Samsung Bixby– Lightweight

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Bixby is hopelessly outclassed.

  • Bixby voice only shines in the areas where Samsung has given it special access to hardware that competitors do not have.
  • Outside of this area, Bixby is a third-rate experience that is unlikely to generate much traction especially as the vastly superior Google Assistant is just a button press away.
  • The voice piece of the Bixby digital assistant has finally launched but despite months of feverish activity in trying to teach Bixby to speak English, it is still not very good at it.
  • Bixby has been granted exclusive hardware access such that it can work when the screen is off or the device is locked.
  • This is something that Google Assistant cannot do but it also comes with the reality that Bixby is always listening.
  • I think that this will make some users very uncomfortable as a microphone in one’s pocket is far more intrusive than a microphone listening in the kitchen.
  • Voice recognition works best when there is an element of training involved as users often say things in very different ways.
  • Unfortunately, it appears that for some users, Bixby is unable to recognise the training sentences implying that this part of the system still needs work.
  • In effect Samsung has programmed Bixby with a series of standard functions that can be used to operate the smartphone as well as basic functions in the apps.
  • Outside of that area, the user is pretty much out of luck.
  • Unfortunately, these only really work for Samsung apps which outside of the messaging app for SMS, I think no one really uses.
  • Furthermore, for navigation and search, Bixby uses Google but without some of the bells and whistles that make Google so good.
  • For these functions, it makes no sense to use Bixby when one can go straight to Google.
  • Bixby does support third party apps through the “Bixby Labs” program but unfortunately it doesn’t seem to work properly.
  • Bixby can open things like Google Maps, YouTube and so on but does not seem to be able to get past the main screen of those apps.
  • The problem with Bixby is simply that its creator, Samsung, has no artificial intelligence expertise to speak of and digital assistants are only about AI.
  • Google Assistant is the best not because Google knows how to make an assistant but because the AI that runs it is the best in the world.
  • This contrast is so stark, that Samsung has had to resort to hobbling Google Assistant in certain areas (hot word) just to give Bixby a chance.
  • I think that this will encourage users to try Bixby once or twice but when they realise how poor it is, they will go back to Google Assistant.
  • Google will not be losing any sleep over Bixby even though it could end up on a very high percentage of Google ecosystem devices.
  • Samsung is now the No. 1 semiconductor manufacturer in the world, but I still rank it almost dead last when it comes to AI.
  • I think its investments in this space would be better accruing to shareholders in the form of higher profits rather than being invested in functions that are likely to damage Samsung’s reputation rather than improve it.
  • Samsung’s recent rally has removed the valuation argument for Samsung which leaves me preferring Tencent, Baidu and Microsoft.

GrubHub – Big appetite

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Eats24 is an essential acquisition.

  • GrubHub is making exactly the right moves to give it the best chance to beat its larger and much better financed rivals in the brutal food delivery business.
  • Alongside results that broadly met expectations, GrubHub announced the acquisition of Eat24 for $288m well over double what Yelp paid for it in February 2015.
  • This may seem to a huge premium but when one looks at what Eat24 can bring to GrubHub, it is not difficult to make the case that this could be the most important move GrubHub has made in its history.
  • GrubHub is an online marketplace where diners come to order amd have delivered food from participating restaurants.
  • As an online marketplace (network business) it is subject to exactly the same dynamics as ride hailing, classifieds and so on.
  • 20 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • In effect, by hitting one of these two criteria the marketplace becomes to the go-to place to transact meaning that buyers become somewhat less price sensitive and sellers will pay more to sell their goods there.
  • It is this that allows the marketplace to make proper money but before this level is reached all players will almost certainly be under excruciating pressure.
  • GrubHub is no different in that since the advent of UberEats and Amazon’s entrance into this space, there has been relentless pressure on margins.
  • In the last 12 months EBIT margins have fallen to 13.9% in Q2 17A from 18.7% in Q2 2016 despite a 32% increase in revenues.
  • GrubHub is the market leader with 34% but Uber is not that far behind with 20%, Eats24 with 16% and Amazon on 11% (Cowen &Co).
  • Regulatory scrutiny has been high on GrubHub’s previous acquisitions but the fact that this deal is likely to be passed with barely a ripple is an indication of how much more competitive the market is now considered to be.
  • There is some overlap between GrubHub and Eats 24 but importantly once combined the platform will have 75,000 unique restaurants on its books and 48% market share of transactions.
  • Assuming that the acquisition and integration proceeds flawlessly, then GrubHub will be more than double the size of its nearest rival (Uber) and able to at least stabilise its margins.
  • Furthermore, as long as it can hold onto this advantage, it should be able to withstand the pressure from its rivals despite the fact that they have very big brothers backing them up.
  • Consequently, I think that GrubHub had to make this acquisition otherwise it faced being ground down by its better financed rivals until it was forced to sell itself to one of them.
  • GrubHub has made the right strategic move to ensure its longevity but now it comes down to execution to determine its future.

Spotify – Free foundation

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Apple Music still making no dent.

  • Spotify has crossed 60m paid users and while its absolute level of growth is slowing due to the law of large numbers, it is still adding paying subscribers at the very healthy rate of 2m per month.
  • In September 2016 Spotify hit 40m, passed 50m in March 2017 and hit 60m at the end of July 2017.
  • For the last 18 months, Spotify has been steadily adding subscribers at around 2m per month which is showing no signs of slowing down.
  • This has held steady for the last 5 months indicating that Apple Music is having very little impact on Spotify despite the substantial advantage Apple has in owning the App Store and having complete control over the iPhone.
  • I continue to believe that this is for two reasons
    • First:  Spotify remains fundamentally a better service.
    • This is driven by the fact that the music is now incidental in that anyone can create a service with 40m tracks and a search box.
    • Where Spotify is different is that it uses the data that it collects from all of its users in order to make its service better.
    • Apple also does this but Spotify’s AI in music continues to meaningfully outperform Apple’s.
    • By understanding the characteristics of the music offered by its service and the preferences of its listeners, it can accurately match the two together.
    • This also allows it to come up with innovative services that keeps its service fresh and one step ahead of the competition.
    • Second: Spotify has a large and engaged free tier of users that serve as the funnel for conversion into paid users.
    • Free users get to spend time with the service without paying for it, making it much easier to make these users understand why the service is better than anything else available.
    • This meaningfully offsets the disadvantage that Spotify has compared to Apple when it comes to marketing.
    • These free users generate data which Spotify can use to train its algorithms which can in turn be used to make the service better.
    • Apple also has a lot of data but has not been nearly as good at turning raw data into actionable intelligence with which it can improve its service.
  • The net result is that Spotify’s position is strengthening with every new user that it adds and between them, Apple and Spotify account for almost all of the growth in the recorded music industry.
  • Consequently, I remain unconcerned that Apple will be able to put real pressure on Spotify and think that its path to better profitability remains clear as the labels increasingly need Spotify more than Spotify needs the labels.
  • This position is becoming clearer as Spotify was able to strike a better deal with Universal (see here) and the outlook is that the rest of the industry will be signed on similar terms.
  • I still think that the key issue for Spotify going forward is to maintain momentum of growth of its free users.
  • It is the free user pool that has been the foundation of its outperformance of Apple, meaning that the free tier will be critical to keep the paid tier (where the real money will be made) increasing at this very healthy rate.
  • I continue to think that there is enough space in this market for 2 big players and with those spots filled, it is the fortunes of Pandora, Tidal, Deezer and so on that trouble me now.

Indian e-commerce – Road to ruin.

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The only likely winner in India is now Amazon.

  • Snapdeal has ended merger discussions with Flipkart in a move that, I think, snuffs out the one chance the local players had to keep Amazon at bay.
  • At the same time Softbank is now looking at committing $1.5bn – $2bn into Flipkart in a move that I think will solve nothing because in a network economy, two halves do not make a whole.
  • I think Softbank should not put any more money into Indian e-commerce as the most likely winner in this market is now Amazon in which Softbank has no stake.
  • Snapdeal’s strategy is now to become a niche player and is cutting costs and selling assets in order to raise the capital required to reach profitability in its niche.
  • In my opinion, this strategy demonstrates a fundamental misunderstanding of how Amazon works and what it is likely to do to win the Indian market.
  • Most companies have a strategy that involves trade-offs such as offering high quality or low prices.
  • This is the route that Snapdeal is taking by deciding to streamline and focus on by giving sellers the best experience in India.
  • This is not how Amazon functions as there is no either / or in its vocabulary.
  • Instead Amazon goes for dominance and offers high quality and low prices or in this case the best experience for both sellers and buyers
  • How Flipkart will alter its strategy following the failure of the merger remains to be seen, but without the scale that Snapdeal would have given it, its chances of seeing off Amazon are greatly reduced.
  • Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
  • 20 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
  • This, in a nutshell, is the problem faced by both Flipkart and Snapdeal in India.
  • Flipkart is bigger than Snapdeal and so it is in a slightly better position, but it is not double the size of its nearest rival.
  • Furthermore, both will now have to contend with Amazon which is absolutely determined not to make the same mess of India that it made in China when it went up against Alibaba and lost.
  • I estimate that Amazon pumped $400m of losses into the Indian market in Q1 17A and roughly the same amount again in Q2 17A and I don’t think it will be afraid to up the ante from here if needed.
  • Amazon is not the largest in India but it can lose far more money for far longer than either of the other two.
  • Flipkart has around 35% of monthly active users but it will need to reach at least 50% before it is double the size of Amazon (7Park Data).
  • This is why a Snapdeal merger made sense, because adding Snapdeal’s users to its own would have got it pretty close to achieving that milestone.
  • Consequently, Amazon will now be able to grind its two main rivals down to the point at which they either exit the market or agree to be acquired.
  • Both of these scenarios are likely to result in much lower valuations than were being discussed as part of the deal.
  • Hence, I think that Amazon is the only real winner from the failure of this merger which I think raises existential questions for local providers of e-commerce marketplaces in India.
  • In the short-term this is unlikely to help Amazon’s fundamentals much and so I remain unenthused with an investment in its shares.
  • I continue to prefer Tencent, Baidu and Microsoft.

 

Amazon & Baidu Q2 17A – Back to basics

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Amazon and Baidu get back to what they do best.

Amazon – Not making money

  • Amazon reported disappointing results and guided weakly as it once again spent everything it could on investing in future revenue growth.
  • Q2 17A revenues / EBIT were $38.0bn / $628m compared to consensus at $37.2bn / $1.0bn.
  • AWS put in another mighty performance with revenues of $4.1bn and margins of 22% but this was gobbled up by the international operation where margins have fallen to -6.3% from -1.4% in Q2 16A.
  • I am pretty sure that is mostly driven by Amazon’s absolute determination not to lose India to Flipkart / Snapdeal the way it lost China to Alibaba.
  • The good news is that Flipkart and Snapdeal are squabbling over their merger and the longer it takes them to get it done, the less chance they have to keep Amazon out of their home market. (see here).
  • This heavy investment looks set to continue with Q3 17E guidance disappointing once again.
  • Q3 17E revenues / EBIT are expected to be $39.25bn – $41.75bn ($40.5bn) / LOSS $400m – $300m (LOSS $50m) compared to consensus at $39.9bn / $1.1bn.
  • There is no sign of this “bumbling around break-even” in sight and consequently the valuation of Amazon looks more stretched than ever.
  • I prefer not to pay now for profitability that very fleetingly materialises.

Baidu – Performing in line with China.

  • Baidu reported good Q2 17A revenues as the regulatory impact on its revenues has past and the company kept a tight lid on expenses.
  • Q2 17A revenues / net income were RMB20.7bn / RMB4.4bn compared to consensus at RMB20.7bn / RMB3.3bn.
  • A large part of this improvement has come from cutting back on investments in its food delivery business but also from a big fall in traffic acquisition cost which fell from 15.9% of sales in Q2 16A to 11.9% in Q2 17A.
  • Despite the cuts, investments in AI and content remain intact and are the two main thrusts for revenue growth beyond search.
  • In AI, I rank Baidu highly, although it is very focused on China, and think that this is its biggest strategic advantage to remain a big player in Chinese Internet.
  • Baidu should be able to make its services more intuitive and useful compared to those of its competitors which should help its services win and keep more users.
  • The outlook for Baidu remains steady, now that the regulatory problem is in the rear-view mirror, and I see an upwards correction as it catches up with its peers.
  • I continue to like Baidu alongside Microsoft and Tencent.

 

Facebook Q2 17A – Cash community

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Community is about cash generation.

  • Facebook reported another set of excellent results and laid out pretty concrete plans of how it aims to put off, for as long as possible, the inevitable slowdown in its growth.
  • Q2 17A revenues / adj-EPS were $9.3bn / $1.32 compared to forecasts of $9.1bn / $1.32.
  • Mobile advertising, and especially video, underpinned most of the growth as mobile now accounts for 87% of total advertising revenues.
  • Facebook now has 2.01bn MaU of which 1.32bn visit everyday
  • Two major themes have emerged over the last 6 months which were further emphasised at these results.
    • First: community. Facebook is moving away from connecting friends (as it has already done this) and towards creating communities.
    • There are already 100m members of groups around particular interests which Facebook aims to push much higher.
    • These groups meet both virtually and physically and I think they represent an incremental monetisation opportunity.
    • This is because they represent the most engaged users where their interests are as clearly defined as they are on Twitter.
    • This means that Facebook should be able to monetise them much more effectively as the advertisements served will be more relevant and therefore can be more highly priced.
    • Furthermore, should Facebook succeed in growing the membership of these groups meaningfully, the average time spent by users on Facebook will also rise.
    • This will give both a price and volume lift to revenues allowing much faster growth.
    • Second: Artificial Intelligence. It is clear that this is Facebook main strategic priority.
    • This is because it is very far behind the curve when it comes to the quality of its AI, and it badly needs to at least be able to understand and categorise the huge amounts of data that it generates every day.
    • Facebook also intends to use AI to understand its users better so that it can suggest content that exists outside of their social circle in which they might be interested.
    • This will also have the convenient side effect of enabling Facebook to target its users more effectively, thereby increasing the price it can charge to marketers.
    • AI still remains a major weakness for Facebook but importantly, it is aware of the problem and is working on fixing it as fast as it can.
  • Behind the desire to connect people and create communities lies a Sheryl Sandberg’s highly efficient cash collection machine.
  • At the end of the day Facebook is a business not a philanthropic organisation and it is doing an excellent job of earning a good return from the data it collects.
  • I still remain concerned with short-term growth due to the maturation of its core businesses and the fact that new areas like messaging and gaming have yet to really generate revenues.
  • So far in 2017, Facebook has been able to defy both its own (and my) forecasts for revenue growth but the comparisons are getting tougher and tougher to keep up this pace.
  • Hence, I doubt that Facebook can keep this up until its new businesses mature and I still see a pause coming in revenue growth over the next 6 to 9 months.
  • It is at that point, that I am looking to get in for the long term as Facebook is showing all the signs of becoming the biggest ecosystem of them all.

Alphabet – Other people’s money

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Core businesses showing signs of maturity.

  • Alphabet reported good Q2 17A results but the fact that it has having to share more of its revenues with third parties is hurting profitability and indicates that growth in its core properties is maturing.
  • Q2 17A revenues-ex TAC / Adj-EPS were $20.9bn / $8.90 below consensus of $21.2bn / $10.34.
  • While I consider the EU fine to be little more than an annoyance (see here), it is the traffic acquisition cost (TAC) where I have concerns.
  • Over the last 12 months, Google has been forced to pay away more of its revenues to its network members and distribution partners.
  • Google network members are now keeping 72% of their turnover compared to 70% a year ago and distribution partners now get 11% of the revenues that Google generates from their devices compared to 9% a year ago.
  • The problem here is that this falls straight to the bottom line and looks to have been entirely responsible for the weakening of margins experienced during the quarter.
  • To a certain degree, what Alphabet is doing is buying growth in revenues and paying for it with lower profitability.
  • This is exactly what Yahoo did much more aggressively prior to its acquisition by Verizon and it was able to mask a decline in its core business by buying in revenues from elsewhere.
  • It implies that monetisation of its own properties and content such as search, mail, maps is starting to hit their capacity ceilings, leaving the company needing to find more growth from third parties.
  • In this regard, the star of the quarter was YouTube which now has 1.5bn MaU with a staggering average engagement time of 60 minutes per day.
  • YouTube is the main home of the alternative media which continues to gain substantial traction across the world as well as the place to go to learn how to do almost anything.
  • YouTube has also seen very high growth of viewing from regular TV screens and is gradually making the move into traditional entertainment.
  • Machine learning and AI are found everywhere in Google’s products and given its lead here, it has the ability to make its services more useful and more intuitive than the competing services of other ecosystems.
  • Hence, I think the outlook remains pretty good for Alphabet but the underlying growth in the core business looks like it is maturing.
  • Hence, profit growth could lag revenue growth as margins come under pressure from increasing TAC leading to more disappointment.
  • I remain pretty cautious on Alphabet overall as the share price has more than kept up with the growth the company has enjoyed over the last 24 months.
  • I still prefer Tencent, Baidu and Microsoft.

Uber vs. everyone – Colonial times

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Uber’s dreams of colonisation are slipping away.

  • First Uber lost China, then Russia and now it looks as if South East Asia may go the same way.
  • I am sure that Brazil and India are taking feverish notes.
  • SoftBank and Didi are investing $2bn investment in Grab, the Singapore-based ride-hailing company that offers its services in 6 countries including Malaysia, Singapore, Indonesia, Thailand, Vietnam and Philippines.
  • The total round is expected to be around $2.5bn with a post money valuation of $6bn.
  • Grab is present on 50m devices with 1.1m drivers and fulfilling 3m rides per day.
  • Grab has two advantages over Uber.
    • First: dominance. According to Grab, it already has 91% market share in taxi hailing and 71% in private vehicle hailing in the markets it serves.
    • This is crucial as RFM’s rule for online marketplaces states that to become to go to place to buy or sell a product or service, the marketplace has to have 60% market share or be double the size of its nearest rival.
    • Assuming these figures are accurate (there was a lot of dispute in China), then Grab has already become to the go to market place although the opportunity is very lowly penetrated.
    • I suspect that this is why it needs such a large fund raising as this position has to be maintained while the ride hailing becomes much more prevalent in the region.
    • Second: GrabPay. One of the problems with ride hailing in emerging markets is the fact that credit card penetration is very low.
    • A large part of the ride-hailing experience is the ease and simplicity of payment and GrabPay is way to bring this experience to those with no credit cards.
    • GrabPay credits can be purchased at ATMs, stores and banks (in a similar way to mobile phone airtime popups) which can then be used to pay for Grab services.
    • I think that this will remove one of the major hurdles to uptake of the service as this issue has made life difficult other offerings like EasyTaxi which operates in Latin America and the Middle East.
  • Uber’s rivals overseas are making the most of its turmoil at home as while management attention is focused in USA, I suspect not much is going on overseas.
  • This gives its rivals more time to establish themselves and none of them appear to be wasting any time.
  • The net result is that Uber’s dreams of colonising the world appear to be slipping away.
  • I suspect that it will remain dominant at home and some key Western markets (like UK) but it will have to do much more than just ride hailing in those markets to justify a $65bn valuation.
  • This is why autonomy may end up being so important as if Uber can capture a large piece of the gigantic $2.7tn transportation market in USA by operating a fleet of autonomous vehicles, then it could conceivably be worth 10x that figure.
  • However, Uber has a very long way to go before it gets to that point as its autonomous offering ranks dead last by RFM’s reckoning (see here) and the car makers could well be fighting in this market for their very existence.
  • I would not be surprised to hear of secondary transactions in Uber stock at well below $65bn and I can’t see much that’s going to push it up anytime soon.
  • One to avoid for now.

Blue Apron – Size 12s.

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Amazon’s size 12s causes dismay for Blue Apron and Hello Fresh.

  • The saga of Blue Apron is rapidly becoming a horror story that could end in acquisition as I think that rushing to IPO too early has now made it extremely difficult for the company to raise new money.
  • Blue Apron is a food delivery company that sends its members boxes with the exact ingredients required to cook entire meals at home.
  • Members pay a subscription in order to receive a certain number of meals per week.
  • It is exactly the same as Hello Fresh which operates out of Europe and is part of the Rocket Internet group.
  • The proposition is quite simple in that by cutting out wholesalers and distributers it can offer good prices on high quality ingredients making the service inexpensive enough to attract cash rich, time poor customers.
  • The problem is that Amazon’s clearly intends to stomp on these businesses with its acquisition of Whole Foods and its application for a trade mark to enter this line of business.
  • This has decimated the valuation of Blue Apron and, I suspect, sent waves of panic through Hello Fresh.
  • Prior the Whole Foods announcements, Blue Apron was expecting to IPO at $15-17 per share and as of the close of trading on 17th July 2017, the shares were valued at $6.59 some 59% below where it was just a few short weeks ago.
  • The bigger problem is that Blue Apron has massively ramped up both operating and capital spending ahead of its IPO.
  • In Q1 17 Blue Apron lost the same amount of money that it did in the entirety of 2016 and also spent $50m on capex which it finanaced by raising debt.
  • Hence, I reckon that after paying off the debt, Blue Apron has around $250m in the bank which is not going to last very long with losses running at $50m per quarter.
  • Hence, it either has to generate profit soon (unlikely) or raise more money.
  • This is going to be extremely difficult because with the share price 59% below where it was expected to be and Amazon coming head-on, no one is going to want to finance the company.
  • The further problem is that Amazon new found scale in groceries will mean that it will most likley undercut Blue Apron and Hello Fresh and still offer consumers better quality produce with more reliable delivery.
  • The one advantage that Hello Fresh has over Blue Apron is that it operates in Europe where Amazon has yet to arrive with groceries giving it time to react and that it is backed by the much larger and better financed, Rocket Internet.
  • If Blue Apron had remained private, this issue would not be nearly so acute as one would only be able to speculate on the impact on Blue Apron’s valuation rather than see it in the cold light of day.
  • Hence, I can see Blue Apron’ valuation continuing to fall and then being acquired, potentially by the behemoth that has been the architect of its woes.
  • I see no bargain to be had and would steer well clear of this.

 

Uber & Yandex – Russia on top.

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Uber bails from another fight it was not going to win.

  • Yandex and Uber are merging their ride hailing businesses in Russia and surrounding countries but it is clear to me that the real winner here is Yandex that has managed to send Uber home with its tail between its legs.
  • Yandex and Uber have announced that they will create a new company and contribute both cash and their assets to create a company that will offer ride-hailing and associated services (like food delivery) in Russia, Kazakhstan, Azerbaijan, Armenia, Belarus and Georgia.
  • Yandex is contributing $100m while Uber is putting $225 into the new company.
  • Critically, Yandex will own 59.3% of the new company while Uber will own 36.6% with the employees holding 4.1%.
  • The CEO of Yandex.Taxi will become CEO of the new company and I have no doubt that all of the key operational roles will be filled by executives from Yandex.Taxi.
  • The new company has an agreed valuation of $3.73bn after the transaction.
  • The fact that Yandex has ended up with 59% of the company and outright control despite only putting in less than half the money that Uber has put in, indicates that its existing ride hailing business is far stronger than Uber’s.
  • I see this is an almost exact repeat of what happened in China when Uber sold out to Didi and withdrew from the country.
  • I also think that Uber had very little choice as it was competing against the local champion and was only around half of its size.
  • Uber and Yandex.Taxi are market places meaning that to really make money, one has to have 60% market share or be twice the size of the nearest competitor.
  • I suspect that Yandex.Taxi was already almost at that point and that seeing the writing on the wall, Uber took the wise decision to sell out.
  • The net result is that Uber has a 37% stake in a company that will now dominate 5 countries and should be able to show very healthy profitability.
  • This is a much better outcome than the alternative which was holding 100% of a money losing company and being eventually being driven out of business.
  • Uber is currently beset with real problems in addition to the management issues it is facing at home.
  • Russia is the second huge market from which it has been driven which will give competitors in Brazil and India hope that they can do the same.
  • This makes its global domination strategy look somewhat questionable, leaving its real opportunity being to take control of autonomous transportation and creating transport as a service.
  • The problem here is that analysis of autonomous driving data strongly indicates that Uber is by far the worst at autonomous driving (see here), casting doubts over whether it will be able to live up to that ambition.
  • With both of these outcomes looking decidedly shaky and management turmoil, it is not a surprise that Uber investors are feeling somewhat nervous.