Decoupling – A Great Tool To Analyze Business Strategies & Disruption

What is Decoupling? In an insightful working paper, Thales Teixeira and Peter Jamieson described Decoupling as “the separation of two or more activities ordinarily done in conjunction by consumers”. The separation’s purpose is to increase value for consumers by focusing on the value-creating activity while reducing exposure to the value-capturing or value-destroying one.

Breaking down a business’ success or failure is not a straightforward exercise. There are so many factors at play. The same goes for disruption. However, I believe Decoupling offers a simply yet powerful tool to analyze business strategies and disruption.

Below are a few examples of how I use Decoupling to look at companies:

  • Uber: consumers have a transportation need to go from A to B. That’s the value-creating piece. However, before Uber, there were several non-value-creating activities. If someone wanted to drive themselves, they had to physically and mentally stay alert for some time and look for a parking slot. If riders used a taxi, they had to somehow manage to get a cab and in some cases, suffer from an unhygienic car/driver. Uber decoupled the act of going from A to B in a comfortable manner from all other noises by providing consumers a way to book a decent car with just a few taps on a phone and a driver that is already vetted.
  • Aldi: at grocery stores, consumers want to buy groceries that they deem worth their money & time. That’s the value consumers need. Some stores; however, sell many more items, stack different variations for one item (cereal, milk or ground coffee, for example) and, as a consequence, have bigger stores that take time for consumers to navigate. Aldi competes and, dare I say, wins over consumers by focusing on selling good groceries on the cheap by 1/ leveraging private labels which are cheaper than national brands; 2/ eliminating activities like market research, advertising or unnecessary expenses; 3/ keeping their stores small and just acceptably decorated. They decouple affordable groceries from everything that threatens to increase costs.
  • Venmo/CashApp/PayPal: Consumers always need to send money to and receive money from other folks as quickly, cheaply and seamlessly as possible. Before the likes of Venmo, CashApp or PayPal, it was either cash on hand which necessitated an actual time-consuming meet or a check which took some time to settle. These apps decoupled the money exchange activity from the time wasters. Consumers can exchange money in almost real time.
  • AWS: every company needs IT infrastructure to operate and compete in this day and age. What they don’t need is to go out, scrap all the components, stand up an IT stack and maintain it over time, including hardware replacement and software update. AWS decouples the use of IT resources from the act of acquiring and maintaining it. Because of AWS, startups can get going quickly without saddling themselves in high expenses while big companies can leverage the cloud and scale down IT workforce.
  • AirBnb: ordinary hosts that don’t operate a resort or hotel have three essential activities: hosting, finding guests and verifying that such guests are trustworthy enough to let into their homes. Guests, on the other hand, have to travel and find a place where they can feel safe. AirBnb functions as the decoupler that allows hosts to focus on hosting and guests to focus on traveling. The brand name of AirBnb and the network effect bring one party to the other. Their review mechanism fosters the trust in the ecosystem.
  • TSMC: the production of computer chips involves design, manufacturing and assembly of chips. Each step requires different expertise and cost structure. Semiconductor shops in the past used to do everything. Then, companies like TSMC decoupled from the value chain. The Taiwan-based firm focuses on building the best fabs in the world and manufacturing chips, leaving the design and assembly to somebody else. The result is that TSMC is now the market leader in the chip manufacturing market and the indispensable player in this industry.

Decoupling works because it reduces costs for both the decouplers and consumers. From the consumer perspective, the more activities, the more costs. And I am not merely talking about monetary costs. Time spent on non-creating activities is also a significant cost. From the decoupler perspective, focusing on one link in the value chain deepens expertise, reaches economies of scale and lowers unit economics. Aldi is still one of the most affordable and best grocers out there. Remember when Uber and AirBnb used to be cheap when they had their breakthrough?

Decoupling, in my opinion, is a useful concept and powerful tool to look at businesses. Thales’ book will have more details. If you are interested in learning more, I’d recommend that you read it.

Weekly reading – 6th August 2022

What I wrote last week

Apple Q3 FY2022 Earnings

AWS, what a business!

Even with a loss of $2.6 billion, Uber had a great quarter

Business

($) America’s New Energy Crisis. A worrying report on the state of the energy supply in the US. Demand continues rise and unfortunately, so do oil prices. Projects to produce green alternatives take a long time to be completed and integrated into the national grid. “As U.S. power supplies tighten, developers are struggling to build these projects quickly enough to offset closures of older plants, in part because of supply-chain snarls. Another reason: It takes longer to approve their connections to the existing electricity grid. Such new requests neared 3,500 last year compared with roughly 1,000 in 2015, according to research from the Lawrence Berkeley National Laboratory. Typical time needed to complete technical studies needed for that grid approval is now more than three years, up from less than two in 2015. One renewable-energy developer, Recurrent Energy, filed more than 20 of these grid-connection requests last year in California, a state that needs more clean power to replace several gas-fired power plants as well as a nuclear plant slated for retirement in the coming years. It took the company seven years to get approval and construct a separate battery storage project in that state.”

($) JPMorgan Is Building a Giant Travel Agency. “It bought a booking system, a restaurant review company and a luxury travel agent. It is building its own airport lounges and a force of thousands of travel agents. A new website will launch in the coming months. JPMorgan estimates that its customers account for one of every three dollars spent on leisure travel in the U.S., though those customers book only a tiny amount on the Ultimate Rewards website. With the new offerings, JPMorgan executives believe the bank could capture $15 billion in bookings in 2025, five times what it handled before the recent buildup. That would make it the third-biggest travel agent in the country, based on 2021 volumes, according to industry publication Travel Weekly. The plan has risks. Travel-rewards giveaways have proved expensive for JPMorgan and other banks, and they haven’t always led to the lasting relationships the banks hoped for. JPMorgan also has important corporate partnerships with airlines and hotels that expect the bank to send customers their way. Some of those partners have already complained about the success of Sapphire taking away customers from their cards. The bank is already seeing early signs of that luxury demand. The average price Chase customers are paying for hotels is more than double the industry average, the bank said.”

From legroom to airfare: How JetBlue’s takeover of Spirit could change air travel. If you don’t know how expensive it is to travel domestically in the US, take a trip to Europe and try to fly within the continent. I was really shocked the first time I booked a domestic flight here. I am still shocked sometimes nowadays. There is competition between major airlines, but prices are still high because there is no regulatory pressure on a handful of airlines that fly customers. I don’t know if this merger will help anything. Having another major may drive air fares down. But it could as well join the fun and charge a lot.

US, Japan reaching for a 2-nm chip breakthrough. The race to secure semiconductor supply for the future amidst the political threat from China is more intense than ever. I don’t think China, regardless of whether Xi will be in charge, will give up Taiwan, home to TSMC. It’s not only because TSMC is THE fab of the most advanced chips in the world, but it’s also because China believes Taiwan belongs to them and has no rights to independence. Any nation’s leader will not fulfill their duty if they don’t think about hedging this risk. US and Japan are doing the right thing here. Better late than never.

Ad tracking rules could become much stricter in Europe; Apple’s ATT vindicated. Companies that rely on ads dollars should really pay attention. “This is the single, most important, unambiguous interpretation of GDPR so far. It backs up the approach of Apple.

($) Netflix Is Scrambling to Learn the Ad Business It Long Disdained. “One of Netflix’s goals was to secure a big “minimum guarantee”—a promise that it would get a large influx of ad revenue to limit its financial risk, say people familiar with the discussions. Netflix also hunted for a senior leader with advertising expertise, mindful that it knew little about the business of selling ads. The company approached at least two top Comcast executives for a senior role while the partnership negotiations were continuing with their employer, angering the top brass at the cable giant, some of the people said. Mr. Hastings has set lofty financial ambitions for the ad business. He and other company executives have told investors and ad industry executives privately in recent months that Netflix will eventually be able to charge advertisers about $80 for every 1,000 views of an ad by helping them target specific audience segments, people familiar with the discussions said. That would put Netflix among the most expensive destinations for ads, alongside top NFL television programming. Creating an advertising-supported tier isn’t the only about-face the company is making in its quest to revive growth. After years of treating password-sharing by customers as a marginal problem—Mr. Hastings said in 2016 he loved the practice—Netflix plans to begin charging households a sharing fee sometime in 2023.

Chip Makers Have a Message for Car Makers: Your Turn to Pay. The ever-growing demand for chips turns the negotiation tables around. Chip manufacturers now command more bargaining power than they ever have. Car producers have no choice but either put up or shut up. As every car company is now racing to bring electric vehicles and trucks to the market, they won’t shut up.

Other stuff I find interesting

Some wonderful photos of my country taken by an award-winning photographer

US regulators will certify first small nuclear reactor design. I understand that there are concerns over safety and nuclear waste, but nuclear is perhaps the best tool at our disposal to generate clean energy at scale to accommodate the ever increasing demand. I wonder how and/or if this step would help increase the use of nuclear power

Who Is Collecting Data from Your Car? An eye-opening read on the vehicle data world

Tails, You Win. Now that I think about it. Love is just pure dumb luck. The person that you fall in love with happen to love you back. If you manage to fall in love and spend the rest of your life with the same person, creating happy moments and sharing wonderful children and grandchildren, that’s as taily as tails get.

Biden wants an industrial renaissance. He can’t do it without immigration reform. As an immigrant myself, I can tell you that if I had known what I do now, I would not have come to the US. The immigration process here is very talent-unfriendly. The country pours billions of investments into technology, yet the immigration system is antiquated and undoes all the good that such investments bring. To secure the future of the US, the government needs to massively and quickly reform its immigration

Hidden menace: Massive methane leaks speed up climate change. It’s horrifying to learn that we are pumping an incredible amount of this polluter into the air while knowing that it can speed up climate change significantly.

The U.S. made a breakthrough battery discovery — then gave the technology to China. I could hardly believe what I read. A promising battery technology took a dozen US scientists, 6 years and millions of taxpayers’ money to be developed. Then, the Department of Energy transferred the technology to a company based in China where it is currently further developed and produced

Stats

HALF of the nation’s clean power is generated by nuclear energy

Gen Z has led all generations in terms of 30-59 day credit card delinquency this year, according to Vantage Score

OnlyFans has 200 million registered users

Globally, only 9% of plastic waste is recycled while 22% is mismanaged

Even with a loss of $2.6 billion, Uber had a great quarter

Uber lost $2.6 billion in the last 90 days!

However, that headline-grabbing figure doesn’t fully tell the whole picture. The fact that Uber stocks went up by more than 10% after hours indicates investors were pleased with what they saw and heard from management. There are reasons to that.

Total Gross Bookings (GB) grew by 33% amidst a challenging environment when inflation was the highest in decades. Revenue went up by 105%, although that included contribution from the acquisition of Transplace. Without the acquisition, my estimate is that Revenue would still be up by at least 30-40%. The number of monthly active platform users hit an all-time high record of 122 million while the number of trips increased by 24% to 1.87 billion, just a tad shy of the all-time record of 1.9 billion set in Q4 FY2019, right before Covid.

More importantly, Uber became a free cash flow generator for the first time in history. All three main businesses, including Mobility, Delivery and Freight, were all profitable on an adjusted-EBITDA basis. I understand that some folks have a bone to pick with the adjusted-EBITDA numbers, but Free Cash Flow doesn’t lie and it indicates Uber is on the right track. The giant net loss quoted above included $1.7 billion of unrealized losses related to Uber investments in Zomato, Aurora and Grab, as well as $470 million in stock-based compensation expense.

Back in my review of Uber Q3 FY2021 earnings, I wrote that Covid created a golden opportunity to transform itself. The latest results were further proof of that. Before Covid, Uber was all about Mobility, both in terms of gross bookings and revenue. The pandemic hit Mobility hard, but gave Delivery a great momentum that has not been relinquished since. In the last quarter, both segments notched the second-highest gross bookings in history in Q2 FY2022 while each recorded the highest revenue ever, albeit with some benefits from the model changes in some markets. Without Covid, I doubt that Uber could turbocharge its Delivery business that quickly. Now, instead of relying on Mobility, Uber has two weapons that complement each other well.

Uber Mobility and Delivery's Gross Bookings and Revenue
Figure 1 – Mobility and Delivery’s Gross Bookings and Revenue
Uber Delivery Gross Bookings and Basket Size
Figure 2 – Uber Delivery Gross Bookings and Basket Size

In A look at Uber after it acquired Postmates and Drizly, I wrote:

The way I think about Uber as a business is that it connects end users, partners and drivers altogether. The more end users Uber can present to its partners, the more partners it is likely going to sign. In turn, that means Uber’s end users can have a bigger selection at their finger tips, raising Uber’s value proposition. On the other hand, a bigger end-user pool helps the company sign up drivers. Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up.

The rise of Delivery does wonders for Uber as it can bring more businesses to drivers. At times, when there is no rider to transport, couriers can deliver food or other items to better utilize the one resource that we can’t get back: time! Now that consumers are back on the road to office and travel, drivers have more opportunity to earn. On the call, the executives bragged that drivers in the US earned $30 per hour on average. That’s pretty competitive. Thanks to its scale, Uber believes it is best positioned to attract and retain drivers. The company has consistently talked about being more efficient with their operations and relying less on incentives. Such self-sustained growth is reflected by the fact that Delivery has had positive adjusted EBITDA for three quarters in a row.

Uber Delivery Net Revenue and Adjusted EBITDA
Figure 3 – Uber Delivery Net Revenue and Adjusted EBITDA

Uber is a multi-sided network, dealing with consumers, drivers and merchants. They co-exist together and each cannot without the other two. Retaining drivers is crucial to retaining merchants and riders. In addition to the $30+ per hour income, Uber recently introduced some new features to support drivers. Soon, for the first time ever, drivers will be able to see in advance where the trip will end and how much they will earn for that trip. Drivers can compare multiple trips at once and decide what works best for them. Then, Uber will offer drivers a chance to earn 2-6% cash back at gas stations with Uber Pro Card. Gas is arguably one of the biggest expenses for drivers. The cash back is a nice gesture that will go a long way to retain this important class of stakeholders.

When delivery companies such as Getir or GoPuff are forced to shrink operations, the scale that Uber is operating on provides a great deal of advantages. If they can maintain that scale, other competitors will find it highly challenging to take share from Uber without near-term damage to profitability. And in case you haven’t noticed, profitability and sustainable growth is the tune that Wall Street wants companies to sing, not growth at all cost.

Sustainable growth is one area where Uber has been much better since Dara became CEO. Back in 2020, in Uber’s latest chess moves, I wrote about the downside of Uber operating in many markets and praised Uber’s effort to withdraw from countries where it was not competitive. Yesterday, in a conversation with Bloomberg, Dara reiterated that stance by saying that Uber is still operating Mobility in India, but will shut down Delivery because they don’t think they can be the market leader. This type of strategic thinking and discipline can only benefit a company like Uber in the eyes of investors.

Moving forward, there are several levers that Uber can pull to stimulate growth and profitability. The first is Uber One. As of Q2 FY2022, Uber One has 10 million paid subscribers. That’s a respectable figure, compared to the 6 million reported in Q3 FY2021. However, considering that the company has 122 million monthly active platform customers, Uber One’s penetration is less than 10%. Once that number increases, it will boost the company’s top and bottom line meaningfully.

The second lever is advertising. Every company wants those high-margin ads dollars and Uber is no exception. Since its launch in Q3 2020, advertising on Uber has been used by 27% of all active Delivery merchants. Though Uber should be mindful of how a litany of ads can adversely affect customer experience, I don’t see any reason why the share of active advertising merchants cannot reach 40%.

Uber Active Delivery Merchants and Share of Active Advertising Merchants
Figure 4 – Uber Active Delivery Merchants and Share of Active Advertising Merchants

Then, there are New Verticals in Delivery (groceries and non-food items) and Uber 4 Business. Combined, these two levers make up less than 10% of Uber’s Gross Bookings, indicating that there is room to grow in the future. The management team mentioned that they are still hiring for Uber 4 Business, a strong signal that they consider it important to the company’s future. New Verticals, like the partnership with Albertsons, plays a key role in increasing the utility of the Uber apps to consumers. Here is what Uber had to say:

As far as new verticals go, we’re quite satisfied in terms of the growth of that team. It’s at about a $4.5 billion run rate in terms of gross bookings. We are investing in this business. And despite investing in this business and it’s in the hundreds of millions of dollars, you can see the profitability that we’ve been able to drive with the delivery business overall. It’s really because of the scale and efficiency that we’re bringing to bear.

What we’re seeing with new verticals customers is that Uber Eats customers who also order from new verticals tend to stay with us, tend to have higher frequency. And it’s really a part of the power of the platform that we’re having. If you ride with us, if you eat with us, if you drink with us, if you order groceries with us, we just become an everyday part of your life. You top that off with the membership program. And we think we have a relationship with customers that really can’t be duplicated in industry on a global basis. That’s what the strategy is all about and we’re quite optimistic about our progress to-date

Source: Alphastreet

Overall, I am pleased with what Uber reported this quarter. Even though the stock is still down significantly, the business is in a stronger position now than it was before and during Covid. That is not to say that the company can afford to take its foot off the gas pedal and to lose discipline. What is gained today will be easily lost in 90 days. The macro economic situations remain chaotic and unpredictable. Consumers may have to cut back on non-essential spending and Uber, whether they like it or not, often falls into that category. Regulatory threats are always there. Formidable rivals such as DoorDash and Instacart are still competing hard. Hence, they need to stay focused and relentlessly execute. But with this result, I think at least they gained some investors’ confidence, including mine.

Weekly reading – 14th May 2022

What I wrote last week

Uber Q1 FY2022 Results

Book Review – After Steve: How Apple Became A Trillion-Dollar Company And Lost Its Soul

Business

Newest trend in delivery apps: move from cars to e-bikes. Micromobility is great for short-distance deliveries in a busy city like San Francisco. This is how Grab Food, Shopee Food and others manage deliveries in Ho Chi Minh City. Consumers order food within 3-4 kms most of the time. Traffic jam is a feature of the city. If couriers used cars for deliveries, there wouldn’t be any food delivery business! eBikes are also environmentally friendly. I hope to see more innovation and governmental subsidies in this space

John Gruber on the European Commission’s calling Apple Pay an illegal monopoly. I like John’s takes on Apple-related things. He is experienced and more importantly nuanced and fair. “This passage, as well as much of the rest of the E.C.’s “statement of objections”, seeks to dismiss the hard work Apple has done to make Apple Pay successful. Yes, NFC is an industry standard, and Apple Pay is, in part, built on top of that. But before Apple Pay, NFC was hardly used, even though Android had supported it since 2011. When Apple Pay launched in late 2014, its support for the existing NFC infrastructure was so good, it worked with many credit card terminals that had no explicit support for “Apple Pay” specifically. Apple Pay was so easy to use people were using it at retailers who weren’t even Apple Pay partners. That’s not a credit to NFC, which had been in place for years. That’s a credit to Apple. I honestly don’t understand where the E.C. sees anticompetitive behavior with Apple Pay. What I see is market share dominance stemming from the hard work of designing better integration into iOS and iPhones and educating users about the feature. How else could the iPhone’s share of NFC payments so far exceed the iPhone’s share of mobile phone sales? I’m not saying Samsung and Google suck at this, per se, but Jennifer Bailey’s team at Apple is really good, and perhaps just as importantly, really diligent about this sort of thing.”

Congress is ‘moving too slowly’ on semiconductor supply crunch, Commerce Secretary says. The dysfunction and ineffectiveness of Congress, especially in this matter, will cost America a lot both in the short and long term.

Buy Now, Pain Later? An interesting read on BNPL and specifically Affirm

Don’t forget Microsoft. Business schools around the world should teach students about Microsoft and its revival by Satya Nadella.

Business Travel Rebounds as Execs Choose (Real) Face Time Over Zoom. I, for one, am curious about whether business travel will come back to the pre-pandemic levels and how it will come back. During the pandemic, articles were written on how business travel would never be the same. Anecdotally, my colleagues at work traveled to Omaha, Nebraska for monthly meetings and quarterly department reviews as if nothing had happened in the past two years. China remains a question mark. Because they remain persistent on the zero-Covid strategy, they are not a viable destination at the moment. And I hope that the prolonged fight with Covid does not give other variants a chance to spring up. I think we have enough of a pandemic for, let’s say, the next few decades.

Inside the Collapse of CNN+, the News Channel’s ‘Apollo Mission’. The launch of CNN+ seems rushed and more like a political move by some executives than a savvy business initiative

How Gillette Embraced the Beard to Win Over Scruffy Millennials. Gillette went from demonizing beards to embracing them. After years of fruitless resistance and declining sales, they finally realized that their bread and butter product is no longer what men want. More than half of the men in the world don beard, including two-thirds of millennial men. Sensing that the tide they were going against was too strong, Gillette launched new beard-friendly products rolled into a line named King C. Gillette. A deviation from what the company is always known for, but a good strategic shift, I think.

Other stuff I found interesting

Could solar power solve Puerto Rico’s energy nightmare? I can’t imagine living in this day and age without electricity. Especially when that happens in a U.S territory.

Moon soil used to grow plants for first time in breakthrough test. This discovery inspires a lot of questions, possibilities and dreams

Cat Litter Could Be Antidote for Climate Change. I don’t know about you, but I don’t have “cat litter could absorb methane before it goes up in the air” in my 2022 bingo card. But it’s a nice surprise and discovery.

Stats

NYC subway ridership as of March 2022 is 60% of the pre-pandemic levels

Germany has 9% of all bitcoin nodes

“In 2021, U.S. podcast advertising revenues rose to $1.4 billion”

Only 50% of the time when a PayPayer user goes to a site that has PayPal does that user use PayPal

Uber Q1 FY2022 Results

Last week, Uber announced the earnings results of Q1 FY2022 and the numbers show that its operation continues to recover well after Covid-19 disruptions. Here are the highlights:

  • Gross Bookings: Gross Bookings increased by 35% to $26.5 billion
  • Mobility & Delivery Gross Bookings: Mobility saw 58% in Gross Bookings while Delivery had a 12% YoY growth
  • Revenue: Revenue rose by 136% to $6.8 billion. Total revenue was boosted by the acquisition of Transplace. Nonetheless, Mobility and Delivery revenue grew by 195% and 44% respectively
  • Net loss: While net loss was an astounding $5.9 billion, $5.6 of which came from the loss in value of equity investments in other companies. Loss from operation stood at $482 million, down from $1.5 billion a year ago
  • Free Cash Flow: FCF for the quarter was -$47 million, up from -$682 million a year ago. Uber’s operation cash flow was $15 million, up from -$611 million in Q1 FY2021

For Q2 FY2022, forecast Gross Bookings is between $28.5 to $29.5 billion, resulting in growth of 30% to 35%, on top of the 114% growth booked in Q2 last year. The company also expects to generate positive free cash flow for the full year of 2022. Investors and analysts must love the forecast by Uber as the drop in its stock price last week was much less severe than Lyft’s. And they should like what they see from Uber, especially when we dig into the numbers a bit more.

As mentioned above, revenue growth outpaced gross bookings growth in both Mobility and Delivery. Mobility take-rate hit 23.5% in Q1, back to the pre-pandemic levels, and it’s still short of the long-term target of 25% set on Investor Day 2022. Delivery has seen a steadily increasing take-rate for the past 3 years, reaching 18% in Q1 FY2022, which is already higher than the target of 15%. Delivery is a highly competitive space with the presence of heavyweights such as DoorDash or Instacart. I wonder if this heightened take-rate will remain stable or if Uber will reduce its cut to attract and retain merchants.

Uber's take rates

The good news for Uber is that such an increase in revenue didn’t come at the expense of profitability. Mobility’s adjusted EBITDA margin came back to the 2019 levels while Delivery’s was positive for two consecutive quarters in a row. Last quarter saw Freight become adjusted EBITDA profitable for the first time in the company’s history. Since the management team forecast to have positive FCF for the whole year, this trend seems to become a norm moving forward, rather than a fluke. Furthermore, the Fed plans to have more rate hikes in the coming months to curb inflation. At a time like this, companies will do well to demonstrate to investors that they can generate profits. To that end, Uber is in the pole position to reach profitability in an industry whose unit economics have long been questioned.

Uber Delivery adjusted EBITDA
Uber Mobility Adjusted EBITDA Margin

There are a few levers that can help Uber grow both the top and bottom lines. First, airport rides. Rides to and from airports used to account for 15% of Mobility Gross Bookings. From the low during 2020, share of airport gross bookings have grown to 13% of Mobility. There is still room to get back and probably exceed the pre-pandemic levels. Additionally, the same goes for Mobility as a segment. Its Gross Bookings is still down by compared to the 2019 levels. Total GBs for Mobility in 2021 trailed that in 2019 by $14 billion. Once that gap is closed, the higher take rate from this segment can only help with the bottom line. Additionally, the next lever is ads. The ads business is growing healthily as annualized run rate rose to $225 million in Q1 FY2022, more than double what was reported a year ago. Almost one out of four Delivery merchants is an active advertiser on the platform. As Sponsored Video Ads is available on a pilot basis, we should see more merchants advertise and more ads revenue. Last but not least, new verticals. These verticals have been doing about $4 billion in annualized run rate every quarter in the last few months. That’s less than 10% for all Delivery GBs in 2021. Given the latest developments such as the deepened partnership with Albertson, the expansion of Eats in Germany, the new deal with BP, the collaboration with Rakuten and Amazon Prime in Japan, and the introduction of group ordering, I expect new verticals to grow substantially soon.

In summary, I find the earnings report positive. Uber stock has been battered for months as its price dropped by 44% in the last year. Folks are concerned about the business model and they have reasons to be. Uber functions as a middleman working with a lot of important stakeholders: consumers, drivers, merchants and lawmakers. Maintaining those relationships on a global scale in different cultures and political agendas is extremely difficult. For good measure, competition is fierce with deep pockets as well. To invest in the company means that one believes in flawless strategy AND execution. One down quarter wouldn’t do as much damage to Apple as it would to Uber because the former has a dominant market share and is in a much better position than the latter. With that being said, Uber management navigated a pandemic by pivoting to Delivery, which changed the business forever. Could another management team have done better? Possibly, but we never know. The fact that Uber now has a friendlier image than it did, that its Delivery business is an equal of Mobility and that it has other levers to pull is a testament to the work of the management. Just look at Lyft. Even though its revenue is smaller than Uber Americas, its revenue growth rate hasn’t recovered as quickly. That’s due to Delivery, because as mentioned above, Uber Mobility’s business is still down compared to the 2019 levels. That goes to show how important it was for Uber to react and execute effectively during the pandemic. While it’s highly challenging to stay competitive and create profit in this industry for factors mentioned above, it’s precisely such factors that can make Uber’s moat robust if they can get execution right. A big if, indeed. I get where the skeptics come from, but personally, I am still on the believer side, for now.

Uber US & Canada revenue growth vs Lyft revenue growth

Disclaimer: I own Uber stocks in my portfolio.

Weekly readings – 12th February 2022

What I wrote last week

Thoughts on PayPal’s latest earnings

Apple’s next growth opportunity. Disney’s streamers showed resilience. ESPN+ achieved its FY2024 target

Business

Stream big: how Netflix changed the TV landscape in 10 years. I don’t deny that Netflix revolutionized the streaming industry or that it has the scale advantages. What I disagree with Netflix bulls or fans on is the alleged invincibility. The latest earnings call was a disappointment, sending the stock down by 20%. For the first time, the management team vaguely admitted competition which includes rivals with deep pockets and additional services that can help “subsidize” these rivals’ streamers. So far, Netflix has been successful, but it’s not a lock that they will continue to be the market leader in the near future.

‘Spider-Man: No Way Home’ could have hit $2 billion at the global box office if it were released in China. Movies without a release date in the most populous country in the world leave a lot of dollars on the table. It will be interesting to see producers strike a balance between freedom to cast whoever they want or craft whatever story they want to tell and the need to appease China. A big payday from a release in the country is something worth thinking about.

New Airline Bets You’ll Stop in Alaska for a Cheaper Flight to Asia. Personally, I look forward to the launch of Northern Pacific and flights to Asia through Alaska. I have never been there and tickets can be cheaper. So why not?

Deep Dive: Xiaomi. More than just cheap phones

How Alexandre Arnault Is Shaking Things Up at Tiffany & Co. An interesting profile of one of the Arnault children. He seems to have more than just the right last name

A $6 Billion Wipeout Was an Omen for Food Delivery Stocks. At this point, I feel like it’s irresponsible to invest in food delivery startups or publicly traded firms that do not have the scale. While it’s already tough for the established incumbents to run their business in the black, it’s an order of magnitude harder for those without scale. And if you haven’t noticed, the market isn’t looking kindly on unprofitable companies in a cut-throat market like food delivery.

Stuff I found interesting

Where Is There More Lithium to Power Cars and Phones? Beneath a California Lake. “In the U.S. hunt for lithium, an essential component of the batteries that power electric vehicles and cellphones, one big untapped source might be bubbling under a giant lake in Southern California. The U.S. currently imports almost all of its lithium, but research shows large reserves in underground geothermal brines—a scalding hot soup of minerals, metals and saltwater. The catch: Extracting lithium from such a source at commercial scale is untested.”

House Passes $350 Billion Competitiveness Bill, but Senate Fight Looms. Read this article and you’ll see how broken Washington is. The country really needs leadership, assistance and regulation to compete on strategic fronts. Yet, these lawmakers are prioritizing tribal politics instead of putting the country first.

EV Charging Network Will Target Interstate Highways. “Dotting the interstate-highway corridors with charging stations is considered a priority because it will give EV motorists confidence that they can take long-distance trips without trouble recharging. Stations will have to be installed every 50 miles, no more than one mile off the interstate, according to a guidance memo by the Federal Highway Administration. And stations will have to have at least 600 kilowatts of total capacity, with ports for at least four cars that can simultaneously deliver at least 150 kilowatts each. The stations also have to be accessible to the general public, or to fleet operators from more than one company. The locations can include privately owned parking lots if they are open to the general public.”

Germany’s Covid Boomtown Stumbles Over Its Newfound Riches. Progressive politicians want companies to pay more taxes; which companies do not want to do. Folks just want stable jobs and to be taken care of by the tax money they pay. Marburg is another example of how hard it is to strike a balance and keep everyone happy

Stats

International students earned nearly half of the master’s and PhD STEM degrees in the US in 2019

90% of Uber’s earners work fewer than 40 hours per week and 60% work fewer than 20 hours per week (Investor Day 2022)

46% of Uber’s gross bookings in Q4 2021 came from customers engaged both with Mobility and Delivery. These customers made up only 17% of Uber’s customers base (Investor Day 2022)

10% of all first time riders to Uber in 2021 came to a 2-wheeler or a 3-wheeler trip (Investor Day 2022)

Uber lags behind DoorDash in the U.S. Uber advertisers made up 18% of its merchants

Uber Eats in the U.S accounts for 23% of its total Gross Bookings. Still far behind DoorDash

To prove that it’s a valuable partner for merchants, Uber commissioned what they call Uber Merchant Impact Report. This report is based on internal data between October 2020 and September 2021, as well as an online survey of 727 U.S merchants whose response is anonymous. According to Uber, there are 400,000 active Eats merchants in the U.S alone. Hence, the number of surveyed responders (727) doesn’t seem very representative to me. Nonetheless, the report does have some useful nuggets.

In the last twelve months, Uber Eats facilitated $11 billion in “sales” for merchants in the U.S. The word “sales” here is tricky as I don’t know for sure whether it is Gross Bookings or what merchants actually receive after Uber gets its cut. The difference can be in the region of 25%. In this case, if we assume that the figure is Gross Bookings, it means that Uber Eats in the U.S was responsible for 23% of the company’s total Delivery Gross Bookings (approximately $48 billion) in the last year. Quite a significant piece of the business. However, it still lags quite far behind almost $40 billion in Gross Bookings that DoorDash recorded in the U.S in the same time frame.

Additionally, Delivery has 400,000 active merchants and 2 million active drivers in the U.S at the end of September 2021. In the past year, these merchants and drivers helped facilitate more than 500 million Eats orders. In contrast, DoorDash, if we assume all their Operating metrics are U.S alone, has 500,00 active merchants, 3 million active riders and almost 1.3 billion orders.

Uber Eats/DeliveryDoorDash
Gross Bookings between Oct 2020 and Sep 2021 (in $ billion)11 – 13.7540
Orders between Oct 2020 and Sep 2021 (in millions)5001,300
Active merchants as of end of Sep 2021 (in thousands)400500
Active drivers as of end of Sep 2021 (in thousands)2,0003,000
Comparison of operating metrics for the U.S market

Uber advertising is growing

Uber advertising was first launched in the U.S in Q3 2020, has since expanded to all Eats markets, exceptGermany, and has been seemingly well-received by merchants. The number of active advertising merchants grew from 30,000 in Q3 2020 to 140,000 a year later. As share of total active merchants, advertisers made up 5% and 18% in Q3 2020 and Q3 2021 respectively.

While the growth figures look good, I have a couple of concerns over this advertising business. The first is its outlook. We obviously can’t expect 100% of merchants to become advertisers. If 18% is the adoption rate right now, how much higher can it go? 25% or 50%? In that case, what would be the ramifications of having too many advertisers and too many sponsored listings on an app? We all feel annoyed with Google searched result pages littered with ads. If Uber is not careful, it will risk losing valuable consumers because of inferior customer experience. That’d be too high a price to pay, I’d say.

The second concern I have is whether this segment can actually move the needle. Uber revealed that advertising reached an annualized run-rate of $100 million in Q3 2021. Whether this number was annualized on a weekly or daily basis is unclear; which makes it impossible to really gauge how much revenue Uber actually generated from advertising. Additionally, even the annualized run-rate of $100 million is a drop in a bucket as Uber’s last 12 months’ revenue was almost $15 billion. Is advertising dollars helpful? Yes. Will it be a needle mover soon? I doubt it.

Super Apps

In this post, I’ll touch upon briefly the definition of a Super App, give a few examples and talk about the business implications of these apps.

The term Super Apps is generally credited to Mike Lazaridi, the founder of Blackberry, who defined it as “a closed ecosystem of many apps that people would use every day because they offer such a seamless, integrated, contextualized and efficient experience”. In laymen’s terms, a Super App is an application that offers various services on one interface. While the mix of services offered by Super Apps varies from one to another, the common denominators of these apps are 1/ they are all two-sided networks popular with both merchants and consumers and 2/ they all began their journey by being excellent in one function before branching out to others. Merchants need to have access to a lot of consumers to join a network while consumers only find the network useful when there is a lot of utility, namely plenty of merchants. The chicken and egg problem of a two-sided network is hard. Therefore, the singular focus on a vertical in the beginning makes sense as start-ups can’t afford to solve this issue in multiple verticals. No-one can build a Super App right from the get-go. Once an app excels and makes a name for itself in a vertical, why not leveraging existing traffic and offering users more reasons to stick around longer?

Examples of Super Apps

WeChat

WeChat started out as a messenger app. An engineer named Allen Zhang alerted his employer Tencent on a threat of other competitors taking away its market share and app engagement. To stay competitive, WeChat transformed itself into an app on which users could do everyday things on a single interface including payments, social media, e-commerce, doctor appointments, hotel reservation or ride-hailing. The pivot was a hit as the new services surpassed even the apps that inspired WeChat in the first place. 

Facebook

Facebook and its founding story need little introduction. Over the years, Facebook has added several services to make itself stickier as a platform. Nowadays, users can shop on a marketplace or Facebook-native stores; create new connections with Facebook’s own Tinder version; make payments with Facebook Pay or consume exclusive content from creators. With its ambition and virtually limitless resources, it won’t be a surprise that Facebook or Meta will expand its offerings in the future.  

Grab

The title of grab.com reads “Grab: The Everyday Everything App”. Its status as one of the biggest Super Apps in Southeast Asia is so different from its humble beginning. Grab was founded as a taxi-hailing business in Malaysia in 2012 by two Harvard graduates. The company gradually expanded into other areas, such as other modes of ride-hailing, food delivery & nonfood delivery, travel bookings, bill payment and financial services. In Vietnam, almost everyone in big cities uses Grab for daily tasks from food delivery, ride-sharing or bill payments.

What Grab mobile app looks like in Vietnam
Figure 1 – What Grab mobile app looks like in Vietnam

Uber

Uber was founded in 2009 by Travis Kalanick and Garrett Camp as a ride-hailing alternative to taxies. The company’s meteoric rise saw it become a global phenomenon, but the company today is more than just a ride-hailing app. In 2014, Uber launched a food delivery service called Uber Eats, which was later rebranded under Delivery. While Covid-19 decimated the Mobility segment (ride-sharing) as riders were restricted by stay-at-home orders, the pandemic was a catalyst for the transformation of Uber as a whole. Delivery has been growing substantially due to consumers ordering food and grocery deliveries. Its gross bookings have repeatedly surpassed Mobility’s and now reaches Mobility’s pre-pandemic level. Second, the company has made strategic acquisitions to expand beyond food delivery. In June 2020, Uber acquired Cornership, a popular grocery delivery service in Latin America. A few months after, it added Postmates, which is very competitive in coastal cities and offers delivery-as-a-service for non-food items. In October 2021, Uber took over an alcohol delivery startup called Drizly. The company has been tinkering with marijuana delivery in Canada and waiting for the green light from the federal government before launching it in the U.S. Powered by the new capabilities, nonfood categories make up around 5-6% of Uber’s overall gross bookings and are expected to grow more in the future. Uber’s ambition is very simple: be the go-to app when consumers have a transportation need. 

PayPal

PayPal first made a name for itself by being a secure digital wallet and online payment system, especially as the primary checkout option on eBay. Since its spin-off from eBay in 2014, the company has added plenty of services to its mobile app and become a formidable two-sided network, due to relentless acquisitions and product development. End users can access various services on the current PayPal app, including paycheck deposit, high-interest savings, bill payment, remittance, credit cards, debit cards, in-store & online payment, BNPL, PayPal Credit, P2P payment, shopping deals and investing. PayPal’s end goal is to be the go-to Financial app for its users.

PayPal's offerings to consumers and merchants
Figure 2 – PayPal’s offerings to consumers and merchants. Source: PayPal

Cash App

Cash App started out as a P2P payment app in which users could transfer funds to anybody in the U.S. Nowadays, users can pay for purchases in stores and online with Cash App debit card and Cash App Pay; invest in stocks and cryptocurrency; or make deposits into checking accounts. In November 2020, Square bought the tax filing division of Credit Karma and subsequently added to its flagship app the ability to file taxes and receive tax refunds. In August 2021, Square paid $29 billion for Afterpay, one of the major BNPL players in Australia and in the U.S. It’s just a matter of time before Cash App turns on BNPL for its users and merchants. Cash App’s ambition is similar to PayPal’s; which makes it interesting to see how the two compete in the future.

Pros and Cons of partnering with Super Apps

Merchants stand to gain an additional payment option as well as more sales from Super Apps, but the story isn’t all rosy. Too much reliance on Super Apps means that merchants’d risk ceding the control of direct customer relationships. In business, few things are more valuable than that. Take Apple and Amazon for instance. Apple’s customer base is so loyal and attached to their brand that almost all developers or other brands take the back seat in negotiations . Amazon’s scale and iron grip on the valuable Prime base allows them to dictate terms over merchants. When you buy from a merchant on Amazon, do you feel more related to the former or the latter?

For banks, Super Apps can have adverse impact in a couple of ways. First, services such as PayPal in 4, Afterpay, PayPal Credit or PayPal/Venmo credit cards can reduce issuers’ credit card spend and subsequently balance as well as revenue. Secondly, it’s in their interest to have users maintain an in-app balance and keep funds away from banks’ checking accounts. Think about it this way: would you feel more poised to use PayPal when your PayPal balance was $20 or $0? That’s why Venmo credits dormant users $10 for downloading and logging into the app again or why Square wants users to keep tax refunds in Cash App balance. The reduction in deposits can raise banks’ cost of funds as well as threaten to cut off the most fundamental relationship with customers. 

On the other hand, Super Apps present a battleground for financial institutions vying for wallet share. Once the connection between checking accounts or debit/credit cards and these Super Apps is established, users often don’t want to go through the inconvenience of updating their default payment method. Hence, every financial institution wants to be the primary source of funds for consumers on these Super Apps to have a leg up over the competition. In this sense, Super Apps offer a business opportunity.

In summary, as you can see above, there are multiple paths towards the Super App status, whether an app’s starting point is to be in messaging, digital wallets or ride-sharing. I think all successful consumer-facing apps have ambition to gain the Super App status. If not, they’d do something wrong. It’ll be interesting to see how these Super Apps compete for mindshare as feature parity is established (meaning they all offer similar features). For merchants, working with Super Apps can be a double-edged sword. While the benefits these apps bring are very tempting, merchants need to keep in mind the risk of losing customer relationships. Like people usually say: don’t miss the forest for the trees.

Weekly reading 6th November 2021

What I wrote last week

I gave two examples from Financial Times on why you should be vigilant about what’s on the Net

Uber’s Q3 FY2021 results

Good reads on Business

Why acquisitions lead DTC exits. “An acquisition, especially from a larger firm in the space, can provide brands with the resources needed for sustained growth, like marketing expertise, a stronger supply chain, access to new customers or a wider distribution network. At the same time, an acquisition — as opposed to alternative exit methods like a public listing — keeps many aspects of the business, namely its financial reports, private. Acquiring a brand gives larger companies access to the brand’s data, e-commerce expertise and its customers. Through an acquisition, a larger company may also be looking for expertise, resources and sometimes real estate it doesn’t have yet, in addition to talent and customers”

The Facebook name was such a drag that employees referred to it as a ‘brand tax’. What it’s interesting yet has been so obvious to me for a while is that while Facebook is supposed to be an entity making decisions based on mountains of data, the call to add “from Facebook” to Instagram and Whatsapp was made unilaterally by Mark Zuckerberg based solely on his preference and against studies with concrete data from his staff. I am sure this isn’t the only instance that this sort of things happen in Facebook or quite frankly any organization

The economics of pumpkin patches. If you haven’t subscribed to The Hustle, you may consider doing so as their weekend write-ups are usually a joy to read.

A New Market Emerges for Online Delivery: 10-Minute Groceries. The idea of 10-minute deliveries is straightforward, but requires gigantic investments and great execution. In other words, it’s exceedingly difficult. On top of the operational challenges, consumers can switch to another provider at any time, making the cost of acquisition and retention expensive. My guess is that these providers use initial investments to generate demand and popularize the concept of 10-minute deliveries. Once consumers are used to the concept and demand it from retailers, these retailers have no choice but to offer it, either by building the capacity themselves or working with the delivery services. The likelihood of retailers building the capacity themselves is low, especially for small and medium-sized retailers. Hence, these delivery services can improve economies of scale by signing up more and more retailers. Oh and don’t forget the ads dollars that will definitely grow once the delivery apps become popular enough.

Is Facebook Bad for You? 360 Million Users Say Yes, Company Documents Show. “Facebook researchers have found that 1 in 8 of its users report engaging in compulsive use of social media that impacts their sleep, work, parenting or relationships, according to documents reviewed by The Wall Street Journal. A Facebook team focused on user well-being suggested a range of fixes, and the company implemented some, building in optional features to encourage breaks from social media and to dial back the notifications that can serve as a lure to bring people back to the platform. Facebook shut down the team in late 2019.

Rene Ritchie talked to two Apple executives about Apple’s switch to their own chip M1. Two things stood out to me from this interview: 1/ the minimalistic style that Apple follows is reflected on the principle that no transistor is wasted on the chip. If a transistor is on the chip, then it has a job to do and it really needs to be there; 2/ the construction of the M1 chip is a collaborative effort between multiple different teams that starts from the vision for better customer experiences. Other chips are designed to maximize benchmarks and meaningless stats and then hardware and software follow to accommodate the chips.

Stuff I found interesting

The untold story of the world’s biggest nuclear bomb. The deaths that stem directly from these nuclear bombs are tragic. What’s even worse is the long-lasting radioactive effect that can linger for hundreds of years. The next generations didn’t do anything to deserve that

‘Father of tiramisu’ Ado Campeol dies aged 93. “Campeol was the owner of Le Beccherie, a restaurant in Treviso in northern Italy where the famous dessert was invented by his wife and a chef. The dish, featuring coffee-soaked biscuits and mascarpone, was added to their menu in 1972 but never patented by the family. According to the dessert’s co-inventor, Chef Roberto Linguanotto, the dish was the result of an accident while making vanilla ice cream. The pair then perfected the dessert by adding ladyfinger sponges soaked in coffee, and sprinkling it with cocoa – calling it “Tiramisù”, which translates into English as “pick me up”.

A very good M1 Max Macbook Pro by MKBHD

Stats

Chile, Australia and Argentina have 75% of the world’s Lithium reserve with Chile making up 45%, according to World Economic Forum

Source: World Economic Forum

Uber Q3 FY2021 Earnings

In this post, I’ll share my notes on Uber Q3 FY2021 earnings and the business in general.

The last quarter saw Uber’s business continue to recover from the recent challenges, including driver shortages and lockdowns in various parts of the world. The number of Monthly Active Platform Consumers (MAPC) reached 109 million, an increase of 40% year over year. This is the highest number that Uber has seen in the last 12 months. The number of trips rose 39% as the average monthly trips per consumer was flat at 5 each. As usage increased, the company saw Gross Bookings (GB) and Revenue grow by 57% and 72% respectively (Figure 1). Adjusted EBITA, which Uber uses to measure profitability, was positive for the first time.

Specific segments (Mobility, Delivery and Freight) showed great progress in both GB and Revenue. Mobility led the way in GB growth at 67%, followed by Delivery at 50%, mainly because of the law of big numbers. In revenue growth, Mobility trailed Delivery (62% and 97% respectively), because the latter managed to raise its take rate by 410 basis points (Figure 2) while the former’s take rate took a modest hit. As the revenue continued to climb and operational optimization kicked in, Uber’s Delivery was inches away from profitability on Adjusted EBITA basis.

There is an argument to be made that Covid-19 created a golden opportunity for Uber to transform itself. The pandemic impacted its Mobility segment to great extent as lockdowns were imposed and consumers stayed at home. Not only did the company persevered, but it also pivoted successfully to grow its Delivery service. Since December 2020, the company’s total GB every month already exceeded that of February 2020. The key was in how Uber did it. While Mobility’s GB still hasn’t recovered to the pre-Covid level, Delivery has grown leaps and bounds by several folds (Figure 3). Furthermore, the two segments start to complement and support each other as one becomes a key acquisition tool for the other. Here is what Dara, the CEO, had to say on the earnings call:

So about 50% of, for example, U.S. and U.K.gross bookings come from cross-platform users. That number is closer to 45% globally and generally increasing. In the U.S. now, mobility continues to be a very significant customer acquisition tool for Eats. So now 1/4 of U.S.first-time eaters are coming from our Ride’s business, which is pretty extraordinary. For perspective, that’s more new users than we get from Google, Apple, Facebook, Instagram from all of these paid entities combined.So it’s free. We have tested that because consumers actually like this super asset that we’re building and the numbers are significant and increasing. And then on the other side, what’s interesting is that 20% of U.S. mobility first trips are coming from eaters. So now that we have a very, very big delivery business, we’re able to now cross platform into whether it’s offers or on the app or off app, we’re able to promote into our Mobility business. That number for the U.K., for example, is 40%. I’ll repeat it. 40% of U.K. first trip mobility users actually came from Eats — were Eats users, which is pretty extraordinary.

Source: Uber Q3 FY2021 Earnings Call

This synergy and ability to cross-sell is a competitive advantage over other Delivery rivals like DoorDash or Mobility nemesis (Lyft). None have this capability, especially on a global scale, like Uber does. From a consumer perspective, the extra utilities that Uber offers create a compelling reason to be a member and use the Uber app more often. According to the management team, there are 6 million members globally who already make up 1/5 of the total GB. On average on the Eat side, members’ basket size is 10% bigger than that of non-members. In Taiwan, Eat members made up more than 50% of the market’s GB and placed 3x more orders than non-members.

The increased utilization is also reflected on the driver side. A few months ago, in an article on the acquisition of Postmates and Drizly, I wrote: “Drivers have limited resources in their vehicles and time, as even the most dedicated drivers can’t drive for more than 24 hours a day. Nobody wants to drive around needlessly all day without getting paid while having to pay for vehicle expenses and gas. As a result, the more business opportunity Uber can bring to drivers, helping them better leverage their time and resources, the more drivers will sign up. When it comes to making more trips and money, do drivers care if it’s a parcel or a person that needs transporting?”. The sentiment was confirmed yesterday by Dara on the earnings call:

On the driver side, one thing that’s pretty cool is that about 1/3 of our new driver sign-ups now are driving both people and food, so to speak. And that is a higher number than our overall number. So about 25% of our drivers in the U.S. drive both people and food. That number was in the teens pre-pandemic.So it’s going up from the teens to 25% overall. And new drivers, 1/3 of them are electing to do both. So that, again, is like the iteration of our product getting better and better in terms of kind of pushing both services or offering both services, both on the demand and supply side.

So I think we’re going to see more earners on our platform for years and years to come. And we are finally getting the right muscle in terms of promoting cross-platform usage, which is going to lead to higher utilization on our platform in terms of time of day and in terms of driver utilization, structurally, it will be an advantage over the other players. So we want to be that platform that is kind of the one-stop shop for earners that they keep coming back to for a long period of time.

Source: Uber Q3 FY2021 Earnings Call

The investment in drivers that Uber made earlier in the year, plus the recovery from Covid and the increased driver utilization, helped the company tackle the driver supply issue. Compared to January 2021, Uber has seen 75% more active drivers in Q3. The wait time dropped from 7. 5 min on average in the U.S in March 2021 down to 4.5 min in October 2021.

In addition to the true ride-hailing and food delivery services that people come to know Uber for, there are a few other developments that are very promising and potentially beneficial to Uber. First is advertising. Having a marketplace (app) that is used by millions of users enables the company to monetize that traffic. Merchants wishing to broadcast their name and generate more business ought to pay advertising dollars to Uber. From Uber side, advertising revenue which Uber reported to amount to $100 million on an annualized basis in Q3 2021 and feature 140k merchants is high margin that allows the company to “fund” other emerging verticals. Which brings me to non-food deliveries. The new verticals make up about 6-7% of Delivery’s total GB and are expected to reach double digits next year. The investments that Uber has made to scale these verticals actually dragged down the profitability of the whole Delivery segment as the core verticals are now already in the black.

Additionally, the company is expanding alcohol delivery to more states in the U.S after the acquisition of Drizly. Drizly has a business model that is already profitable. It acts as a marketplace to connect merchants and consumers, but leaves the delivery duty to merchants. That way, Drizly can simply earn revenue from monthly subscriptions and a small fee every order without having to deal with drivers and all the expenses that come with delivery. Other ventures include rapid delivery, dark grocery (tiny warehouses that hold a limited selection of grocery to facilitate rapid delivery) and Baby + Kids vertical.

One stripe that people have against Uber is the tendency to burn money every quarter. The criticism is legit as that’s been the company’s model. This quarter saw net loss balloon to $2.4 billion, $2 billion of which came from a “net headwind (pre-tax) from revaluation of Uber’s equity investments in Q3 2021”. According to Uber’s CFO – Nelson Chai, the write-down resulted mainly from the loss of value of Uber’s stakes in DidiChung and this fluctuation can continue from one quarter to the next. I have quite mixed feelings about this issue. While I appreciate that Uber has valuable assets such as this equity, the fluctuation and complication don’t provide the simplicity and certainty to investors.

Lastly, Uber revamped its pricing tiers for merchants. The new pricing system mirrors very well what DoorDash offers with two distinct differences. One is that while DoorDash includes in its take rates the credit card processing fees, it’s unclear if Uber does the same. This can be an important point as 2.5% in credit card fees can mean the world to merchants. The other difference is that Uber guarantees 5 more orders every month with its Premier tier than DoorDash’s highest tier. As these table stakes are level-set, the difference between these two impressive companies will come down to: who executes better, who can bring more business & drivers to merchants?

Overall, this, to me, is a good quarter for Uber. The company took steps to address the driver supply issue and they worked. There is a great synergy between Delivery and Mobility that seems to go from strength to strength over time. Delivery doesn’t seem to show signs of slowing down and is actually profitable at the core while still in the red with the new verticals. Once Mobility gets back to the pre-Covid level and the new investments become more mature, the outlook will be even brighter for this company.

Disclosure: I have a position on Uber.

Appendix

Figure 1 – Uber’s Q3 FY2021 Financial & Operational Highlights
Figure 2 – Uber’s Revenue and Take Rate in Q3 FY2021
Figure 3 – Uber’s Monthly GB
Figure 4 – Uber’s platform supply growth efforts showing results in the U.S