• February 11, 2025

    Why I'm short Uber

    Last Friday around 11:30am, Bill Ackman of Valeant, Herbalife and Netflix fame fired off a surprise tweet stating that he’d amassed a roughly $2.2 billion investment in Uber. As is typical for Ackman, he came in with an analysis the depth of which can only be measured in nanometers while proclaiming very confidently that “Remarkably, it can still be purchased at a massive discount to its intrinsic value.”

    Ackman has a history of firing off very poorly conceived investment ideas based on gut feel as is evidenced by his catastrophic trade in Netflix in 2022.

    Now before this tweet was sent as most know, Uber had released earnings on Wednesday morning and the initial market reaction was to sell it off.

    Retail bulls and people like Josh Brown were quick to confidently proclaim that the market was wrong and this company is a “cashflow machine.”

    In this post I’ll explain why all of them are wrong, the initial market reaction was absolutely the right one and why I believe Ackman is going to suffer another embarrassing loss on this trade.

    For what it’s worth, Uber is a company I’ve followed and analyzed for a long time. I wrote a post last year about how their marked to market losses were going to result in an EPS miss which did materialize.

    The thing to understand about Uber bulls is that they continuously focus on two numbers: gross bookings and free cash flow. For those unfamiliar, gross bookings are essentially the top, top line that Uber takes in. If I order an $85 food delivery, that is considered $85 of gross bookings. Of that $85, some portion goes directly to Uber in the form of inflated menu prices plus delivery fees and that is revenue. So gross bookings are the total dollars spent on the Uber platform.

    Free cash flow is the net income they made from operations plus expenses like stock based compensation and depreciation of assets they’ve added back in.

    If you haven’t figured it out yet neither of these numbers have much of anything to do with profitability. If you want to measure the strength of this business there is really only one number that matters that Uber consistently tries to mask- income from operations. Income from operations is simply the profit that was generated by the actual business without adding any expenses back in or shenanigans by their CFO.

    If we look at last quarter’s results we can see that Uber posted $44 billion of gross bookings which translated into about $12 billion of revenue. On the surface that seems like an enormous amount of money.

    But how much money did Uber actually make from processing all that cash?

    $770 million.

    Which brings me to why this trade is going to go badly for Ackman. Uber is simply not a profitable business. That is plain to see if you just cut through all of the nonsense that Uber uses to disguise the core business.

    Despite cutting all R&D, raising prices and completing record numbers of trips and enormous gross bookings, they could barely make a profit. The bulls do not understand this and continue to parrot idiotic nonsense like “tHiS cOmPaNy iS a CaShFlOw mAcHiNe!!!” In reality they basically break even then issue stock, count it as an expense which they add back as free cash flow and raise debt to buy back stock so that the shareholders aren’t diluted.

    For the last quarter, Uber reported $1.7 billion in free cash flow, a 122% increase. But as we already said, $770 million of that was profit. Where did the other billion come from?

    Let’s consult the 8K:

    Image

    Here we can see that $730 million of FCF came from stock-based compensation, unrealized foreign currency transactions, and depreciation. So a large chunk of the cash that this amazing business threw off was from exchange rate losses and stock issuance.

    Here’s another interesting part of this story. Gross bookings, trips completed and net income were all up exactly 18% year over year. That means that even though Uber processed 18% more trips and spend the profitability didn’t increase at all. And that I think is the real story here. Uber has achieved maximum profit margins and in a quarter with record numbers, generated $770 million of profit.

    A last but most important point. Uber has had a massive tailwind over the past few years that few seem to consider and that has been the amazingly stable price of oil. One of the highest cost inputs for drivers, gas, has been locked at about $3 a gallon. I’m not making a prediction about the price of oil here, but its very likely that save for some economic calamity, the price of gas is not going significantly lower than where it is, but could conceivably have a lot of upside. If that happens, who will bear the cost? The drivers who have already been squeezed, riders who are paying higher prices, or Uber? If that becomes an expense that Uber has to partially offset, its going to be a massive drag on profit. It’s a major risk to the business but one I never hear anyone mention because they’re focused on self-driving cars.

    By the way, if you doubt this analysis because of the recent move in Uber on the back of Ackman’s investment being made public, keep in mind that when he announced his Netflix buy in early 2022, the stock rallied 27% over four days before collapsing. The point being that these types of gimmicks- a highly regarded investor publicly announcing an investment followed by a retail pile-in can drive a stock vertically for several days but eventually the stock is going to go where it was going to go. We’ll know very soon whether or not this was a legitimate investment thesis by Ackman or just a retail and FOMO driven bear market rally.

    But what about autonomous?

    Much ink has been spilled over the past several months about the emergence of autonomous vehicles and whether or not they pose an existential threat to Uber. Uber has traded down, ostensibly on headlines like Tesla launching their Cybercab.

    For what it’s worth, I personally don’t believe AV poses an immediate threat to Uber. I think that for the most part those stories are distractions and provide a convenient excuse to sell. So often stocks top on stories that seemingly have little fundamental implications in the short term and provide obvious opportunities to buy on dips.

    Just a couple of examples, the “Babson Break” in 1929 and the Omicron variant which essentially marked the top in the market on Thanksgiving night, 2021. Of course after those initial breaks the market just kept going lower for no obvious reason.

    For reasons previously stated I believe the fundamentals of Uber’s business are very weak yet the public perception among retail traders and a lot of institutional investors is overwhelmingly bullish. I’ve noticed that each time Uber has sold off on headlines related to Waymo or Cybercab it has been met with immediate skepticism from the bulls and viewed as a “dumb” reason to sell.

    A little history

    I think one of the more poorly understood stories as it relates to Uber is just how they have created such enormous growth in revenue and profits recently.

    Before Dara K. became the CEO, Travis Kalanick was at the helm. He created a lot of controversy, but in my view he was an essential part of the company’s DNA and an amazing innovator with tons of great ideas. His top priority at the time of his termination was the development of autonomous vehicles. When he left, that innovative culture left with him.

    The Uber board decided that they didn’t want innovation, they wanted profits and they wanted them now. So they installed Dara who admittedly has done exactly what they hired him to do.

    The Uber strategy post-Kalanick has been a four-pronged approach.

    1. Cut all R&D expenses (read, AV development)
    2. Raise rider costs
    3. Cut driver pay
    4. Add as many different offerings on the app as you can dream up sprinter vans, shuttles, freight, etc.


    Here’s the thing. Unless you are immensely profitable like Apple or Meta (which clearly Uber is not), you can choose to focus either on growth or margin expansion. As Jeff Bezos famously said, “your profit is my opportunity.”

    And for so many years pre-Dara, that was Uber’s strategy. Take over markets by charging lower fares and making rides extremly quick and convenient.

    Post-Dara, however, rides have become more expensive and there has been zero development in autonomous. Uber is not stupid, though. They know they need to remain relevant in autonomous so they are attempting to have the best of both worlds- to spin a tale as if they are perfectly positioned to be the platform while not spending a dime on development themselves. Additionally, Uber has made massive investments in Aurora Technologies and Grab so that they can claim that they are involved though not having to show any R&D expenses on their balance sheet.

    But I believe that the past couple of earnings reports have shown a slowing trend in increased profits and as discussed, this past quarter profits grew exactly in line with rides and revenue, implying that Uber cannot increase profit margins any more than they have and are totally at the mercy of how many rides they can book. If for some reason there are fewer rides than expected next quarter they will miss earnings. The only way that they can continue to exceed Wall Street’s expectations are to get more and more riders.

    Obviously, though that can’t continue in perpetuity and with each quarter the expectations are increased. That’s truer than ever now that the stock has risen over 20% on Bill Ackman’s investment and this renewed retail enthusiasm considering Uber a “can’t miss” trade.

    And that really I believe is why the stock sold off on earnings. Because Uber in a way acknowledged as much in their light guidance. This is a stock that trades at a very high multiple despite how bulls try to mask it through metrics like FCF. The pressure on Uber is immense and I believe the risk reward for this stock is to the downside.

  • January 15, 2025

    Is a bottom in?

    Not likely.

    A market surging 2% in a downtrend on a single CPI print is probably more indicative of a bear market than an ongoing bull market. We’re about 5% off a peak with enormous valuations, hugely stretched sentiment, many bulls calling a bottom, and elevated earnings expectations for the next year.

    Not a great setup.

    Vertical rallies with depressed sentiment, terrible news, and a general lack of interest in the stock market is what you want to see when trying to bottom-call. That is clearly not what we have here.

    I expect this rally to fail, though not today. That would be too easy. Likely will drift higher for a few days and then I believe the downtrend will resume.

    I haven’t posted in a long time but I plan to write my updated macro thesis soon, along with some single stock bear cases. For now, suffice to say, the reasons for a bear market don’t present themselves on day one. They don’t usually start to become obvious for several weeks or months.

2025

2022

2021

2019