UBER: Distribution is The King
It's still 50% discounted from the reasonable option value.
I met with Travis Kalanick on a panel at UCLA back in 2016.
He was still the CEO of Uber at the time, and he was answering questions ranging from entrepreneurship, corporate governance, how to build, how to scale, etc..
What stuck with me from that panel is how the UBER business model evolved over time. It didn’t happen. It happened because of a critical insight—an insight they gained after they started building the company.
The spark for Uber came in December 2008, when Garrett Camp and Travis Kalanick were frozen out of Parisian taxis after the LeWeb conference.
Don’t imagine two struggling engineers; at this point, both of them were already rich. Kalanick had sold Red Swoosh to Akamai Technologies for $19 million, while Camp sold StumbleUpon to eBay for $75 million a year ago.
When they somehow got themselves in a cab, the same thought was going through their entrepreneurial cortex, “Getting a cab shouldn’t be this hard.”
The reason I said you shouldn’t imagine two struggling engineers is that what they later built was a solution to their own problem.
These were two wealthy entrepreneurs. Kalanick explained that they weren’t seeking cheap, accessible mobility; they were looking for something fast, comfy, and premium.
They did exactly this. The first UBER they built wasn’t a basic taxi app—it was a premium driver service.
They worked with licensed limo drivers, and when users requested a cab, they would be picked up with a black, luxurious sedan, of course, at premium prices.
They named it Uber Cab and launched the beta in 2009. This was its website:
You see what this is? It has nothing to do with the current Uber model we now know.
Kalanick made this very clear in the panel. His sentences stuck with me: “We weren’t the geniuses who envisioned Uber’s today, we simply created a premium taxi business that you could use through a website or app. We solved our own problem.”
How did it morph into the Uber we know today? It was a contingent path.
Their early hires were Google data engineers because they were using Google APIs for mapping and calculating the estimated time of arrival.
That team generated a crucial insight—when the estimated time of arrival (ETA) was below 5 minutes, conversions surged.
From there on, the challenge was obvious: How to reduce ETA?
At any given moment, there were more prospective riders than drivers. This was the main factor leading to a longer ETA. How to solve this? Remove the lid that constrains the supply—this was the crucial insight.
At around the same time Lyft started experimenting with peer-to-peer riding services, and California’s Public Utilities Commission signalled it would treat “transportation network companies” differently from limos, opening a legal path for private‑vehicle drivers.
And Uber Cab made the Pivot to UBerX.
They incorporated a peer-to-peer platform in their application, allowing third-party drivers to respond to demand. Growth exploded.
In his own words, this was when Kalanick understood that “distribution is the king.”
UBER stock price has been depressed lately because of worries that the robo-taxis will disrupt its ride-hailing business, relying on human drivers.
I bet it won’t. Further, I bet it’ll make Uber even richer.
I believe those who argue otherwise largely misinterpret UBER’s business, they ignore a crucial fact—distribution is the king, and UBER has it.
Today, I’ll explain why UBER is one of my high-conviction picks for the next decade.
Let’s cut the BS and get started!
What you're going to read:
1. Understanding The Business
2. Competitive Analysis
3. Investment Thesis
4. Fundamental Analysis
5. Valuation
6. Conclusion
🏭 Understanding the Business
What Kalanick referred to as “distribution is the king” is actually a profound insight into platform economics. UBER isn't just a ride-hailing app — it's one of the most sophisticated business ecosystems ever built.
This is what most people don’t get about it, and most of those who get it don’t really understand the huge implications of this in terms of business economics.
Let’s dig here a bit.
The pivot from UberCab to UberX represented more than just a business model shift. It unlocked what economists call exponential network density — a critical factor that makes or breaks marketplace businesses.
Network density measures how many potential matches exist within a given geographic area. When UBER allowed anyone with a qualifying car to become a driver, it dramatically increased this density.
At its core, UBER's platform executes a complex optimization problem across multiple dimensions:
Geographic matching — Uses GPS data to pair riders with nearby drivers
Dynamic pricing — Adjusts prices in real-time based on supply-demand imbalances
Dispatch efficiency — Calculates optimal routes considering traffic patterns
Multi-homing — Enables drivers to serve both ride requests and deliveries
Batching — Groups multiple requests to maximize driver utilization
The technical implementation is staggering. UBER's systems process over 100 million daily requests, each requiring calculations across billions of possible combinations in milliseconds.
Every ride teaches the algorithm something new — traffic patterns, rider preferences, driver behavior. This creates a data flywheel that compounds UBER's advantage. With each additional transaction, the platform becomes incrementally more efficient.
This increasing efficiency results in Uber keeping more of the customer payments. Its take rate has steadily increased from ~20% to ~27% in mature markets.
This revenue model scales exceptionally well because:
Fixed costs are largely decoupled from transaction volume.
Technology investments benefit the entire network.
New verticals leverage the same infrastructure.
This platform extensibility enabled UBER to build additional businesses on top of its core infrastructure — becoming an ecosystem of integrated businesses.
UBER Eats transformed restaurant delivery using the same matching algorithms. It connects restaurants, drivers, and hungry customers. Launched in 2014, it now processes $70 billion in annual bookings across 11,000+ cities.
UBER Freight digitized the inefficient $800 billion trucking industry. Traditional brokers use phone calls and paperwork. Freight offers instant quotes, real-time tracking, and automated payments.
Why is an ecosystem a huge advantage? Because it creates cross-platform efficiencies.
For example, a driver might transport a passenger to work, deliver lunch via Eats in the afternoon, then transport packages before evening rush hour. This cross-utilization creates operational leverage that no competitor currently matches.
This advantage translates directly into pricing power. As UBER continues to optimize its matching algorithms and expand density across verticals, it strengthens its position as the default transportation platform.
This is what Uber really is. It’s an ecosystem.
But how durable is this model?
Is it also durable against what’s coming—autonomous taxis?
I think it is.
🏰 Competitive Analysis
Let me be straightforward—UBER defies the traditional norms of competition.
This is why I love it.
Traditionally, competitive advantage is thought to stem from two sources: Differentiation and lower costs.
The godfather of the competitive strategy, Michael Porter, institutionalized the concept in his great book “Competitive Strategy” published in 1980.
It’s really simple: A Product or service can either be generic or specific.
The model relies on two assumptions:
If the product is a generic one, people will buy the cheaper alternative.
If it’s specifically tailored for one job, people will buy the one that does it best.
If you go to a business school today, this is still the model taught. Because it works, at least most of the time. At the time of this model, they thought people would buy either because it’s cheaper or because it’s the best. They didn’t think people could buy or use something because other people do.
Indeed, the concept was first laid out in 1985, 5 years after Porter’s book, by Carl Shapiro and Michael Katz in their seminal paper “Network Externalities, Competition, and Compatibility.”
What’s special about these guys? They are competition economists from UC Berkeley.
Being from Berkeley, they were well immersed in the competition of technology companies surrounding them. Looking at Microsoft, they noticed a phenomenon—as the number of people using the Microsoft operating system increased, more people were attracted to it.
They observed that as more people used the system, it became more valuable simply because of compatibility factors, and more users got attracted to be compatible.
They called this “network externalities.” Today, it’s usually called direct network effects.
Social networks like Instagram and Facebook are the best examples. The bigger they get, the more valuable they become for users because you can find more friends there, create larger audiences, etc..
Strong direct network effects make it extremely hard for competitors to disrupt the incumbent, yet they aren’t the strongest form of network effects.
In the late 1990s, we understood that the internet enabled yet another new business model: Two-sided marketplaces.
Think about Amazon. It’s a marketplace with two sides, buyers and sellers.
More buyers make it more valuable for sellers and attract sellers.
More sellers make it more valuable for buyers because sellers engage in price competition, and low prices attract more buyers.
This keeps working infinitely, creating a virtuous cycle.
After observing companies like Amazon, economists Jean-Charles Rochet and Jean Tirole formally defined two-sided marketplaces in their landmark 2003 paper “Platform Competition in Two-Sided Markets”.
In their framework, Uber exhibits classic indirect network effects: the value to riders increases with more drivers participating, and vice versa.
This flywheel creates what I call a compounding marketplace advantage. Each incremental transaction strengthens Uber's position relative to competitors
Let me explain:
When Uber enters a new market, initial ETAs might be 15+ minutes. As they add drivers, ETAs drop to sub-5 minutes, where conversion rates soar. Once a market reaches critical density, something remarkable happens — wait times stabilize at 2-3 minutes while driver utilization simultaneously improves.
This is mathematically impossible for subscale competitors to match. If a competitor has 1/10th the drivers, they cannot achieve comparable ETAs while maintaining the same utilization rates. And they’ll likely keep having fewer drivers because Uber’s indirect network effects make new drivers choose UBER rather than competitors.
So, why did I explain all this? Everybody has already agreed on Uber’s supremacy over rivals. The real threat is robo-taxis. Right?
The same dynamics apply to robo-taxis, too. Think of it like you are just changing the driver. Instead of humans driving the car and making the money, it’s now AI models driving the cars, and companies behind them are making the money.
What does this change in Uber’s position mean? I think, nothing.
Remember, the main success of Uber is that it successfully aggregated enough of a commoditized service, in this case, human-driven taxis. The same aggregation problem exists if the new service is also a commodity. I think it’s.
Earlier, much of the thesis about robo-taxis was that Tesla would dominate it. However, Waymo has already launched, it’s operational in several cities, completing more than 250,000 paid drives a week, and Tesla is still not around.
On top of that, Nvidia is developing a generalized infrastructure for autonomous driving and a specialized infrastructure for General Motors. Nebiu’s AVride has also completed more than 10 million miles on public roads. It’s coming too.
If this technology had been reserved for one early mover and it’ll have long enough time alone in the market to reach a critical mass before others could launch, I would say it’s a threat to Uber. But in the current shape, it’s already clear that the tech will be commoditized, and we’ll have many providers.
Where the product or service is commoditized, distribution is the king.
If these companies try to scale globally at the same time, that’ll just be a race to the bottom. They’ll each struggle pretty much with the same things, creating a huge deadweight loss in the industry and delaying profitability for years. Plus, some of these services will face the risk of staying below the efficient scale.
What I think will happen instead is that most of those providers won’t want to assume the risk of staying below the efficient scale. Instead, they’ll partner with Uber to leverage its distribution. We already see this:
What I think will eventually happen is that Uber will evolve into the Amazon of mobility.
Just as Amazon connects buyers with third-party sellers of commoditized products, Uber will connect riders with commoditized autonomous transportation services. Uber will generate revenue through platform fees, dispatch optimization, and customer management—all while maintaining its human driver network in jurisdictions where autonomous vehicles aren't yet permitted.
This is an amazingly strong competitive position to be in at this stage.
In short, robo-taxis won’t disrupt Uber, they’ll make it bigger, faster, and more profitable.
The king of distribution becomes the emperor of commoditized supply.
This isn't just an advantage; it's an economic inevitability in markets defined by indirect network effects, platform economies, and regulatory complexity.
📝 Investment Thesis
My Uber investment thesis relies on three pillars:
1. Uber still has a long runway for growth.
When we talk about Uber, most people think of it as a business that’s rapidly maturing.
I don’t know why it happens. Probably because of AirBnB.
Uber and AirBnB were the poster-children of two-sided marketplaces; they both were a part of 2019-2020 IPO frenzy and they are perceived as the two most successful businesses of their generation.
The difference is that AirBnb’s growth has slowed down pretty significantly, and it’s now seen largely as a maturing business. This makes people somehow assume that Uber will face the same issue soon.
This is not true. Uber is still growing fast and has a runway to keep doing it.
Despite all the success, Uber is still active in just over 70 countries.
It’s not active even in many eastern European countries, let alone most of Africa and Southeast Asia. These are giant markets with huge populations.
In some, it faced regulatory barriers; in some others, heavy local competition; and in some others, simply tech and security infrastructure weren’t sufficient.
Yet, these won’t stay this way.
As the age of AI comes, these countries with high regulatory barriers will have to reduce them, or they’ll succumb to underdevelopment. AI will allow underdeveloped countries of now to skip a few phases rapidly, and make localization much less important.
When the conditions mature, Uber will have the chance to enter these markets, and when it does, it’ll enter with a whole business ecosystem, not just with one business.
These markets are collectively as big as Uber’s current active markets. This is a huge opportunity, and Uber will tap into that eventually.
2. Some of its ecosystem businesses are still young.
Uber is aggressively tapping into last-mile delivery in many categories, not just food delivery.
This proved to be a huge market during the pandemic, but started to stagnate after that as platforms hiked the prices to turn profitable. As a result, what was once a very fragmented market started to consolidate as sub-scale players either went bankrupt or were acquired by bigger players.
Uber followed a distinct strategy.
To disperse fixed costs as much as possible, it wanted to maximize the utility of its network. To do this, it rapidly tapped into other last-mile delivery markets too.
It now delivers many items from food to groceries, electronics, alcohol, and even hardware tools for home improvement. It wants to deliver everything.
These are very young verticals that don’t mean much individually but can move the needle when combined.
On top of that, it’s also still very early for Uber Freight.
This is a stagnant segment as Uber is still seeking the best business model here. But once it finds this and doubles down in this market, it’s big enough to move the needle.
3. Autonomous Vehicle Partnerships Will Be A Tailwind
Uber’s main challenge with human drivers is the utility rates.
Humans can drive only 6-8 hours a day. Thus, in rush hours, demand far exceeds the supply, and it drops drastically at other times.
This means that Uber can’t actually benefit from rising prices in rush hours because of supply constraints, but takes the hit from lower prices in dead hours.
Autonomous vehicles decisively solve this problem. They can work up to 20 hours a day, generate anything between double and triple what a human driver generates, and also with higher utility rates.
In Austin, 100 Waymos on the Uber platform are already busier than 99% of the human drivers.
Though the robo-taxi fleet will take time to scale, when it does, EBITDA can double in no time.
In sum, Uber is not an exploding startup anymore, but it still has a big enough untapped market and additional opportunities to grow double digits for at least several more years to come.
📊Fundamental Analysis
➡️ Business Performance
Uber is a behemoth. Plain and simple.
Just look at its 5-year performance.
Let’s note that the very fast growth between 2020-2023 was largely due to the recovery of the world from COVID-19. Lockdowns were gradually eased, and people started to move again, they they were completely removed. Uber’s business exploded.
However, the effect of a low starting base was 100% phased out by the end of 2023. Yet, the company’s growth accelerated. It grew 16% in 2023 and increased to 18% last year.
This is some phenomenal performance and manifestation of its excellence in execution. It gets no further comment.
➡️ Financial Position
It’s rock solid.
It has nearly $22 billion in equity against just $11 billion in debt, and its annual EBITDA of $4.5 billion can pay off the whole debt under three years.
What’s even more meaningful to me is that it kept conservatively managing its balance sheet even at the depths of COVID-19 in 2020. Nobody would blame them for having raised more debt, yet it didn’t do that. This is a clear signal.
At the end, we are looking at a business that is still growing fast and has a very strong financial position.
These were hardly concerns for Uber, of course. The main concern surrounding it is whether it can sustain this growth in the foreseeable future.
We have to answer two questions to determine it:
Will it be disrupted?
Will it keep putting its money to productive use?
I tried to answer the first one above in competitive analysis and my investment, now let’s try to find out the second one.
➡️ Profitability & Efficiency
Gross & Net Margin
The hallmark of a strong competitive position is stable or increasing gross margins.
The reason is simple—gross margin shows the business’s ability to charge a premium over the cost of goods and services.
The higher this premium, the more unique and unmatched the goods or services; the lower the premium, the more commoditized they are.
When you look at Uber’s margins, you see a very low standard deviation.
It looks like the gross margin has declined a bit, but the more important thing is that it’s not a secular decline. It dipped in 2022 and then started to gradually rise again.
What happened between 2020 and 2022? We had a really high inflation.
What likely happened was that Uber struggled to quickly pass price increases of its input costs, so it ended up absorbing some of it. After the inflation stabilized, it quickly started to expand margins again by using its pricing power.
When we look from that perspective and qualitatively acknowledge the lack of a real competitor, we understand that there is no secular problem.
Net margin expansion is the actual impressive point in Uber's story.
It expanded from 5.1% in 2023 to 27.1% in the last twelve months. This supports our narrative of increasing business efficiency. This will improve even further as the revenue share of its high-margin businesses like advertising increases.
Overall, we are looking at a business that has solid pricing power and an increasing ability to translate its top line into the bottom line.
Return on Investment
If there were a North Star of investing, it would be investing in businesses that generate high returns on invested capital.
Charlie Munger put the reasoning squarely: “Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns.”
Uber makes nice returns on its invested capital.
However, these high numbers can be misleading as it became profitable only in 2023. To check this, I look at its sales-to-invested capital ratio in 2022, when it was still unprofitable.
2022 numbers:
Revenue: $31.9 billion
Total Equity: $8.5
Total Debt: $11.7
Cash and Equivalents: $4.2 billion
Sales-to-Capital Ratio: 1.99
Meaning, Uber was generating nearly $2 for every $1 invested, even when it was unprofitable on paper. This is indeed impressive.
Summing up, Uber has a really strong foundation with impressive capital allocation.
Yet, this doesn’t mean it’s an attractive investment.
We have to check the valuation.
📈 Valuation
I employ a two-stage discounted cash flow model to determine Uber’s fair value.
I assume that Uber will keep growing at an annualized rate of 15% in the next 5 years, and then growth will converge to a terminal rate of 3.5%.
It’ll have a middleman’s operating margin of 35% in maturity, and its moat will give it an above-average ROIC of 14% in the terminal period.
I assume the cost of capital will converge to the average of all mature companies, which is around 7.5%.
Here is how it looks:
As you see, the model implies just 15% growth for this year and 10.9% annualized growth for the next 9 years after that, assuming declining efficiency in capital allocation.
Of course, the main limitation here is that it doesn’t incorporate the chance of failure.
What if things go the opposite way in the robo-taxi business and it really gets disrupted?
In this case believe its delivery business will still remain intact, and the final business value will be cut in half, giving a fair value of $71 per share.
What’s the chance this happens? I think at most 30%.
Incorporating the chance of failure:
($142x0.7)+($71x0.30) = $120.7
Even if you assume a 50% chance that the ride-hailing business will get disrupted, we end up with an option value of $106 per share.
Despite the recent surge in price, Uber remains undervalued.
🏁Conclusion
Uber is one of those generational companies—it’s dominating its industry, it has amazing fundamentals, and there is still a long runway for growth.
If there wasn’t a catch, the market would never give it away at today’s valuation.
The market is pricing in near-total disruption of its ride-hailing business, so it won’t be able to generate much of the terminal value. I don’t think this is the case.
Uber’s main strength is its position as the biggest aggregator of supply. Even if we assume robo-taxis will totally take over the market, imagining a fragmented market doesn’t make sense in my view. It would be like asking people to download apps of multiple taxi companies, but only taxis drive themselves.
I don’t think that would be a significant improvement. I think the best option for Uber and providers is to partner, aggregate demand, and distribute it in the most efficient and profitable way.
This is what I think will happen.
That may be wrong, but the current valuation implies that the market is giving just around a 15% chance to that scenario occurring. I think it’s much, much higher than that.
This makes Uber a worthy shot in my book.
That’s all, friends!
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Great write up and thesis. Although I wouldn’t exactly say it’s stock has been depressed ….its close to ATHs, up 40% since Dec
Even if autonomous vehicle manufacturers agree to partner with Uber, I believe the profit margins will be significantly lower than they are today. These manufacturers will have substantial negotiating power and the flexibility to switch to competitors like Lyft. In contrast, individual drivers today have virtually no leverage in negotiations. What’s your take on this?