One of the great things about being a corporate behemoth is that you can double-cross … errr … ”diversify away from” your allies. In this case, Alphabet Inc (GOOG, GOOGL) is getting into the ride-hailing business, despite having dumped $250 million into Uber Technologies.
The program, which is being piloted in San Francisco, will offer a carpooling app known as “Waze Rider” which is effectively meant to compete with UberPOOL. GOOGL would likely take a commission on each ride.
The implications for GOOGL, Uber, and even the taxi medallion financial industry are interesting.
GOOGL Stock Changing the Dynamics
For GOOGL, the move is just good business. It needs to diversify away from advertising, which accounts for more than 80% of its revenue. It would also make for a nice companion business to its ongoing pursuit of the self-driving car, which likely won’t be ready for many years to come.
It is also a smart move because, while it has invested in Uber, there’s no reason why it should limit itself to a small equity piece of a company losing money hand over fist. If Uber never develops into a profitable entity — and there are many reasons why that may not happen — GOOGL wants to have a presence in the ride-hailing business.
So overall, this is a big positive for GOOGL.
It is a big negative for Uber. Another reason GOOGL had to move in this direction is the bloom is off the rose for Uber. There are plenty of headwinds facing the company.
The most critical is the rising tide of driver discontent, which explains why 50% of drivers quit after the first year.
Uber has been cutting fares in many cities, and the best estimates now put driver earnings barely above that of taxis, if at all. Insurance liability is still an issue, as insurance companies have been slow to roll out hybrid policies.
Following a big class action settlement in California over the issue of whether drivers are employees or independent contractors, there are going to be scores of other similar lawsuits. Thus, the shakedown has 49 states remaining.
We also have surge pricing under assault as being anti-competitive in a N.Y. court case, and cities like Austin are fighting back and demanding Uber be regulated like taxis.
Not that the ride-hailing conquest, whether it involves Waze, Uber, GOOGL or anyone else, is even a certainty going forward. I still maintain that at some point, three terrible things will occur that skewer the business model.
The first is that a terrible ride-hailing accident will occur in which many lives are lost. The insurance will be found to be nonexistent, cancelled by the carrier (since ride-hailing is not covered under regular policies) or insufficient. There will be lawsuits and scrutiny of Uber.
The second is that some maniac will, sadly, go on a rampage and assault and kill a string of passengers. There have already been sexual assaults. Uber will lose 50% of its ridership as women abandon the service.
Both of these will lead to the third move — government will enter the fray in a very big way. As it is, Uber left Austin simply because the city insisted on background checks and licensing. Imagine the outcry when something really awful happens.
That leads us finally to the taxi medallion financial industry. Taxis have shown remarkable resiliency, particularly in the street-hail-protected city of New York. As it is, most players in the taxi medallion financial industry, like Signature Bank (SBNY) and Capital One Financial Corp. (COF) are significantly diversified.
Their stocks have actually suffered a bit because of their taxi medallion loan portfolios, even though none have reported any significant losses. That means they are likely undervalued, and any negative impact in rideshare only helps them.
As of this writing, Lawrence Meyers has sold June and July $700 naked puts on GOOGL.