TIP844: Uber (UBER): The Autonomy Referendum — Is Mr. Market Completely Wrong? w/ Daniel Mahncke & Shawn O’Malley

23:21Shawn O’Malley:I mean, especially right now here in Hamburg, when I want to go somewhere, it's not really about will the car take, let's say 10 minutes. It's more about how much time do I need to actually find a parking spot. So I think this is one of the most important problems for all big cities where you have a lot of cars. And it's not a huge business, but it's one of those where you just have one more reason to open the app. And if Uber does it job well, it can then cross sell you on, for example, paying for other services from Uber. So they basically bake as much stuff as possible into Uber One as an additional value add just to get you on the app and then cross sell you on other things.

23:55Shawn O’Malley:And what they found is that multi-product users spend more than three times what single product users do. So just by getting existing users to use more different services from Uber, they can drive a ton of growth at low acquisition costs. And as they say, getting a customer you already have is obviously cheaper than getting a new one. And I think that's also one of the things that I thought about the first time we covered the company where I was like, doesn't everybody already have Uber? How are they supposed to keep growing for 20 plus percent? Well, it's exactly this, you know, getting these existing customers and making them more profitable.

24:28Shawn O’Malley:But anyway, I'm sure we could talk about half a dozen other things that we're excited about for Uber, but I would be more interested today in actually getting into what the market is paying attention to instead, because again, Uber stock isn't exactly matching its results over the past year. end, I assume that largely boils down to one name, which shouldn't come as a surprise, is Waymo.

24:50Daniel Mahncke:Yeah. So let's lay out the facts first. I'll try to do so as neutrally as I can. In February, Waymo, Alphabet's driving subsidiary, raised$16 billion at$126 billion post-money valuation. And they raised that capital from some very well-respected venture capitalists like Sequoia and Dresden Horowitz, with Alphabet remaining majority owner in Waymo. And so it's another pretty powerful backer to have. And Waymo's vehicles have now driven well over 100 million fully autonomous miles, completed 15 million paid rides in 2025 alone, which is triple the prior year. And it's doing something on the order of magnitude of 500 ,000 rides a week.

25:37Daniel Mahncke:And they say that they're hoping to expand to more than 20 new cities this year, and that includes Tokyo and London. And maybe they'll be coming to Frankfurt and Hamburg one day soon, Daniel. And all that sounds really impressive, but just to emphasize how optimistic the market is about Waymo's future, you've got the private markets valuing Waymo at roughly the same valuation as all of Uber. A company that I should say, in contrast, is doing more than 3 billion trips a quarter and has$10 billion in free cash flow. Somebody has to be wrong here. Waymo is either grossly overvalued or Uber is grossly undervalued, at least in my opinion.

26:26Daniel Mahncke:Don't get me wrong, Waymo is incredibly impressive technology, but there is a difference between novel technology and being a scaled multi-billion dollar profitable business that can support a more than$100 billion market capitalization. We know that Waymo can plug into cities that already have lots of ride hailing and transportation options, places like San Francisco. But I should mention that a chunk of the rides they've completed were actually ordered via the Uber app. And so can Waymo fully replace Uber? That's the question. And then the other question is, can it take enough market share from Uber to undermine Uber's business long-term in a space that's already growing incredibly quickly?

27:08Daniel Mahncke:And so I think they have a lot to prove still to warrant that kind of valuation. And my belief at a high level is that drones and autonomous vehicles are going to make convenience cheaper than ever. And so it'll be so easy to get picked up or to order whatever you want and have it in minutes, maybe not quite teleportation, but something pretty close, the industry is going to expand massively. We're going to find ourselves all using these services much, much more often. And I think we'll just become more spoiled by convenience and more dependent on it. And a lot of folks who are on the margins as Uber or DoorDash customers at the moment, I do believe they'll be won over as more frequent users as automation brings prices down.

27:55Daniel Mahncke:It'll become cheaper to hail a ride or to get food delivered, and then the frequency of order volumes will increase dramatically. That's sort of my view on it. And with the point being, Waymo could take a slice of market share from Uber. They almost certainly will. But if the whole pie is growing fast enough, there will be more than enough room for multiple huge winners.

28:18Shawn O’Malley:You sort of touched on it briefly, but a lot of Waymo rights have actually been ordered through the Uber app, as we all know, and not necessarily the Waymo app exclusively, reflecting that until now, the two companies have tried to partner. And I think the bare argument has always been, despite that, that Waymo is just using Uber, right? That they are exploiting their wide distribution to build their own brand awareness, and that they're trying to pull it off by themselves and just sort of pulling the rack out from underneath Uber and just by breaking up and basically pulling Uber's users to the Waymo app, to the exclusive offering.

28:52Shawn O’Malley:That's not exactly what we've seen yet, but I think there are signs that this is what could be happening in the future. I mean, Uber stock was knocked to its 52-week low, and I think it was late July after Waymo formally notified Uber that it will end the exclusive partnerships. And I think it was Austin and Atlanta. And those were two cities where also Waymo's robotaxis were available only through the Uber app, which is not the case in every city that they actually partner in. So Waymo plans to launch its own app in both of those cities. And I think it's early 2028 when the existing contracts with Uber expire.

29:27Shawn O’Malley:And just to clarify, that doesn't necessarily mean that their partnerships are fraying in every city, but clearly there are tensions between Uber and Waymo and they are intensifying it. If Waymo were to indefinitely remove their fleets from Uber's app, that would be a setback for Uber without a doubt. And that's also why Uber is racing to partner with as many other AV companies as they can so that no single AV maker actually comes around the corner and dominates the entire market. And instead, you have many players competing with each other. And then Uber is sort of the neutral aggregate of demand for customers in that field.

30:02Shawn O’Malley:And I got to say, I do actually worry about the Waymo dynamic specifically. However, what gives me some peace of mind is that there's no loyalty in the ride-hailing business at all. And you would probably think that's a negative for Uber because it's the biggest brand. And you could say, you know, as the number one, people will choose Uber because of the loyalty. but I actually think it's an advantage because if there's no loyalty, you need an aggregator of demand. And even if people don't choose Uber because of its name or because of the brand, they just choose it because it will be the best aggregator of demand because it has the most scale.

30:33Shawn O’Malley:So that means either it's cheapest or just coming faster. If I'm at a restaurant, I just want to get home. I don't want to wait for 20 minutes if I can go into Uber app. And then it's a 10 minute ride, right? Even if they charge up a bit for that and Waymo is cool and it's unique. And I would love to drive one at some point. Unfortunately, I can't here in Hamburg, but when there are 10 AV companies, why would anyone care to order a Waymo instead of any other AV? I think it's pretty cool right now. And it's sort of the only one that you actually see on the streets. But 10 years time, when you have drones flying around you, food delivery, I think there will be so many companies and nobody really cares.

31:06Daniel Mahncke:Today is turning into a very futuristic episode, evidently. But yeah, the Uber and Waymo follow-up is real. And the Financial Times reported that around this time back in July, the two companies had begun lobbying regulators for opposing frameworks, which is what has put them at odds increasingly. Uber wants these rules in place that enshrine hybrid networks of human drivers and robots working together. So for example, in New Jersey, Uber lobbyists propose that any platform offering robo-taxi services be required to have human drivers provide at least 85 % of all rides during a three-year pilot program.

31:46Daniel Mahncke:And so that is not very subtly, clearly intentioned at Waymo and setting them back. And you can imagine why this would tick off Waymo. And so things have actually gotten pretty petty, honestly. Waymo has accused Uber of not taking good care of their vehicles. And then Uber has turned around and pointed the finger back at them, complaining about safety issues on Waymo's end.

32:10Shawn O’Malley:It's getting personal, I think. But I think, Sean, you 15 months ago in your first pitch laid out a pretty good case for why these hybrid ride-hailing networks will probably, most likely, win out over strictly AV platforms. So instead of me just repeating what you said, I would say we just give that a listen.

32:26Daniel Mahncke:The beauty of Uber's model is that the vehicles are not on their balance sheet, and drivers can opt to make themselves available in response to demand in real time. Thus, Uber drivers can be incredibly flexible about responding to ride requests and a lack thereof. Another way to maybe say that is that supply on Uber's platform naturally adjusts to demand. And for, say, Waymo, to try and allocate XYZ number of cars to a city that will displace Uber, well, the reality is that they're either going to under-allocate vehicles or over-allocate them at any given moment in time. There's just no way to perfectly match demand with a fixed supply of vehicles driving around, which is why it's better to deploy a more limited fleet and just partner with Uber, tapping into their network for bookings.

33:12Shawn O’Malley:So grade yourself, Sean, how do you think about that argument today? How does it stack up compared to how you thought about the company and also all the developments 15 months ago? I mean, the market certainly has an opinion. And I think at the moment, it's fair to say that it doesn't exactly favor Uber.

33:28Daniel Mahncke:I'm as vulnerable to confirmation bias as anyone, but I would argue that actually the logic of that clip has been validated. Demand for rides remains wildly spiky, and that is just fundamentally not going to change. The peak to trough ratio within a single day's demand for rides is something like four to one, and a fixed fleet of robo-taxis that's sized for peaks in demand is going to sit idle during those trough times of the day, while a fleet that's sized for the demand troughs is going to leave riders stranded at rush hour and be completely unreliable. And Uber uniquely solves this by flexing millions of human drivers in and out of the market in real time, which is why in Austin, Uber's own data showed with Waymo vehicles on its network were busier than 99 % of human drivers, but that's because Uber's demand aggregation kept them full.

34:24Daniel Mahncke:There are so many people, there's almost a liquidity to the Uber network that is very, very hard to replace.

34:32Shawn O’Malley:I've actually heard that even today, if you open the Waymo app in California, rate times run something like 18 minutes versus just a few minutes on Uber. So I think the reality of needing to have flexible supply where drivers can come online to work for just an hour or two doing these demand spikes hasn't changed. And it's already being felt for the people who actually use Uber and Waymo. But again, I think currently Waymo just has this advantage of being more exciting if you get into them. So maybe some people will use it. But if you just think about your daily life, you don't want to wait, let's say, 18 minutes if you could just wait five minutes.

35:08Daniel Mahncke:Yeah. I don't think that these challenges are lost on Waymo. This is a pretty smart company. And that's why longer term, I do believe that they will want to continue to work with Uber if that proves to be the best platform for monetizing their hardware. So of course, they want to try it on their own with their own app. But if that doesn't work out as well, they may ultimately revert back to wanting to plug into Uber. And one thing that gives me pause though, is that Waymo does not necessarily have to be efficient. It doesn't have to be profitable. What it's trying to do is be strategic in the sense of with$16 billion of fresh capital and really virtually unlimited backing from Alphabet if needed, though that is sort of changing as Alphabet is allocating a lot of resources toward AI and data center construction.

35:55Daniel Mahncke:But basically, Waymo can afford to have terrible fleet utilization for years if that's what it takes to displace Uber. And you know who proved how to use that playbook? Uber. Uber subsidized rides for a decade to gain scale. And some people thought the business would never be profitable. And so the question now is really how ugly does Waymo want to get in this competition with Uber? Are they going for the grand prize? Do they want to completely wipe Uber off the map? Or are they okay with maybe a more secondary role in the market or a role where there's room enough for both of them? And so if it's the former, they can certainly cause Uber a lot of pain for some time to come.

36:36Daniel Mahncke:And that could be in the form of burning lots of capital for the next decade and really triggering a race to the bottom in pricing that I don't think kills Uber long-term, but would certainly set back the returns that we expect them to generate. And so, again, I don't think that they'll be able to just grid it out for so long that they'll inevitably kill Uber, but a subsidy war is really not going to be good for anyone but consumers. I mean, consumers will benefit from cheap ride prices, but for us as shareholders, it'll be a bleak picture for us. And so, like I said, there is though a version of reality where they choose to avoid this race to the bottom and opt to instead treat Uber as a strategic partner long-term where both sides can win big by working together.

37:27Shawn O’Malley:When I said in the beginning that I find myself sometimes questioning my conviction in Uber, I think this is what it actually comes down to. I mean, Google has spent billions of dollars on Waymo and I just struggled to see how they did that with the goal in mind to, I don't know, become one of 10 AVs integrated into the Uber network. So they must have had the goal. And this is also what they're currently showing with the strategy to actually dominate that market. And if they do, they could throw so much money at it, that it just destroys Uber's margins for many, many years, and therefore also our investment.

37:58Shawn O’Malley:And even if they don't kill it, that would be sort of a worst case outcome, at least if you think about it for the next five to 10 years. And whether we like it or not, at least in select cities, the single best autonomous vehicle company on earth, just looked at everything which Uber is offering, which is 200 million users, the demand aggregation, the utilization logic that you basically just talked about, and then said, no thanks, we'd rather build it ourselves. And I don't know, if I were to be a bear here, I would say, isn't this the market's whole point that they say, well, if the technology leader doesn't need Uber, why would the eventual winner of autonomy, whether it's Waymo or any other company still in need Uber.

38:39Daniel Mahncke:It's a good point. And just to put everything in context so far, Waymo does 500 ,000 rides a week, whereas Uber does 40 million trips a day. So the entire global autonomous vehicle industry, all the players combined is only doing something like 50 million trips a year, as Uber adds roughly 3 billion trips a year, just in growth. So in other words, autonomous rides today are around one-tenth of 1 % of global rideshare volume. And maybe he's biased, but Uber's CFO has been pretty blunt that over the next five years, AVs are, quote, relatively immaterial to Uber's volume. So he doesn't even see AVs as really being something significant for a while down the road.

39:30Daniel Mahncke:And the fastest growing AV deployments today are, at best, tripling their volumes each year. And in Uber's early hyper growth years, they were actually 9 to 10Xing their volumes annually. So even for the best case scaling curve for robo taxis, things are progressing slower than what we saw during the ride-hailing platform wars of the 2010s. And that tells me that the integration of AVs is going to play out over a long, long time. Overnight, every car on the road is not going to become an AV. And so there's going to be lots of regulations. There's going to be protests. Customers are going to be hesitant to adopt the new technology.

40:11Daniel Mahncke:And then also there's just a lot of work to be done for AVs to still operate safely in all environments, not just on the pristine roads of San Francisco and Austin, Texas. So they're going to need to be able to navigate rainstorms and blizzards and chaotic traffic and cities like developing countries and a whole bunch of other really complex problems. And so again, I think we have to put everything in perspective. Even if there is some plausibility to the market's concerns about the terminal value of Uber, it's certainly not on any sort of immediate timeline.

40:46Shawn O’Malley:Although the business and the geography are concentrated. I mean, if you decompose U.S. profits, mobility, which is obviously the ride-hailing business, is roughly 60 % of operating profits. And then the U.S. represents roughly 60 % of the mobility business. And then if you just look one way further, looking at the top 20 cities in the U.S., they're the only places that Robotex is currently, realistically, operate at scale in the foreseeable future. And that includes about a quarter of U.S. mobility profits. So we're mainly talking about the risk of them getting into the U.S. and then competing with Uber there.

41:19Shawn O’Malley:And what that comes out to, if you just look at all the numbers, that's effectively 9 % of Uber's profits that are genuinely exposed to overtaxing competition, at least in the near to medium term. And what is that? Probably like five to 10 years time. That's what I would label this. And if you include the suburbs, which AVs, if we're being honest, won't reach for a long time, you get to maybe 18%. But actually, again, the suburbs have been one of Uber's, I think you mentioned last time, biggest growth areas with their wait and save initiatives. where you can wait longer and then you get a lower price.

41:49Shawn O’Malley:And again, it took even Uber a long time until it got into the suburbs because it's just a lot more organizational things that you have to do to even there have enough drivers at the right time to actually pick up people. And meanwhile, the other half of the company is just delivery. And that involves a human walking food to your door. And I know that robots are not doing that at scale at any time soon, although we talked a lot about drones today, but I don't know, thinking about drones that can do this, I think it will still be five to 10 years out at a minimum. And before that, you won't see any restaurants setting up to work with delivery drones, assuming that would even be possible for most restaurants.

42:27Shawn O’Malley:So when Uber's valuation multiple of operating profits gets cut in half, like it has been in the past year, the market is implicitly writing down the whole company for a risk that directly at least touches maybe a 10th of current profits. Although we all know It's not how the market works. They look out 20, 30 years at least sometimes, and this appears to be a thing here with Uber.

42:49Daniel Mahncke:What's really interesting is that in Austin, in Atlanta, which are supposed to be two of Waymo's biggest showcase markets, these cities have actually been among the fastest growing Uber markets in the US. And in San Francisco, which is Waymo's most mature market, which is funny to say, mature for a business this young, but still. Waymo does legitimately have a 15 % to 20 % share of rides, but Uber's trip growth accelerated in San Francisco in 2025. If you're asking how it can be, it goes back to a point I mentioned earlier, robo-taxis are expanding the market. They are converting people who would have driven themselves or taken public transit into rideshare users.

43:31Daniel Mahncke:The category is growing faster than market share is shifting. And rideshare today is less than 1 % of the roughly 3 trillion miles that Americans drive every single year. And as autonomy pulls costs down toward being on a closer parity with car ownership, at least in cities, that leaves a lot of room for that 1 % number to grow. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I'll often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas.

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47:21Shawn O’Malley:Well, I would say with great opportunity comes great competition, I guess. I got to say, I watched Spider-Man this weekend, so maybe that's coming to my mind here right now. But I got to say what you said actually reminds me of an argument that we had with Adobe a while ago, where we said that, especially in the beginning, there will be even more videos and photos to edit because AI creates them. And before that, they were just not in the system. I think it's again, like a short-term versus long-term thing where especially right now, Waymo's just get more people to use Uber and Waymo and just ride hailing in general.

47:53Shawn O’Malley:And then you have to question 10 years, 15 years time, where will they actually go? Is it still Uber that equidates demand or is it just a single company where they will go? I mean, Tesla, for example, is also scaling its own Robotex service and potentially has the manufacturing base to just flood the market with purpose-built, let's call it 30K cyber caps, assuming their camera-only technology actually gets to a point of being truly autonomous, which I think is a question for people who have a better understanding of how this technology actually works. But for better or worse, Tesla remains the industry outlier, still refusing to use lighter sensors.

48:28Shawn O’Malley:Although I think the prices of those have come down, I've learned that a Waymo car by now is supposed to only cost about 25K in terms of the lighter sensors. It used to be a hundred K just a couple of years ago. And then if you also look at Amazon with a Zoox subsidiary, they're also playing both sides as well. So Zoox will put its vehicles on Uber's networks in, I think it's Las Vegas and Los Angeles, but it will keep its own app too. And I think Amazon CEO of devices literally just asked, quote, why should we give that up? Right. When discussing owning the customer directly and Amazon currently has about 260 million prime members compared to Uber's 50 million Uber One members.

49:05Shawn O’Malley:And they also have a long history of being willing to burn cash to win a market. And I think we discussed all of this last time, and especially once when we gave a presentation on Uber, that they are competing with all of these companies that are not only expanding to the field, but who just have a lot of money to burn.

49:21Daniel Mahncke:I would say Uber's response to account for all this has been pretty dizzying. It feels like every other week, there's a press release with a new self-driving partner attached to Uber. And so a year ago, Uber had 14 autonomous vehicle partners, but today it has more than 20. And more importantly, these partnerships have gone from being abstract deals to concrete commitments with vehicle counts in cities and in dollars, all defined clearly. With Neuro and Lucid in particular, Uber committed to having a minimum of 35 ,000 Lucid Gravity SUVs running Neuro's self-driving system following a commercial launch in the San Francisco Bay Area late this year and Houston in mid-2027, and then hopefully dozens of markets after that.

50:10Daniel Mahncke:And Uber and its fleet partners will own those vehicles. And then what's also pretty cool is Hertz. The rental car company, yes, Hertz, has spun up a new affiliate called Oro Mobility, and they are going to handle the charging, cleaning, maintenance, and depots for these AV fleets. And they've already leased a 50 ,000 square foot depot in Houston for that exact purpose. And so then there's Rivian with 10 ,000 autonomous R2 robo-taxis that are going to be starting in San Francisco and Miami in 2028. And then they have an option to take that number to 50 ,000 vehicles across 25 cities by 2031, all plugged into the Uber network.

50:52Daniel Mahncke:And then on top of that, Uber is investing up to$1.25 billion into Rivian based on certain technical milestones, which is another important part of Uber's strategy. They've taken billions of dollars worth of ownership stakes and various self-driving companies, I think probably to hedge risk to some extent, but also mainly to invest in ensuring there's more competition than just Waymo and Tesla. Because in a world where there are many AV options, Waymo pretty much loses all of its leverage. And Uber wins by being simply the best place for human drivers and AVs to all come together on one neutral platform.

51:31Shawn O’Malley:That sounds a bit like the circular funding that we see in AI, just on a much smaller scale, I got to say. And still, I mean, seeing all of the AV players in the game is what makes me most bullish on Uber because I don't like the idea of them competing with Google. But then you also have Tesla. You have so many OEMs and perhaps the biggest threat that you can have in capitalism lately, which is NVIDIA. And NVIDIA is putting its full self-driving software stack into robot taxis that will launch on Uber in Los Angeles and San Francisco in the first half of next year while targeting 28 cities globally by 2028.

52:06Shawn O’Malley:And NVIDIA also shares the thesis that autonomous is driving, software will become a commodity layer that basically any automaker can license, meaning that in the long run, Waymo is just nothing special, if you think about it that way. And internationally, WeRide is already running a fully driverless, fair charging service with Uber in Dubai, plus Abu Dhabi with Zurich and Madrid coming soon. So there are just so many players coming in that it's hard to even wrap your head around. You only hear about Waymo against Uber, but every company is having these cars now.

52:37Daniel Mahncke:Yeah, it's much more than that. We're seeing AV companies roll out internationally, but we're also seeing that it's not just US tech companies working on AVs. The Chinese company Baidu has a product called Apollo Go, and that's coming to Uber in Dubai. And then there's Pony.ai, which is a funny name. That company was relatively new to me, but they're partnering with a European fleet operator called Vern that Uber is investing in, and they're hoping to launch Uber's first commercial robo-taxi service.

53:07Shawn O’Malley:I'm glad you also mentioned the Chinese providers, because just like with LLMs, there's very much a tech rivalry in AVs between the US and China too. And I think you would probably argue that once again, that this is a good thing for Uber, at least because Uber's management has said that Chinese AV companies, hardware and software costs are quote, better than anything they are seeing anywhere else. And Baidu's robo-taxi costs under$30 ,000 to build. So while everyone in the US watches Waymo, there's a parallel autonomy race in the Middle East, in Asia, and in Europe, but Uber has skin in the game, and it's essentially every horse in the race.

53:43Daniel Mahncke:And there's one other thing I think we should mention. Uber launched something called Uber Autonomous Solutions, creative name. And this includes insurance, customer support, fleet management, and remote assistance that any AV operator can buy instead of having to build themselves. And so the other reason Uber is excited about this part of the business is for the data they'll get. Uber is putting sensor kits on regular human-driven Ubers. And because Uber does 40 million trips a day, those cars see every weird edge case on earth multiple times a day. And by the end of the year, they're expected to be collecting up to 2 million miles of training data per month.

54:25Daniel Mahncke:And then actually selling that data to AV partners, It kind of reminds me of Reddit selling out their data to LLMs to train on. So Uber is basically monetizing data from its human driving network to help AV competitors and companies that they've invested in catch up to Waymo.

54:45Shawn O’Malley:Which is a pretty smart strategy, I got to say. And I want to touch on one of the things you mentioned in our last episode on Uber, which is that you think there will be financial companies that arise similar to REITs for hotels and office buildings, but instead four fleets of basically AVs that will be run as businesses through Uber. And I think that idea being somewhat similar to how Marriott operates hotels, but doesn't own the real estate. Is there anything new on that end or that front?

55:14Daniel Mahncke:It's probably a good way to think about it. And that's an insight I got from Uber's CEO, Dara Kosar-Shahi. And to be honest, it sounded a little like science fiction when we first discussed it, but this is now Uber's literal official corporate strategy. Per Uber's CFO, the autonomy ecosystem has five layers. So there's the marketplace facing the consumers, and that is Uber. There's the AV software developer. So that's Neuro and Waymo. Then you have the automakers who are building the cars. You've got the fleet operators that are running depots and charging stations. So think Hertz. And then fifth, you'll have third party financing to make this all happen.

55:53Daniel Mahncke:These are the institutions that will actually own the vehicles that comprise these AV fleets and take on those balance sheet risks. So Uber runs the network, someone else owns the cars, and that is how Uber stays a capital light business.

56:08Shawn O’Malley:But still, I mean, today we have Uber signing off-take agreements, guaranteeing it will buy cars, rolling off assembly lines, kind of like the deals that we also see from hyperscalers, guaranteeing compute demand to support data center construction. And Uber is basically leasing depots in, I think it's Houston and investing in Verne and Rivian and Nero. And if you would add it all up, it's something like$10 billion that has been committed to the AV build out. And that would have sounded like a lot more money just a few years ago. But gosh, nowadays, that does sound modest compared to the investments that especially the Max 7 are making into AI.

56:44Shawn O’Malley:And still, I mean, the financialization, if you want to call it that, of AVs where pension funds and read-like vehicles take these assets off Uber's balance sheet is the promise phase two that we got last time. For the time being, Uber is increasing its capital intensity by owning these assets on its balance sheet compared with their normal model, where, of course, as we know, human drivers own the vehicles and they aren't on Uber's balance sheet. So that's just some perspective to keep in mind. But there's some really big news that we've made it this far into the episode without even mentioning.

57:17Shawn O’Malley:And that is, while the market was reacting to the news about Uber and Waymo having sort of a fallout, Uber was attempting the largest acquisition in its history, which is the company Delivery Hero.

57:29Daniel Mahncke:Delivery Hero is a food delivery company, actually headquartered in Berlin. So I thought at first that you were going to be very familiar with it, but actually it's a German company with no business in Germany after they actually sold off their German operations a few years ago. And what it does have is leading delivery platforms across the Middle East, Asia, some other parts of Europe, and then also Latin America. And these are brands like Talabat in the Gulf, which most listeners probably won't know. And then there's Baiman in South Korea, and that company basically dominates the Korean market.

58:02Daniel Mahncke:And so what happened was Uber quietly built up a stake of about 25 % in Delivery Hero. And then on July 16th, it launched a formal offer valuing Delivery Hero at about$14.8 billion or$13.7 billion net of the stake that Uber already owned. And so what happened next is you had Proces, which is a big Dutch investment firm that's pretty well-known in value investing circles. They irrevocably committed to tender their shares, where tendering just means agreeing to sell into the offer. And so correspondingly, that takes Uber past 50 % ownership. And really, it guarantees that the deal will succeed because they have the voting power to make it happen, barring any regulatory concerns.

58:47Daniel Mahncke:And on that front, to preempt antitrust concerns, Delivery Hero is selling its operations in 14 overlapping markets to a third party for about$1.6 billion. And so the deal should close in the second half of next year without any hiccups.

59:04Shawn O’Malley:Just for the sake of the audience, what would you say is the logic behind this deal? I mean, they're not necessarily buying delivery here at a bottom bin price and right hailing and food delivery industries that don't exactly create economies of scale benefits for users. I mean, the fact that Uber has more operations in the Middle East does basically nothing for me here in Germany. And your experience with Uber is entirely contingent on the density of their presence in the city that you actually live in.

59:31Daniel Mahncke:It's a really good question. And the short answer is that it's all about expanding the number of places where Uber can make its full range of products available. So Uber operates both rides and delivery in 34 markets. But after this deal, that number will jump to 58. And that opens the door to them selling Uber one more. We talked about at the beginning of the episode how cross-selling between its mobility and ride apps, where they encourage Uber riders to try to order food on Uber Eats and vice versa. That is one of the most reliable value creation levers Uber has at its disposal. And so Delivery Hero brings them 50 million new consumers and two dozen new markets to run that playbook in, plus again, the extension of Uber One into all of those places or the possibility to do so.

1:00:20Daniel Mahncke:And so the first time we looked at Uber, we talked about how it was very pragmatic for Uber to recognize which markets they were losing in globally. And instead of racing to the bottom there, they chose instead to invest in the local winners. And so they did that by taking passive stakes in Didi, in China, and Grab in Southeast Asia. But the delivery hero deal here flips that upside down a bit and shows that they can go from taking a passive stake to making a full acquisition and integrating that company into Uber.

1:00:52Shawn O’Malley:You often hear about a lot of synergies in corporate M &A, and these so-called synergies have been used to justify many bad deals over the years. But in this case, Delivery Hero does have a big disparity in margins compared to Uber, despite actually having a higher tech rate. And that's because of their substantial technology costs. I think Delivery Hero spends far more on tech as a percentage of bookings because it basically lacks Uber's scale. So Uber runs its entire global delivery business on one tech platform. And for Delivery Hero, I do think it's quite plausible that this will really help the business, but just tying into Uber's backend instead of building out their own.

1:01:30Shawn O’Malley:And there's also a really interesting ads angle to the deal too, because Delivery Hero monetizes about 3 % of its gross merchandise value through advertising, which is a good bit ahead of Uber. But I mean, if you compare that, for example, to MercadoLibre or Amazon, 2 % to 3 % is quite high. So I was surprised to learn that. And if Uber's ads business were to converge toward those penetration levels across a delivery business that post-deal exceeds$100 billion of bookings, you get several billion dollars of incremental, very high margin revenue over four or five years.

1:02:04Daniel Mahncke:There is one other more strategic point that I think we should mention too, and that I'm sure the market is underappreciating, which is that the deal is also sort of an autonomy hedge in the intermediate term to some extent. So if robo-taxis do eventually pressure the economics of Uber's US business, well, now they'll have a bigger global delivery and local commerce machine and markets where autonomy is going to be a more distant concern. And it's just a fact that we know AV adoption will roll out more slowly in most international markets than in the US. And as such, having more geographically diverse revenue at least helps further to minimize the threats from Tesla and Waymo in the immediate future as the company continues to prepare, basically, its counter-response to the threats from those businesses.

1:02:56Shawn O’Malley:We've been going for a while now, and I still feel there's so much for us to discuss and to cover when we talk about Uber. But when you're truly excited about a company and one of our investments, prospects. It's just so easy to talk all day about it. And do you think there's anything important that we have missed and not yet covered here?

1:03:14Daniel Mahncke:One big thing not related to AVs or Deliver Hero is that Kroger, the second largest grocer in America, added roughly 2 ,700 stores onto the Uber Eats app nationwide in January. And then we mentioned Ulta Beauty earlier, and they've also partnered with some other familiar names like GameStop. And I haven't been as excited about grocery long-term because I can imagine a lot of big grocers, I'm thinking Walmart and Target in particular, will want to control the relationship with their customers directly. So they won't want to have a middleman like Uber in the way. And so they may have the resources to build out their own version of the delivery service, sort of like what Amazon has with Whole Foods.

1:04:00Daniel Mahncke:And so that was my worry. But again, And what has actually happened, at least so far, is that Kroger, a company with every resource to go it alone, has chosen to plug into Uber's network instead.

1:04:11Shawn O’Malley:And to just quickly list a handful of other things that Uber has unveiled in the last year, I think I should mention that Uber partnered with Expedia to sell hotel bookings inside the Uber app with 700 ,000 plus properties that offers Uber One members a chance to earn 10 % back in credits. And again, I actually got to check if that's also the case for me or if it's US only, which I hope it isn't. And Expedia might have a US buyer, so perhaps I can't benefit from that. And they also acquired, going back to where I live, another German company called Black Lane, which is a premium chauffeur service operating in 500 plus cities.

1:04:49Shawn O’Malley:So it's quite big. That very much complements the luxury end of Uber's offerings that we haven't touched on at all today. but I think we covered it last time we talked about Uber, at least to some extent. And they also added in a feature they refer to as woman preferences. So it basically allows women riders to match only with women drivers. So you can imagine that's pretty attractive to many women for safety purposes and just makes it all the more likely that people will use Uber on the margins. I mean, if you're partying and you're out and you just want to have an Uber and get home, it's way better.

1:05:21Shawn O’Malley:If you're a woman, you can also have a woman driver compared to a man. And I think this is where we would normally go through the valuation in detail, but we already own Uber. And as we've shared today, we've arguably gotten more optimistic about its growth runway while the valuation has become more and more reasonable over the last year. So I don't think we need a model to tell us that we are very happy owning Uber and may even continue to add to the position. But I did want to play another clip from our last episode together, which was a response from Dara, the CEO of Uber, to a Financial Times column criticizing Uber's buybacks instead of using that capital to just invest in growth.

1:06:00Shawn O’Malley:And let's listen to you reading Dara's letter from last time.

1:06:04Daniel Mahncke:I believe Uber's best days are ahead. We have a large utility-like business that is still in the early days of penetrating its market. This has led us to conclude that a consistent buyback program is the right answer for Uber. We are taking the humble investment route of dollar cost averaging over what we hope will be multiple years. So at that time, the buyback was a$7 billion program. And there was real concern that Uber was either overestimating its growth prospects to Wall Street or misallocating capital to conduct buybacks when it would be better spent on growth investments. And well, thanks to the inflection in Uber's margins, when your profitability doubles year over year, they have found the cash to comfortably do both.

1:06:52Daniel Mahncke:And so actually what has happened is the board authorized a$20 billion repurchase program while making all the investments and partnerships that we've talked about for the last hour and not stretching their balance sheet either in doing so. So I think that's incredibly, incredibly impressive, but how about we bring it all home? I think the evergreen lesson of this episode for me is whatever happens to Uber, the thing is markets can watch a business get objectively better quarter after quarter and simultaneously decide to pay less for it. And in many cases, that is for good reason because they're right about anticipating future growth decelerations or decline in the business in light of maybe current success.

1:07:34Daniel Mahncke:But that is where we see things differently than the market with Uber. And ultimately, to outperform the market, you do need to have some strongly held contrarian opinions. So this is maybe our most strongly held contrarian opinion.

1:07:49Shawn O’Malley:I think the only other option is to perhaps be early to the party. And that's part of why I like companies like Remitly or Delocal that we've also covered on the show, because I think you don't need a highly contrarian opinion on those companies. Of course, the market had its doubts. For example, if you talk about Remitly, how profitable can that company actually be? And I thought it was quite obvious that they can be very profitable. So to some extent, it's still a contrarian take but i don't have to bet against let's say the market on the terminal risk question where also technological process plays a big role and all of that said i must say that i feel even more confident now than i did prior because a lot of news is about waymo so it seems like it's waymo against duber and who's winning and it's just pretty white or black in this case but in reality waymo is competing with all other av players and if waymo can't reach global scale before any of them expand, it will be Uber's markets to win.

1:08:44Shawn O’Malley:And while Waymo has made tremendous progress, and I think the technology itself is just astonishing, right? But I don't think they have a chance at monopolizing AV demand globally, which is probably what they would need to do to actually kill off Uber. So I guess that means that after this episode, I have to log into my personal account and buy some more Uber.

1:09:07Daniel Mahncke:Well, there you go. oh, I've successfully made Daniel more and more bullish on Uber over the last year. And hopefully that doesn't come back to bite us. But to close things out, I think the quote really kind of picks itself for this week. And it's a quote we've probably used in the past, but it's such a good one. I can't help but use it again. Ben Graham, the father of value investing, Warren Buffett's mentor told us that quote, in the short run, the market is a voting machine, but in the long run, it's a weighing machine. And so the voting machine idea is sort of a popularity contest. And then in the long run, this idea of being a weighing machine is about recognizing the weight of something properly.

1:09:48Daniel Mahncke:And so I think the market will weigh Uber properly over time, and that would mean dramatically pushing the stock price higher. So with all that, we'll see you again next time.

1:10:05Shawn O’Malley:And visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principle, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product, hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions at any time without notice.

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