Ever since adding Uber to the Paper Portfolio ~2 months ago as part of the November update, there’s been no shortage of negative news.
The latest episode of this drama continues to unfold with co-founder Travis Kalanick effectively completely severing ties with Uber. Not only has he sold essentially his entire stake in the company (~$2.5 billion), he will also be stepping down from Uber’s board.
In light of the significant and constant selling pressure post-IPO, it is actually quite remarkable that Uber stock has held up relatively well and has bounced from the bottom.
But what’s more important is considering Travis Kalanick’s plans for the $2.5 billion of cash he just raised.
There is a high likelihood that it gets reinvested in his latest company called CloudKitchens:
Ex-Uber CEO Travis Kalanick is back with a secretive startup already valued at $5 billion.
His new company, called CloudKitchens, builds commissary kitchens that restaurants can use for their delivery operations. CloudKitchens also operates its own delivery-only restaurants within those commissaries, including brands like Excuse My French Toast, Egg the F* Out, and B*tch Don’t Grill My Cheese.
Kalanick has kept CloudKitchens largely under wraps, but he’s been buying up cheap properties across the U.S, India, China, the U.K. and elsewhere.
On social media, while the spectrum of opinions is wide, there appears to be no shortage of views that suggest reinvesting so much cash into CloudKitchens would bring additional challenges to Uber Eats. If Uber Eats does become affected, then it would be problematic, especially since Uber Eats is responsible for a majority of losses at the moment:
In fact, if Uber were purely a “Rides” company, not only would Uber be profitable at the EBITDA level, the company would be growing at quite an attractive rate (+24% revenue YoY / +52% Adjusted EBITDA YoY). Not bad for a transactional platform for which the long-term promise is not software-like margins, but the potential to cross-sell high frequency users for other higher margin businesses.
However, based on what has been publicly reported on CloudKitchens so far, it is hard to see how CloudKitchens would/could become an issue for Uber Eats. The two businesses act more like compliments than competitors.
The business model for CloudKitchens more closely resembles a real estate platform company (WeWork for Restaurants?) whereby CloudKitchens buys/leases real estate and then fixes it up for usage by delivery-only kitchens. If the strategy is driven by real estate, $2.5 billion won’t go very far.
The strategy is an interesting one, but it isn’t unique since it is quite similar to the core of McDonald’s. At its heart, McDonald’s is a real estate company that leases land (and brand usage rights) to franchisees. This has been an incredibly successful and high margin business that has resulted in an enterprise with a market cap of ~$150 billion. While CloudKitchens is effectively mimicking the real estate portion of MCD’s strategy, it provides nothing in the form of a recognizable brand that would immediately generate demand.
CloudKitchens would be a platform, but only a B2B platform. Without a direct connection to the demand side (consumers), CloudKitchens is unlikely to generate strong network effects in the long run.
In addition, ghost/cloud kitchens can also be pursued by Uber:
Uber and other companies are driving the change. Since 2017, the ride-hailing company has helped start 4,000 virtual restaurants with restaurateurs like Mr. Lopez, which are exclusive to its Uber Eats app.
Janelle Sallenave, who leads Uber Eats in North America, said the company analyzes neighborhood sales data to identify unmet demand for particular cuisines. Then it approaches restaurants that use the app and encourages them to create a virtual restaurant to meet that demand.
What is likely true, though, is that Travis Kalanick is moving his money to a different part of the value chain where returns are likely to be higher. By moving upstream and into a large fixed cost business, the returns and margins are likely to be higher and more scalable in the long run, all while benefiting from the high variable cost delivery network created by Uber. The trade-off is likely a smaller and less scalable TAM (even the largest corporate landlords in the world hold a minuscule share of existing real estate given the high fixed cost/upfront investment necessary).
Given that our primary interest is in Uber and not CloudKitchens, I continue to think investors are focusing too narrowly on what Uber is (right now, it is Rides and Eats) and not enough on what Uber can be.
Rides and Eats are never going to be very high margin businesses due to the high variable costs associated with drivers and delivery personnel. But this does not preclude Uber from going into higher margin businesses by virtue of having a direct relationship with >100 million MAUs.
For example, Uber is entering the ad business (very high margins – just ask Google and Facebook):
Uber will become an ad platform, selling space inside its Eats app to restaurants hoping to lure in more food delivery orders. A recent Uber job listing spotted by TechCrunch seeks an Uber Eats Ads Lead “to lead the team and efforts responsible for creating a new ads business that enables eaters to discover new foods and restaurants to grow their customer base.”
Advertising margins could/should likely be 90%+.
And it doesn’t take a huge leap of faith because a similar company named Meituan has already shown the way in China:
Just 12 months ago, Meituan losses were growing faster than its sales as it tried to convince restaurants to sign up to its app, spent heavily on couriers, and flooded users with discounts.
But with the likes of Mr Wu now sold on its ability to generate orders, it has started to charge more for ads, take larger commissions and its main food delivery business is now profitable. Its achievement is a beacon of hope for lossmaking food delivery apps elsewhere, from Uber Eats to DoorDash to Swiggy and Deliveroo.
The bounce has also triggered a 145 per cent rise in its share price, making it China’s third biggest public tech company, with a market value of $75bn. Its success has seen it overtake JD.com and search giant Baidu to sit behind Alibaba and Tencent.
And even more broadly, investors are too narrowly assuming that Uber will be confined to just “delivery” of some sort, whether food or people or freight.
Uber appears to already be experimenting with bigger things. In true recognition of their value as a network and aggregator rather than as a transportation business, Uber is broadening its base on both the consumer and supply side.
Such as Uber Works:
On Wednesday, Uber plans to announce an expansion of a temporary staffing service it has been testing in Chicago. The program, called Uber Works, connects workers with businesses offering short-term jobs in hospitality, events, light industrial and other sectors. Miami will become the second city where Uber Works is available, with more planned for next year.
The program has been mainly focused on workers at traditional staffing agencies, but the company plans to start recruiting from its massive pool of drivers in the coming months, said Andrey Liscovich, the chief executive officer of the Uber Works project. That would enable anyone in those cities to sign up for an array of gigs that don’t require a car and driver’s license, potentially unlocking an even bigger labor market. “For us to invest in something, it needs to be on the order of ride-share in size, or even exceed it,” Liscovich said.
Such as Uber Money:
The company announced on Monday the formation of a new division called Uber Money to house its efforts, which include a digital wallet and upgraded debit and credit cards. The emphasis, at first, will be expanding Uber’s efforts to give its 4 million-plus drivers and couriers around the world access to a mobile bank account so they can get paid after each ride, according to Peter Hazlehurst, who will head the new division.
“We wanted to help everybody understand that there’s a new part of Uber that’s focused on financial services and that has a mission of giving people access to the type of financial services they were excluded from,” Hazlehurst said in a phone interview.
With the longer term goal being a super app:
The idea is for Uber to provide, within a single app, access to transport, groceries, hot meals, banking and more. In short, it wants to be a “super-app” modelled on apps like Gojek, whose food and payments features have already overtaken its transport business by revenue.
Uber’s rivals in Asia have already provided a path to follow. Gojek — partly funded by Visa, Google and Tencent — now offers 20 services to its 25m users, including video streaming and digital payments. Grab, a south-east Asian superapp with investment from SoftBank’s Vision Fund, has expanded into an array of services including business loans and insurance.
Connie Chan, a partner at venture capital group Andreessen Horowitz, said popular ride-hailing apps are in good position to become super-apps because they already have both key ingredients: a large audience of frequent users, and embedded payments. The challenge for Uber, which has 100m users across 60 countries, is to learn from Asian companies which tend to be three to five years ahead on mobile innovation.
If Uber can accomplish that across a large number of countries, $50 billion market cap seems more than reasonable.
Disclosures: I own shares in Uber. I have no intention to transact in the next 48 hours.