Human drivers can’t compete with self-driving cars in the ride-hailing market. Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) therefore can’t compete with forthcoming autonomous ride-hailing services like Tesla’s (TSLA) planned Tesla Network, GM’s (GM) Cruise Anywhere, or Ford’s (F) as-yet-unnamed service. This is why Uber’s former CEO Travis Kalanick reportedly called self-driving an “existential threat” to Uber.
Uber and Lyft’s survival therefore depends on transitioning to autonomous ride-hailing. Unfortunately for these two companies, this doesn’t look likely.
Uber and Lyft lack any manufacturing capacity, so they are beholden to car manufacturers that won’t be eager to share revenue if they can avoid it. As I just mentioned, Tesla and GM are building their own autonomous ride-hailing services. While GM currently has a strategic partnership with Lyft, it is unlikely to last long-term. Ultimately, GM has what Lyft needs and Lyft has nothing GM needs. The same goes for Uber’s partnership with Daimler (DDAIF).
This is the same fundamental problem faced by Alphabet’s (GOOG, GOOGL) Waymo, Intel’s (INTC) Mobileye, and Apple (AAPL). Car manufacturers’ cooperation is needed, but they have no incentive to give it. Unlike Alphabet, Mobileye and Apple, however, Uber and Lyft have no means to buy a car manufacturer.
Lyft at sunset. Photo credit: Pkg203.
You might object that GM needs Lyft’s ride-hailing competence. But experience with human-powered ride-hailing has limited usefulness in building an autonomous ride-hailing service. If a company can develop full self-driving software, it can make a ride-hailing app. Many traditional taxi companies have launched their own apps in response to Uber and Lyft. These apps aren’t as good as Uber or Lyft, but plug them into self-driving cars and both the price and service would be superior.
Conversely, if a company can’t crack self-driving, there is no point working on a ride-hailing app. If you have an app but no cars, the app is useless. Investors should not therefore put any importance on whether a company already has a ride-hailing app.
Uber and Lyft can’t survive if other companies launch autonomous ride-hailing services before them. They can't launch autonomous ride-hailing services without cooperation from manufacturers, which is currently occurring to a minor extent but is likely to be withheld when the stakes are higher. The default outcome, then, is that they go bankrupt.
A combination of companies’ announced timelines (e.g. Tesla’s and Ford’s) and forecasts from research reports by ARK Invest and RethinkX puts the launch of the first autonomous ride-hailing service in the 2019-2021 range. This means that Uber and Lyft have two to four years to completely turn things around. Is this possible?
Uber and Lyft are both attempting to pivot to become self-driving AI companies. The problem here is two-fold: 1) self-driving AI startups are abundant and 2) Uber and Lyft’s valuations, particularly Uber’s, are already much higher than the going rate for these startups. Lyft is valued at$7.5 billion. GM bought Cruise Automation for $1 billion and Ford acquired a majority stake in Argo AI for $1 billion. Lyft’s value as a self-driving AI startup, then, may be a small fraction of its current valuation.
Photo credit: Andrew Caballero.
The problem for Uber is much worse. Uber’s valuation is between$50 billion to $70 billion, putting it in the range of the world’s most valuable automakers except Toyota (TM). It cannot hope to be acquired by a car manufacturer at anything close to that valuation.
Neither will Uber or Lyft’s brands be worth more than a tiny fraction of their valuations. For comparison, GM acquired all of the assets of failed ride-hailing company Sidecar, including intellectual property, for under $39 million.
Uber’s brand has been tarnished by a long series of events leading finally to the resignation of former CEO Travis Kalanick. Lyft’s brand is much lesser-known than the brands of companies like Tesla, Ford, and GM, giving these companies little incentive to acquire Lyft’s brand rights.
Unless there are significant, unforeseen changes from the time of this article’s writing, I would strongly advise avoiding an IPO of either company. While neither Uber or Lyft has announced plans for an IPO yet, they are frequently named as companies anticipated by investors to go public. If this happens, it’s important for investors tempted to buy shares for the long term to value Uber and Lyft as self-driving AI startups, not as ride-hailing companies relying on human drivers.
Disclaimer: This article is not investment advice.
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Disclosure: I am/we are long TSLA. 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.