EP108: Small-Cap Dislocations, Durable Moats, and a Bet on the Toll Collector
Stock Ideas From Investment Professionals
Welcome, subscribers!
This week’s crop of investor letters zeroes in on misunderstood businesses trading well below intrinsic value, including a mobility giant ignored due to misplaced fears, a packaging stalwart with quiet catalysts, and multiple small caps with asymmetric setups. If you like buying before the rerating, this one’s for you.
This week, we’re excited to share 8 fresh stock ideas, including:
• A global rideshare and delivery platform compounding earnings at 30%+, trading at just 25x earnings due to misplaced fears.
• A midsized personal lines insurer in California, recently hit by catastrophe, now trading at bargain prices.
• A misunderstood LNG infrastructure play with multi-bagger potential if management delivers on deleveraging and execution.
• A newly public infrastructure construction firm—oversold after a shallow miss, with a deep backlog and powerful end-market tailwinds.
• A packaging company refocusing its portfolio and trading at a steep discount to cash flows, despite recession-resistant end markets.
Disclaimer: Nothing here constitutes professional and/or financial advice. You alone assume any risk with the use of any information contained herein. We may own positions in the securities listed. Please do your own due diligence.
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Let’s get to it.
Pershing Square devoted significant space in their latest letter to a deep dive on their newest equity position in Uber Technologies (UBER). They believe the market is mispricing its long-term earnings power due to near-term fears around autonomous vehicles, and they see that disconnect as a rare opportunity.
New Equity Positions: Uber Technologies (“Uber”)
Uber is the world’s leading mobility and delivery platform. The company operates a high-quality, capital-light business with enormous growth potential led by a superb management team. The Pershing Square funds acquired a position in early 2025 as the decline in Uber’s share price at the end of 2024 provided an opportunity to acquire Uber at an extremely attractive valuation. This was made possible due to concerns regarding a perceived long-term threat from autonomous vehicles. We believe these concerns are misplaced.
Uber is a great business that benefits from industry leading scale, data leadership, and strong network effects owing to its dense multi-sided marketplace. This unique competitive moat insulates Uber from competitive threats and allows the company to offer a robust, self-reinforcing value proposition for both consumers and platform earners (third-party drivers and couriers). For consumers, Uber provides a consistent and reliable experience in a large variety of global destinations at the lowest possible price, made possible by its eight million drivers. Uber’s dense network both minimizes prices and creates bestin-class latency, with average wait times of four minutes, creating a strong value proposition for consumers. For platform earners, Uber provides demand aggregation from more than 170 million monthly active users, plus an excess of value-added services, including routing, pricing, insurance, regulatory support, post-ride support, and more. Uber’s best-in-class technology and demand aggregation offer earners the highest effective utilization of their time, maximizing their earnings potential.
Uber’s robust value proposition has allowed the company to grow bookings (a measure of total value which transacts on its platform) at a 20% compound annual rate since 2019, now $160 billion. Despite Uber’s enormous scale, growth remains robust, with mobility and delivery bookings growing 24% and 18% in the most recent quarter, respectively. Growth is driven by new customers and increasing usage frequency amongst existing customers. The company continues to grow mobility occasions in more mature markets, while expanding into new geographies and launching new product offerings.
Over time, the company has generated enormous operating leverage. Uber’s management team, under the leadership of CEO Dara Khosrowshahi, has demonstrated strong fixed expense control and broad-based optimization of the platform. Notably, current margins are well below their long-term potential. Uber’s high rate of revenue growth positions the business for continued rapid earnings growth over the medium-term as it continues to leverage its fixed-cost base. We estimate that Uber will compound earnings at a 30% plus rate over the next several years.
In recent quarters, Uber’s share price declined as the market became concerned about the future state of ridesharing in the context of autonomous vehicles (“AVs”). While this theoretical risk is mainly applicable to Uber’s US ridesharing business (approximately ~25% of Uber’s gross bookings value), it has had the effect of significantly compressing Uber’s valuation multiple, now at 25 times earnings – a low multiple in the context of Uber’s high growth outlook.
Over the past few years, AV companies have made significant technological advancements towards fully self-driving vehicles, with significant progress from Waymo, Mobileye, Zoox, Wayve, Tesla, and others. While the technology is advancing rapidly, broad-based commercialization will likely be more measured. We believe there are a number of key limitations to commercialization including achieving a consistent “super-human” safety record, establishing a harmonized regulatory framework (including clarity on legal liability and insurance), scaling cost-effective manufacturing, developing on-the-ground infrastructure and operations, and delivering these capabilities through a dense high-utilization network which is responsive to consumer expectations for high availability, low-latency, and low prices.
We believe the next few years are critically important in establishing the safety credentials of AV technology. Tragically, there are approximately 40,000 traffic fatalities each year in the United States. Over time, AVs have the potential to reduce fatalities, but only if the technology is safe and broadly adopted. We believe broad consumer adoption will require strong evidence that AV technology is significantly safer than human drivers. We do not believe it will be acceptable for fatalities to be an ordinary course event in the AV industry, and anticipate consumers will have low tolerance for catastrophic risk. Moving too quickly before AV technology is perfected risks major adoption setbacks.
While most commercialization barriers will ultimately be solved with time and capital, for all of these reasons, we anticipate the near-to-medium-term trajectory of AV expansion is likely to see a measured roll out of AVs within defined geographic operating zones, consistent with Waymo’s approach and Tesla’s recently announced pilot in Austin.
Notably, there is one challenge which cannot be solved: the highly variable nature of ridesharing demand. An inherent feature of this marketplace is that consumer demand varies massively at different times of the day, different days of the week, and certain months of the year. Demand is typically greatest during the morning and afternoon commute, and on weekend nights. Demand can vary by as much as 10 times over the course of a week, yet consumers expect consistent low latency and stable prices.
Uber’s marketplace model is unique because it facilitates dynamic supply. During peak demand periods, drivers enter the marketplace in real time, pushing down prices and maintaining low wait-times. Conversely, an AV-only network will definitionally almost always be under- or over-supplied, leading to sub-optimal utilization. Standalone AV operators can either choose to build their fleet for high-demand periods, in which case it will be massively underutilized most of the day, or build for “average” volume, which will produce better utilization, but will not be able to meet consumers expectations for high availability and low latency during high demand periods. Moreover, a glut of mid-day AVs competing for limited demand is likely to cause market price to plunge, only to see prices spike during high demand periods.
The solution to this problem is to partner with existing rideshare networks who are positioned to offer a hybrid solution – selectively dispatching AVs when it makes sense to do so while using Uber’s marketplace capabilities to bring human drivers into the ecosystem during peak demand periods. To analogize to an energy grid, AVs become a “baseload” solution, with extremely high utilization, while human drivers fulfill peak demand periods. Partnering with Uber allows AV players to scale faster than they could on their own and maximize the unit economics of their vehicles. Uber’s network is uniquely capable of maximizing AV utilization, revenue generation, and unit economics.
In exchange for this value it delivers to its network, Uber is compensated in the form of a 20% payment on the gross trip value, with most of the economics going to the driver (Uber distributed $20 billion to drivers last quarter alone). AV providers who choose to partner are still able to capture most of the value of this industry. We believe the decision to partner with Uber is one of relative utilization and value – does Uber drive sufficient revenue utilization which justifies their 20% take-rate? We believe this is definitively true and anticipate this will become increasingly obvious to all over time. While certain AV companies may also develop their own first-party networks, we expect that most (and perhaps all) AV players will ultimately partner with Uber and allow their autonomous vehicles to operate on Uber’s network. Similar to other fixed depreciating assets (e.g., hotels being a relevant example), AV owners benefit from the broadest possible distribution to maximize utilization and unit economics. Partnering also avoids billions of dollars in operating expenses which would be needed to recreate Uber’s capabilities. We believe a partnership model is the clear value-maximizing strategy for all industry participants.
Over the long term, we believe AV technology has the potential to cause mobility to evolve in the United States. While current AV costs-per-mile of two dollars are comparable to human drivers, over time the technology will improve. Lower costs per mile will invariably expand the use cases for ridesharing, with the potential on the margin to displace private car ownership. Ridesharing today accounts for less than 1% of all miles driven in the U.S., largely concentrated in expensive urban city centers. It is conceivable that the ridesharing industry could grow massively over the long term as AV technology unlocks new mobility-occasions and expands ridesharing into less dense geographies. Our investment case does not presume meaningful increases in ridesharing market share. If it does occur, Uber will be an enormous beneficiary.
Some of the best investment opportunities occur when one has a contrarian view on a business or an industry. We believe Uber’s current valuation represents a significant discount to intrinsic value because some investors are myopically focused on the risk of AVs, without proper consideration for Uber’s strong value proposition and the potential for AVs to benefit the ecosystem. We anticipate Uber will generate 30% or more earnings growth over the medium-term with potential for multiple expansion as the ultimate industry structure becomes more clear.
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