themselves. More restaurants and Uber Eats makes the service more useful to customers, drawing in more users, which draws in more restaurants, which eventually leads to more restaurants competing for those users by directly paying Uber for promotions with advertising. And that is what we're now finally starting to see happen, which is where the earnings power of the business kicks fully into effect.

1:03:25So we could linger on all the numbers that are showing this happening, but But if you just think through the second and third order effects of having a network like Uber's that's still growing, I think you can better appreciate what a moat, a strong network effect really is. And I should also say that ad revenues are very high margin. It's not like with Uber rides where for every incremental ride, you're paying a driver. Advertising is one of the most scalable business models there is with the best incremental margins. And so as advertising plays a bigger part in Uber's story, not only will that be a tailwind for the top line, it'll also support higher profit margins for Uber, where they're converting more of their sales to the bottom line over time.

1:04:08Yeah, there's certainly a strong case that Uber is well-positioned to continue to grow for many years ahead. We haven't gotten too much into the Uber Eats segment, but that certainly can't be ignored either as that generates$14 billion in revenue and also rapidly growing. I think Uber is widely known for the ride hailing service, but Uber Eats is also a significant business segment for them. And you briefly mentioned the valuation earlier, and since your show's called the Intrinsic Value Podcast, I feel like we'd be doing a disservice to at least talk about the valuation of one of these companies here.

1:04:41So we're looking at a company, an Uber, with an enterprise value of around$200 billion, dollars, around$8 billion in free cash flow. And a stock-based comp is something we'll certainly need to consider with a name like this. And just a few years ago, this company was free cash flow negative. So we're just seeing them experience this tremendous operating leverage as they reach scale. And I can't help but think about how certain stocks just attract a certain cohort of shareholders. So when a company inflects on profitability and they've proven that that profitability is durable, you could see some significant upside for the stock.

1:05:18And I think that's what we're seeing right now with Uber with the share price appreciation this year. Talk about how you think about Uber's valuation, given that they just recently inflected to profitability. It's not an easy one to think through because like you said, the financial picture has changed really dramatically in the last few years. This is not a Procter & Gamble where you can look at 30 years of steady earnings growth and pretty reasonably extrapolate that in the future. And partly, I think that's because they weren't exercising their full earnings power for a long time. They knew people would pay higher prices for food delivery or for Uber rides.

1:05:55They knew that those services were worth more, but they intentionally did not charge them as much as they could so they could get as many people as possible hooked on using their services before eventually raising prices later. And now we're at that later point. And so some people have probably noticed that it's a lot more expensive to take an Uber now than it was like three years ago. And so for a long time, Uber was maniacally focused on gaining market share and reshaping customer behavior to get people to do things they've never done before, like maybe order a ride in a stranger's vehicle through a ride-hailing service or pay for food and grocery delivery.

1:06:32And these are things that now seem ubiquitous, especially post-pandemic. But a decade ago and even before the pandemic, it just was not nearly as common. So Uber used low prices to show people how life-changingly convenient their services are, such that people would want to keep wanting to order Ubers after a night out or get Taco Bell delivered on a Saturday night, even after Uber has raised prices. And so that's kind of a long tangent to go on before speaking to intrinsic value, but I say it all because we have to think about the company's actual earnings power, not how much money they're earning today, but if they were focused on maximizing profits as a mature business, how high could prices be?

1:07:17And therefore, how much could they actually be earning? And so the intrinsic value of a company isn't just looking at some multiple of its current earnings, but it's really about understanding where the business is in its lifecycle, like with Reddit, which is why you can't just look at their previous numbers and take them for granted. And you have to really know what the company's goals are so you can assess what the true earnings power is. And so, for example, with Uber, at different points, you might ask, are they focused on taking market share now or are they more focused on maximizing profits?

1:07:45And I would argue that Uber has spent the last 15 years painstakingly building its earnings power across nearly 200 million monthly active users. And really just in the last two years or so, it has been beginning to more aggressively focus on monetizing just some of that untapped earnings power, charging customers higher prices that they're still willing to pay, and then driving people to Uber One subscriptions, which is a more recurring form of revenue for them. And so this higher pricing strategy may come at the expense of adding some new users. So there is a balance here, but I think they've reached a size where it just starts to makes sense to focus more on profitability.

1:08:23And so with that backdrop, where Uber is not only still growing its user base at very fast rates and actually increasing the lifetime value of existing customers who tend to use Uber services more and more over time, I start to feel pretty confident that there's a lot of room for them to be a great compounder of earnings for many years to come. To say nothing of the fact that I think robo taxis will actually plug into their network and make Uber's network even more robust while removing driver costs in the margins. Like I said, driver costs and insurance on vehicles are Uber's two biggest variable costs.

1:08:57And actually what we've seen with Waymo is people are willing to pay a premium to ride in a Waymo for sort of the novelty of it. So there's almost no incremental costs and then also higher top line sales. So it's just easy to get very excited about what autonomous vehicles can actually do for Uber. And yet, this is a company that was trading at about 40 times last year's operating income when I first started looking at it. And to some of the true value investors out there, that might not sound cheap. But as I said, those earnings, I don't believe reflect their true earnings power in full. Plus, I think the core business can continue to grow at 10 % or more for years to come, while advertising helps make the business model much more profitable over time too.

1:09:44So I actually think the business can keep growing quite fast while operating profit margins roughly double from 2024 to 2029, better reflecting Uber's true earnings power in about five years. And actually, some analysts think Uber can be even more profitable. And so anyways, that leads me to what I deem a reasonable base case estimate of Uber's operating profit per share in about five years, which is typically my minimum target holding period for Daniel and I in our portfolio. And then I tried to think through a range of exit multiples to multiply that operating profit per share number by, assuming I wanted to sell out at that time, which I may or may not actually do.

1:10:23And as I mentioned, the stock trades between 40 and 50 times operating earnings today, but that's because the market is anticipating continued growth. If I'm thinking of an exit multiple five years from now, I have to think about what the market might pay for a more mature version of Uber. And so that's probably not going to be 50 times earnings. I actually like to typically use a weighted average range of exit multiples, where at the bottom, I think through maybe a worst case scenario, and I say, okay, perhaps there's a 5 % chance that a high quality company like Uber is trading at 18 times operating profits, which would actually be at a discount to the broader market averages currently that traded around a multiple of 22.

1:11:01So things would have to go pretty wrong for that to happen. And on the top end of what I would consider a reasonable range of multiples for them, there's a decent chance too that the market will continue to be optimistic about Uber and in a few years, maybe be willing to pay as much as 30 times operating. There's some multiple in between 18 and 30. So 18 to 30 times operating profits was the range I settled on as being conservative, but realistic for Uber closer to maturity. And either way, I'm assuming a pretty dramatic contraction in the valuation multiple, reflecting that Uber's growth will decelerate over time.

1:11:37And I really just do it as an exercise to help me better think through how the market should value a more mature version of this business. And that usually involves me looking at peer comps, so seeing what the market is willing to pay for other big tech companies over time, then trying to figure out where Uber maps onto that peer set. And so it's not a better business than Meta in terms of margins and capital intensity. So expecting Uber to have a premium to meta long-term is not going to be realistic. But I do think Uber will prove that it deserves a premium over the median S &P 500 stock. So I don't think you can intricately model out and discount a company's lifetime of future cash flows over 30 plus years with any meaningful accuracy.

1:12:20So I don't waste my time doing it extensively. But you might be able to approximate what operating earnings can look like in just a few years and go through a couple of different scenarios and then think through a reasonable multiple range for the business at that time to help you gauge whether the stock is attractively valued at the moment and what the range of return outcomes could be for you at various entry prices. And obviously, you're not doing a model in a vacuum. If qualitatively, I don't like management and I can't wrap my head around the competitive advantages, or I just don't like the prospects of the industry, I'm just going to rule out the company altogether and not kill time trying to model it out.

1:12:58The modeling is there to help me with my long-term conviction by grounding my reasoning into numbers that give me some context for what may be a good entry price and how much upside or downside I could reasonably expect. But that's really all I use it for. And so for me, I think Uber's value starts to look very enticing at or below about$70 per share, which is where Daniel and I built up a position in the stock back in April. And at north of$90 per share, where it's trading at the time of recording, the odds feel less tilted in a long-term investor's favor, but it's such a volatile stock that I'm sure it'll swing down again at some point and maybe we'll get a chance to snap shares closer to that range.

1:13:37And if I hadn't done that very basic modeling work that we'd like to do with every company, I don't think I would have the same confidence in determining approximately where Uber starts to look attractively priced. Yeah. Uber and Reddit are both very volatile stocks and definitely an interesting company to think through. There's a few points that you and Daniel touched on on your episode that I think are quite interesting. A couple I'll briefly mention here. With many of these tech businesses, they're making more money in the US than they are internationally. So like Meta, they're going to have more spend from in the US, for example, than the advertising they're running in emerging markets, for example.

1:14:17But Uber is in a unique position where insurance is less internationally and they have to pay drivers less internationally. So the international can actually be a segment that is actually more profitable. And then they're also in a really strong position comparatively to Lyft. And I think they're run much better operationally. So if anyone wants to learn more about Uber or Reddit, I would point them to the Intrinsic Value Podcast. You can find it on any of your podcasting apps. And Sean, I really appreciate you joining me here today. Before I let you go, I wanted to give you a chance just to talk more about the show and anything else you'd like to discuss here.

1:14:53Yeah, it's been a ton of fun. Thanks for having me, Clay. Yeah, the idea for our show is straightforward. Every week, we cover in depth a different company like we did today with a couple different names. But basically, Daniel and I alternate pitching each other on the best idea we have at that time. One week, I'm making the pitcher a stock, and then the next week, it's going to be Daniel. And then throughout the episode, like we did today, talk about the economics of the business, their balance sheet, what the competition looks like, what sort of advantages they have, et cetera. And at the end, we try to estimate a reasonable intrinsic value target price to purchase a stock at, where we feel we're getting shares at an attractive discount to their fair value.

1:15:31And if the stock is attractively priced and we like the idea of owning it qualitatively, then we may add it to the shared portfolio that him and I are building over time, the intrinsic value portfolio. And the original idea of the show was to actually entirely build a portfolio from scratch publicly. It's kind of funny to say, but how many of us have actually had the chance to watch a portfolio get built over time from 100 % cash? It doesn't really happen because when you first start studying investing and legendary investors, they already have their portfolios fully allocated in most cases. So you don't get to see the process of going from being entirely cash to being entirely invested.

1:16:13And that is what we're really trying to show. So the point is to not only cover a ton of fascinating companies and learn to value them, but also to build a portfolio transparently and show how we work through things like position sizing, how much cash to keep on hand, when to jump on sell-offs, and just any of that kind of stuff. And we have made plenty of mistakes along the way, but that is really the whole point of the show. So people can learn from what we do wrong. And I should say, we also have a free weekly newsletter that complements all of our podcast episodes. So I'd encourage you to subscribe to that too at theinvestorspodcast.com.

1:16:45And that just includes extra analysis, a look directly at the models we build. All of the models we build are available for download for free, and then also just for additional updates on all the companies we track. Excellent. I'll say again that I love your show. You and Daniel do an excellent job. And a lot of your episodes are over an hour and a half. And to see consistent, high quality research in a podcast format. I just don't think you'll really find it. So kudos to you guys. I'll be sure to get all these resources linked in the show notes for those interested in checking out the podcast, the episodes and the newsletter.

1:17:19Sean, thanks again. I really appreciate it and hope to do it again someday. Yeah. Thanks, Clay. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor's Podcast Network. Written permission must be granted before syndication or rebroadcasting.