Could This Be the Magic Bullet That Gets Uber to Profitability?

One of the most dangerous things in investing is confirmation bias... According to the Oxford Dictionary, confirmation bias is "the tendency to interpret new evidence as confirmation of one's existing beliefs or theories." Alternatively, here's a graphic illustration of the concept... It's human nature... You think about a problem or an issue intensely, do a […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Could This Be the Magic Bullet That Gets Uber to Profitability? By Berna Barshay One of the most dangerous things in investing is confirmation bias... According to the Oxford Dictionary, confirmation bias is "the tendency to interpret new evidence as confirmation of one's existing beliefs or theories." Alternatively, here's a graphic illustration of the concept... It's human nature... You think about a problem or an issue intensely, do a lot of work, and come to a conclusion. After all that effort, who wants to admit they were wrong? But in investing, confirmation bias can be especially dangerous. The more we dig in and ignore new information that disrupts our preconceived notions, the greater the risk of losing money on trades that don't go our way. Last week, my colleague Whitney Tilson wrote about this phenomenon in his daily e-mail... To be a successful investor, you need to have the courage of your convictions. But equally important is the willingness to accept and unemotionally consider disconfirming information and arguments and, if necessary, change your mind. This may sound obvious, but it doesn't come naturally to most people, who tend to be very set in their opinions, especially if they have money riding on the outcome. I agree with Whitney entirely on this point – being willing to accept new information that blows up your investment thesis is an important skill in investing. It's one that can save you a lot of money and heartache, but it's also extremely difficult to hone. Whenever I talk with other investors, I take a keen interest in anyone who tells me about making money being long a stock and then turning around and making money being short the same stock (or vice versa)... because that requires intellectual flexibility and a cold lack of emotions, both of which I believe can be great predictors of investing success. I recently had the opportunity to talk to an expert in the field of local transportation, and I jumped at the chance to get their take on the ride-hailing space... As regular Empire Financial Daily readers know, I have been a longtime bear on shares of ride-hailing app Uber (UBER). I've written about the stock with great skepticism and negativity many times and have more than once called it my poster child for "profitless prosperity." As a reminder of some of the things I don't like about Uber, here's what I wrote in the [December 15, 2020 Empire Financial Daily](... From 2016 through the time of its initial public offering ("IPO") last year, Uber operations lost a cumulative $10 billion. It's the poster child for what I like to call "profitless prosperity": racking up big revenues yet failing to earn a dime. Investors tolerate – in fact, they even embrace (especially lately!) – profitless prosperity when they see a credible story that with just a little more size and scale, profits will follow revenues. The problem with Uber is that in the time period that it lost the $10 billion, it took in more than $79 billion for rides. How much bigger does it have to get to pay for its technology and overhead? How much scale does it need? And where will cost cuts come from when the internet is full of stories that many gig workers can barely make a living driving for the company? Since going public in May 2019, Uber has racked up nearly $4 billion in additional operating losses. While the pandemic has certainly thrown the company a major curve ball, in its best quarter in 2019 – well before the pandemic – Uber still lost nearly $600 million in earnings before interest, taxes, depreciation, and amortization ("EBITDA"). I'm generally highly skeptical about these kinds of "just have a little patience" or "wait until next year" stories. (I think I used up all of that kind of patience being a Red Sox fan in the 1980s and 1990s.) It's hard for those of us trained as value investors to get comfortable with companies that don't generate cash for so long... although those of us with a pesky bias toward cash flowing companies have missed out on some giant winners over the years, like tech giant Amazon (AMZN) and electric-car maker Tesla (TSLA). Recognizing this blind spot, I'm trying to learn new tricks... And I have embraced some companies where profits are just around the corner for the patient, like [home rental marketplace Airbnb (ABNB)]( and [gig worker marketplace Fiverr (FVRR)](. But I just could never get there on Uber. Most of the bull arguments rest on the assumption of a normalized margin of "pick some number larger than 20% but lower than 35%"... and then once Uber gets to this made-up margin number, the company would mint money. But why that 20%-plus number? Just because some other marketplace businesses like Etsy (ETSY) or eBay (EBAY) got there at scale? What about food-delivery service Grubhub, which started out around 20% margins back in 2014 when it went public, but saw those collapse and turn negative by the time it was taken over and merged into European food delivery firm Just Eat Takeaway (TKWY.AS) earlier this year? Doesn't Grubhub, with its army of gig workers, make for a better analogy? --------------------------------------------------------------- Recommended Links: [Buy these five stocks NOW (free ticker symbol inside)]( After analyzing 25,000-plus stocks recently, one analyst uncovered a massive trend that's currently underway. One that's about to turn a $12 trillion industry on its head. And there are five stocks that have the potential to be massive winners thanks to the tsunami of cash that's about to be unleashed. [Click here to see one of them for FREE](. --------------------------------------------------------------- [Act Quick]( With pre-IPO gains of 3,677%... 29,000%... and 460,000%, he's one of the most successful venture capitalists of the past 30 years. And now, you have an extremely brief window of opportunity to get in, too. But space is limited... And Teeka's last major pre-IPO recommendation filled up in less than 12 hours. [Reserve your seat here](. --------------------------------------------------------------- The transportation expert relayed two opinions that confirmed my negativity about Uber... First, the expert expressed a firm opinion that we are literally decades away from autonomous driving in cities for Uber and its competitor Lyft (LYFT). Labor and driver acquisition costs are big expense items for Uber, and some Uber perma-bulls think that at some point not that far away self-driving cars will be a big source of relief from the cost pressures associated with maintaining an army of gig workers driving cars. But citing factors like weather, traffic, and the failure of optical sensor technology to do a good job detecting pedestrians – particularly at night and in bad weather – the expert thought self-driving Uber vehicles in densely populated urban areas were a pipe dream anytime soon and said to expect autonomous driving technology to be first deployed and proven by trucks on federal highways. This obviously confirmed my bear outlook, as did the second big opinion... that price elasticity of demand for hailed rides was extremely high for commuters and those traveling to and from their home for leisure activities. Put another way, when the cost of an Uber goes up 50%, 100%, or sometimes even more, people will suck it up and take the bus to work or find a designated driver to handle Saturday night's outing. The expert did think that trips to and from the airport were less price elastic – that demand wouldn't drop even if the price went up a lot because people have limited choices for getting to the airport. Same for tourists or business travelers using Uber to get around when visiting an unfamiliar city – these kinds of travelers need an Uber ride, as opposed to just wanting one, because it's better for them than driving themselves or taking public transit. Those users who want an Uber but don’t need an Uber will skip it when that ride is really expensive. I guess that's a mixed bag for my bearishness. With surge pricing on nearly all the time lately, I often hear about people skipping Uber. But on the margin, I guess it is good news that the service is stickier in some use cases, like the airport. But there was one opportunity for Uber that the expert was super bullish on... Government contracts. The expert thought that there is a big opportunity for Uber and Lyft to get contracts with local municipal governments to provide "last mile" transportation in areas where transit systems fail. These are the transportation deserts in which there is no opportunity to get on a bus or train without walking for a mile or more. Back before New York City finally opened the Second Avenue Subway line, the one train line that serviced the East Side of Manhattan was so overburdened, it was like a sardine can. Adding insult to injury, people who lived in the easternmost sections of the Upper East Side had to walk more than a mile – or squeeze into an overcrowded cross-town bus – to even get to the one subway line. In response to that black hole of public transit, private van services would line up and grab commuters on those eastern avenues and drive them in groups to midtown or Wall Street for a fixed rate. A bunch of hustlers stepped in to fill the void left by city planners. New York City still has its share of transportation deserts, and I imagine many cities across the country and the globe contend with the same phenomenon. The expert explained the possibility that cities like New York could contract with Uber or Lyft to allow citizens traveling in these transportation deserts to hail shared cars at a reduced rate, one that would be comparable to public transportation's cost – if it existed for where they were going. Cities would step in and subsidize these rides to make Uber whole (and keep it cheap for citizens). This was the first explanation of a path to profitability for Uber that inherently made sense to me... Despite my deeply held bearish beliefs, I tried not to write off this new idea and instead accept the fact that I may have been presented with game-changing information. I'm not ready to reverse my position on Uber's long-term outlook and its potential to linger in profitless prosperity... but you can bet I will have my ears to the ground for any announcements about Uber getting government contracts. If my long-term bearish outlook gets thrown for a loop, I will be ready to accept that reality... but I'm certainly not there yet! Come work with Enrique! My colleague Enrique Abeyta is looking to hire a junior analyst to help him launch his upcoming newsletter, Empire Elite Crypto, later this fall. If you geek out on cryptos and enjoy writing, we'd like to hear from you. Send us your résumé and a one-page write-up of your favorite crypto investment idea [right here](mailto:feedback@empirefinancialresearch.com?subject=crypto%20analyst). In the mailbag, readers react to the crazy story about digital media company Ozy and the faked due diligence phone call... Would you be supportive of your local government subsidizing Uber rides for citizens who live or work in places where there is no public transportation? Have you ever gotten into trouble in the markets because of confirmation bias? Are you an Uber bull or an Uber bear? Share your thoughts and stories in an e-mail to feedback@empirefinancialresearch.com. "I get spam from them every day. Their spam reach IS significant." – Tom P. Berna comment: You're in luck, Tom! Ozy announced on Friday afternoon that it is shutting down and ceasing operations. That was fast... The New York Times article only got published on Sunday night, so Ozy didn't even survive five days after that. I guess you will finally be spared from the company's spam! "A friend shared the article on Monday, and it was also reported by Bloomberg. We concluded that all three – the COO, the CEO, and the Chair – likely knew of the plan or tacitly created the culture in which it was okay, before it happened. I also read the NYT comments on Monday, and there was very little ambiguity around the immorality of it all. When I trained in credit, integrity mattered. The fact that there's no investigation suggests they know what was wrong. Mental health claim? See the NYT comments. Unclear why it's not fraud. I would LOVE to know who did invest. GSAM comes out well for old-fashioned verification of someone's instinct that things were awry. "Thanks for sharing as it's an important story." – Anonymous Berna comment: I agree that Goldman Sachs (GS) did a commendable job here with the due diligence. And I too am dying to know who gave Ozy investment money earlier this year... because the company sure lost all of that money very fast! Regards, Berna Barshay October 4, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. 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