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From Uber to Amazon
Peter T. Treadway

Since issuing the last Dismal Optimist on May 12, tech stocks roared upward. That is until the afternoon of Friday June 9 when tech stocks in the absence of any specific negative news had what can be called a mini-crash. Interestingly, all the major tech stocks hit their daily lows at exactly 2:50-2:51 pm. All the computer driven algos selling at once? Who knows. A well-earned pullback? No doubt.

In any case, I remain long term bullish on the tech sector while acknowledging that volatility on a near term basis may be higher due to the sector’s higher valuations achieved over the last year. Nevertheless, with technology accelerating at an accelerating rate in my opinion investors cannot afford not to be in this sector. Moreover, virtually all successful American and global companies are to some extent tech stocks. The US certainly is a slow growth environment with the Fed threatening modest further tightening. Cyclical plays have limited profit potential. The successful outperforming firms are disrupters and innovators and disruption and innovation are driven by technology.

UBER’S CEO Needs to Be Part Outlaw

It’s no secret that Uber CEO, Travis Kalanick, and Uber’s entire corporate culture have exhibited the occasional moral lapse. I’m not defending this culture. But based on my experience from spending a lot of time in Hong Kong and Macau, I’m prepared to say that whoever is CEO of Uber has to at least have a bit of the outlaw in him (or her).

It’s not just Hong Kong and Macau. In so many places around the world, for example Beijing, Shanghai, Paris, London, Germany, Australia, South Africa, the entrenched taxi interests have enlisted their politicians to fight off Uber’s superior economic model of surge pricing and convenient smart phone ordering and payment system. Surge pricing in particular is a free market economist’s dream come true. (A lot of what I have to say probably applies to Uber competitors like Didi Chuxing or Lyft.) Hong Kong’s government for example, while loudly proclaiming that it wants the territory to be a center of technological innovation, is doing its best to legally shut Uber down. Let them stand in the rain and spend hours looking for a taxi is the politicians’ attitude towards a frustrated public. Hong Kong’s neighbor Macau, where getting a taxi on the street historically has been mission impossible, has flat out banned Uber. But even there, Uber the outlaw lives on! Last week I was in Macau speaking at a conference and our party took Uber to our favorite Portuguese restaurant. But one of us had to sit in the front so the police would not get suspicious that the car was an illegal taxi.

There have been problems with some Uber drivers in some countries, especially regarding alleged attacks on women passengers. There’s no excuse for this. But the economic model, which also includes Uber drivers using their own cars (and therefore contributing capital), is superior to that of so many of the public-be-damned taxi monopolies. But these monopolies in so many places have the law on their side. Uber is the good guy. But it is the outlaw.

With Autonomous Cars the Uber Model Will Require a Big Revision

The advent of truly autonomous cars will require a major change in the Uber model. It would appear to this outsider that Uber is making at least one very wrong strategic move at this time. If Uber ever gets its management problems solved and comes to market with an IPO, investors will have to consider:

  • If there are no more drivers, then Uber won’t get the drivers’ “free car” capital contribution. Uber will have to invest in its own fleet of driverless cars and use a lot of capital in the process.
  • Uber’s operational challenge will be to manage its fleet(s) of cars. It will be responsible for the cars’ maintenance, location, problem resolution etc. Sort of like running a global airline.
  • Uber’s supply of autonomous cars will be fixed at a given point in time. Pardon the economist jargon, but its supply of cars will be price inelastic. Right now, Uber’s supply curve is price elastic. More Uber cars become available for a given ride as the price of a ride goes up. But when it operates its own fleet, Uber’s supply curve will be like that of a hotel with a fixed number of rooms. The hotel cannot adjust the number of rooms in response to demand changes. It can only change the price of a room. (Of course Uber could have a type of hybrid system whereby driver cars would become available at peak hours.)
  • It makes no sense for Uber to invest in the development of autonomous cars at this time. Car manufacturers, be they Tesla, Ford, BMW or whoever, will be competing to sell Uber their driverless cars. The current dust-up with Alphabet’s (GOOGL) Waymo, besides adding another black mark to Uber’s reputation, was completely unnecessary and was the product of a misallocation of capital. You have to wonder whether it is just de rigueur for Silicon Valley big tech companies to have their own driverless car project.
  • Many would argue that electric cars are superior to gasoline powered engines in terms of cost of operation and operating efficiency. The big obstacle is the capacity of the batteries which slowly are improving. Uber should buy the car that makes the most economic sense for its fleets and not get carried away with buying electric cars for non-economic motives.
  • Autonomous cars will come (and that means no driver, no on-board human backup). But they may be further off than the optimists think. That could be good news for Uber since it still has plenty of time to abandon its misguided driverless car project. So many things are just not there yet. For starters, artificial intelligence, even that of AI superstar Nvidia (NVDA), is still not up to negotiating the unusual or “edge” situations. The cost of sensors particularly lidar has to come down while quality improves. Mapping of every road in a driving universe, which for autonomous cars is crucial, has to be to the nearest inch. It will likely have to be crowd sourced and is years away. Depending on the country, a full roll-out of 5G, the expected upgrade in wireless systems and another crucial element in the safe operation of autonomous cars, is probably going to have to wait until 2022. Finally, the regulatory structure has not yet been developed. Reportedly globally over a million people die each year in car accidents. The public tolerates that. But if autonomous cars cut that number in half, will the public see this an improvement? Or will the lawyers and the politicians draw the opposite (and irrational) conclusion? Will the friendly robot (AI)driving the car be held to a higher standard than a human driver? Finally if an autonomous car crashes, who is responsible? The owner, the manufacturer?
  • There’s no question that autonomous cars are just what is needed for aging populations in developed countries. In Florida, where a lot of retirees live, they are reluctant to get rid of their cars. But senior citizens from time to time step on the gas instead of the brake and plough into people sitting innocently in their living rooms.

Amazon Buys Whole Foods – Too Early to Pop the Champagne

Just as this piece was being written, Amazon (AMZN) announced a $13.7 billion cash buyout of Whole Foods Markets (WFM), an upscale purveyor of so-called healthy fresh foods.  Whole Foods has some 431 stores in the United States but its business has slowed down in recent years. The stock market reacted by pushing up Amazon’s stock by 2.44% and inflicting huge losses on Whole Food competitors like Walmart (WMT) and Costco(COST). The market obviously believes that Amazon, with its on-line dominance, its big data knowledge of its customers, and most importantly its superb management, can revolutionize the traditionally low margin grocery industry. The market wants to bet on the company that created on-line commerce, that created Amazon Web Services, that has an awesome partly robotic fulfillment system and that now has Alexa in at our service for our homes.

I consider Amazon to be a core long term holding for those who believe as I do that technology is accelerating at an accelerating rate. But fresh groceries could be a challenge. Amazon’s efforts in this area with Amazon Fresh thus far have been underwhelming. Obviously, Amazon has now concluded it needs a physical presence and more scale to compete in the grocery business. Can Amazon bring tech to groceries? Will consumers want to browse its produce shelves and then order using Alexa? Will they just need to pick up their fresh produce at a nearby Amazon brick and mortar location? Alternatively, can Amazon turn its stores into high tech emporiums requiring no check out waits and little labor?

The other big tech companies such as Google, Facebook (FB), and Microsoft (MSFT) have basically stuck to acquiring “adjacent” businesses like LinkedIn or WhatsApp which are largely high tech by nature. Interestingly the big Chinese companies, notably Alibaba (BABA), like Amazon have move further afield in making acquisitions.

So the question is: Is the new technology, including smart phones, robotics and AI so overwhelming that there is no such thing as an adjacent business for the top tech companies? Are all — or at least the majority of companies — adjacent companies? If so, the market has a right to be excited about the Amazon/Whole Foods deal.

I will conclude with a piece of what may or not be fake news which I received over the Dark Web. It may give some insight into the brilliance of the Amazon AI system and its CEO Jeff Bezos’ decision making process:

Bezos: Alexa, buy me some food at Whole Food Markets

Alexa: Right. I will buy Whole Food Markets

Bezos: Damn!

Amazon driverless cars Tech sector Tech stocks Uber Uber model Whole Foods Markets