The story behind Coronation’s early investment in Uber

South African asset manager Coronation has invested in US ride-hailing giant Uber since April 2021, a month before the company’s IPO, and has held onto its stake ever since despite its rocky start in the public markets. 

Initially, Coronation had only a small stake in Uber and gradually increased its exposure after years of research into the gig economy and the company’s business model. 

Coronation analyst Humaira Surve outlined how Coronation came to invest in Uber, why it grew its shareholding as the share price declined, and why it is now selling some of its stake.

The asset manager was interested in Uber in 2016 – three years before it went public – after Uber’s chief business officer impressed Coronation’s investment team at a conference in San Francisco. 

Then-chief business officer at Uber, Emil Michael, pointed out that in the US, cars were under-utilised by as much as 96%, with 70% of car owners spending just 45 minutes a day in a car. 

His vision was for 70% of the US to access an Uber within 10 minutes in five to 10 years, eventually reaching 70% of the world.

This piqued Coronation’s interest. Surve said the company had a large addressable market, provided value to many entities, and was led by an ambitious yet seemingly sensible management team.

Coronation’s initial research showed promise but also large regulatory risks, and by 2017, Uber had become a mess, Surve said, while losing market share to Lyft. 

When Uber went public in May 2019, Coronation was hesitant to invest as ride-hailing growth slowed in the US, and the company was burning through cash. 

However, years of research into the gig economy began to aid Coronation’s understanding of Uber and its strategy of prioritising market share over profit. 

Firstly, economies of density favour an incumbent as the platform with more drivers has a denser distribution across a city, reducing a consumer’s wait time.

Another key insight was that the market share leader benefits from several small economic advantages per delivery or ride. 

These minor advantages make a big dollar profit difference on a large volume of deliveries or rides. 

The leader can pay drivers slightly less per order than smaller competitors, but drivers can earn more per hour due to better utilisation.

They would also benefit from lower marketing costs due to the stronger consumer experience, resulting in stronger brand awareness and better loyalty. 

Thus, Coronation decided to deepen its focus on Uber in 2021 and found the company to be attractively valued, with Uber dominating the US ride-hailing market with a 72% market share. 

Uber had also recently appointed Dara Khosrowshahi, who had vast experience in dealing with regulators, as CEO, thus reducing the risk of the company being strangled by arduous regulations. 

Coronation also received confirmation from an employee that Khosrowshahi had fixed Uber’s messy corporate culture. 

As regulatory risks receded market-by-market and it became more apparent with each earnings release that the business model was sustainable and that profitability was approaching, Coronation increased its stake. 

After the market price better reflected the underlying company value, the asset manager began reducing its position, particularly after the share price increased in 2023.

The graph below shows Coronation’s stake in Uber over time, from its relatively small shareholding in 2019 to 2021, followed by a sharp increase in 2022 and its steady decline in 2023.