Once Again, NYC Data Shows Resilience Of Taxi Medallions

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Includes: MFIN, SBNY, UBER
by: Larry Meyers

Summary

3 years and 20,000 cars later, the best Uber can do is a 7% YOY decline in taxi revenues.

UberX has likely saturated Manhattan, and revenue should stabilize in the next 12 months.

By now, everyone knows about Uber. Usage will taper off, and new supply will cannibalize existing supply.

Two articles over the weekend, one in the NY Daily News and another in the Economist, have provided more clarity about the UberX vs. taxi situation in New York. As I've long stated, concerns over taxi medallion values and the ability of taxi medallion borrowers to service loans are vastly overblown.

For over a year, we've heard how Uber (UBER) will destroy the New York City taxi medallion. Yet, more than 3 years into the Uber invasion, with UberX vehicles topping 20,000, the best the rideshare service can do is contribute to a 7% taxi revenue decline? That's what data from the NYC Taxi & License Commission says, according to the Daily News.

At the end of 2014, UberX had 16,000 cars on the road, according to its own internal study. Yet, YOY taxi revenue declines were in the low-to-mid single digits. Uber boosters claimed this was because the majority of the 16,000 drivers were added at the end of the year.

Well, here we are in August, and surely those 16,000 have been absorbed into the system, along with another 5,000 or so added this year, and the decline is a mere 7%.

Where is the disconnect? How can all these cars be added and yet only a 7% decline occur? Logically, if all those cars were operating at the same time as taxis, then why don't we see a 50% revenue decline?

Because not all of those UberX cars are operating. In fact, it appears that only about 10% of them operate in any given shift, according to the company itself, quoted in the Daily News article. UberX has 20,000 registered drivers, yet after all this time there are only 2,000 active drivers in central Manhattan from 7 AM to 7 PM on the average day. Not all of these are UberX, either.

This blows up the argument that Uber is going to have much more of a revenue impact on taxi medallions than it already has. The company also said the fastest-growing areas are the underserved outer boroughs, which means they act more as a supplement than competition.

The conclusions have broad implications for the taxi medallion financial industry, as well as Uber's IPO.

First, the 50% one-year attrition rate reported by Uber in its study has gotten worse. Clearly, not all 20,000 registered drivers are driving. More than half have probably bailed out entirely, a percentage only work limited hours, and the rest are out there trying to make a living. This suggests the 80-20 rule may apply, i.e. 80% of the revenue will be captured by 20% of the drivers - those committed to making it a full-time job.

Ergo, no matter how much unconstrained supply is added to the UberX base, it appears that only a fraction will operate at any given time in the most competitive zones. We are so far into Uber's NYC existence that we are likely near the top of its central Manhattan incursion. Moreover, everyone in NYC knows about Uber at this point. It will be increasingly likely that taxi revenue declines will taper off, and UberX drivers will begin cannibalizing each other's revenues.

Second, the reason for the attrition is likely due to the extraordinary unadvertised costs associated with being an UberX driver. In my recent White Paper, "Towards A Cost Estimate Of A NYC UberX Driver", I found that 68% of pre-tax revenue is siphoned away from the first $1 per mile in revenue, 55% of the first $1.50, and 49% of the first $2. And that's pre-tax.

Third, it isn't even clear that Uber is the reason for the decline. As I've also stated, subway ridership has increased substantially. The Economist also points to increased bus ridership, walking, and biking, thanks to things like the Citigroup (NYSE:C) "Citi Bike" program. Data from that program showed 941,000 uses in June of 2015.

Taxi medallion financial industry short-sellers claim that the market is zero-sum, yet the Economist's data shows this is not the case - "the benefits enjoyed by Uber and its customers and drivers have not come entirely at yellow cabs' expense."

This is not to say that Uber has had no effect, but rather, it is not even close to what short-sellers claim it is, or will be.

How does a 7% revenue decline affect debt service for medallion loans? Obviously, every loan is different. However, the TLC reports that the average medallion earns $190,000 per year. An owner-operator will work that medallion as hard as he can in order to make good on his loan. As a senior executive at Signature Bank of New York (NASDAQ:SBNY) said in the company's latest conference call, a medallion is known as "hostage collateral". The driver cannot default on his loan because he forfeits his livelihood. What will he do then? Drive for Uber?

That might be the case were medallion values truly going to zero. Clearly they will not, based on this data. The medallion will have value, and value above the industry average loan of $500,000.

A 7% decline on $190,000, after backing out $25,000 in operating expenses, $40,000 in taxes, and $30,000 per year to debt service ($500K @ 4% amortized for 20 years), leaves the owner with $81,000. It's going to take another 15% decline in revenue to even begin to worry over debt service.

Ultimately, UberX can never compete with the street hail in the NYC Exclusion Zone, and UberX is merely adding capacity to underserved areas. So, please, enough rhetoric about how taxi medallions will become worthless. Within 12 months, the transportation situation will reach equilibrium, revenues will stabilize, and the medallion market will open up again.

Find the medallion lender of your choice, determine their underwriting standards, and consider buying the stocks of the most conservative players.

As for Uber's IPO, the data provides yet another reason to be skeptical. When a company tells you it has 20,000 drivers, and later tells you that only 10% of them are actually on shift, that may explain why the company is seeing hefty losses.

As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat "talking points" but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else's when making an investment decision. Always contact your financial advisor before investing in any security.

Disclosure: I am/we are long TAXI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.