(LYFT) Archives

The Market Outlook for the Week Ahead, or Here’s Another Bombshell

I was all ready to write this week that massive monetary stimulus created by the Federal Reserve will cause the stock market to continue its slow-motion melt up.

The president had other ideas.

As of this writing, the US will impose without warning a surprise 25% increase in tariffs on $200 billion worth of Chinese imports, effective Friday, or in four days.

Clearly, the trade negotiations are not going as well as advertised by the administration. My bet is that the stock market won’t like this. All I can say is that I’m glad I’m 90% in cash and 10% in a Walt Disney vertical bull call spread that expires in nine trading days.

The bigger and unanswerable question is whether this is just a negotiating strategy already well known by the Bronx Housing Authority that sets up a nice dip to buy? Or is it this the beginning of a long overdue summer correction?

Nobody knows.

Certainly, the rally was getting long in the tooth, rising almost every day in 2019, with NASDAQ reaching new all-time highs. Those who kept their big-cap technology stock through the sturm und drang of the December meltdown have been rewarded handsomely. Index players reigned supreme.

However, we live in unprecedented times. Never before has a stock market received this much artificial stimulus at an all-time high unless you hark back to the Tokyo 1989 top. Japanese shares are now trading at 43% lower than that high….30 years later. We all know that our own decade-old bull market will eventually end in tears, but will it be in days, weeks, months, or years?

I had plenty of great wisdom, wonderful sector selections, colorful witticisms, and killer stock picks to serve up to you this week, but they have all be outrun by events. There’s nothing to do now but wait and see how the market responds to this tariff bombshell at the Monday morning opening.

After three months of decidedly mixed data, the information flow on the economy suddenly swung decidedly to the positive. The jobs data could have been more positive.

Of course, the April Nonfarm Payroll Report was a sight to behold. It came in at 263,000, about 80,000 more than expected, and more than makes up for last month’s dismal showing. It was a bull’s dream come true. This is what overheating looks like fueled by massive borrowing. Play now, pay later.

The headline Unemployment Rate fell a hefty 0.2% to 3.6%, the most since 1969 when the Vietnam War was raging, and the economy was booming. I remember then that Levi Strauss (LEVI) was suffering from a denim shortage then because so much was being sent to Southeast Asia to use as waterproof tarps. Wages rose 3.2% YOY.

Professional and Business Services led at a massive 76,000 jobs, Construction by 33,000 jobs, and Health Care by 27,000 jobs. Retail lost 12,000 jobs.

The ADP came in at a hot 275,000 as the private hiring binge continues. Then the April Nonfarm Payroll Report blew it away at 263,000. The headline unemployment rate plunged to a new 49-year low at 3.6%.

Consumer Spending hit a decade high, up 0.9% in March while inflation barely moved. Is Goldilocks about to become a senior citizen?

Apple (AAPL) blew it away with a major earnings upside surprise. The services play is finally feeding into profits. Stock buybacks were bumped up from $100 billion to $150 billion. Don’t touch (AAPL) up here with the stock just short of an all-time high. How high will the shares be when Apple’s revenue split between hardware and software revenues is 50/50?

Pending Home Sales jumped 3.8% on a signed contract basis. No doubt the market is responding to the biggest drop on mortgage rates in a decade. At one point, the 30-year fixed rate loan fell as low as 4.03%. Avoid housing for now, it’s still in a recession.

Topping it all off, the Fed made no move on interest rates. Like this was going to be a surprise? This may be the mantra for the rest of 2019. The big revelation that the Fed will start ending quantitative tightening now and not wait until September, as indicated earlier. More rocket fuel for the stock market. Let the bubble continue.

Uber (UBER) hit the Road for its IPO with valuations being cut daily, from a high of $120 billion to a recent low of $90 billion. The issue goes public on Friday morning. Rival Lyft (LYFT) definitely peed on their parade with their ill-fated IPO plunging 33%.

It wasn’t all Champaign and roses. San Francisco home prices fell for the first time in seven years. The median price is now only $830,000, down 0.1% YOY. Back up the truck! Clearly a victim of the Trump tax bill, this market won’t recover until deductions for taxes are restored. That may take place in two years….or never!

The Mad Hedge Fund Trader suffered a modest setback with the sudden collapse of copper prices last week, thus giving up all its profit in Freeport McMoRan (FCX). Global Trading Dispatch closed the week up 14.48% year to date and is down -1.48% so far in May. My trailing one-year retreated to +18.85%.

Reflecting the huge sector divergence in the market, the Mad Hedge Technology Letter leaped to another new all-time high on the back of two new very short-term positions in Intuit (INTU) and Google (GOOG), which we picked up after the earnings debacle there. Some 11 out of 13 Mad Hedge Technology Letter round trips have been profitable this year.

My nine and a half year profit shrank to +314.62%. The average annualized return backed off to +33.11%. With the markets at all-time highs and my Mad Hedge Market Timing Index forming a 2 ½ month high, I am now 90% in cash with Global Trading Dispatch and 80% cash in the Mad Hedge Tech Letter.

The coming week will be pretty boring after last week’s excitement, at least on the hard data front.

On Monday, May 6, Occidental Petroleum (OXY), now engaged in a ferocious takeover battle for Anadarko, reports. So does (AIG).

On Tuesday, May 7, 3:00 PM EST, we obtain March Consumer Credit. (LYFT), one of the worst performing IPOs this year, gives its first ever earnings report.

On Wednesday, May 8 at 2:00 PM, we get the most important earnings report of the week with Walt Disney (DIS), along with (ROKU).

On Thursday, May 9 at 8:30 the Weekly Jobless Claims are produced. At the same time, we get the March Producer Price Index. Dropbox (DBX) reports.

On Friday, May 10 at 8:30 AM, we get the Consumer Price Index. The Baker-Hughes Rig Count follows at 1:00 PM. (UBER)’s IPO will be priced at the opening. Viacom (VIA) Reports.

As for me, I’ll be watching the Kentucky Derby on Saturday. The field is wide open, now that the favorite, Omaha Beach, has been scratched.

As I will be attending the Las Vegas SALT conference during the coming week, the Woodstock of hedge fund managers, I will take the opportunity to rerun some of my oldies but goodies. We also have recently enjoyed a large number of new subscribers so I will be publishing several basic training pieces.

Maybe it was something I said?

For more on the SALT conference, please click here (you must be logged in to your account to access this piece).

Good luck and good trading.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

May 6, 2019

Tech Letter

Mad Hedge Technology Letter
May 6, 2019
Fiat Lux

Featured Trade:

(PAYPAL GOES FROM STRENGTH TO STRENGTH)
(PYPL), (SQ), (GOOGL), (LYFT)

PayPal Goes From Strength to Strength

Tech Letter

It’s time to revisit one of my favorite tech picks for 2019 that is a constant trade alert candidate.

The attention is warranted with the stock performance delivering a tidal wave of euphoria rising around 30% in the first half of 2019.

I expected PayPal to have a great year, but I didn’t expect them to perform better than Square who are growing from a lower install base.

PayPal’s overperformance signals to the wider business establishment how important a broad install base can be that can tap the network effect to reel in profits.

This is how once legacy dinosaurs can reinvent themselves in months.

The lack of entry points is a concern prodding investors to chase the stock if they want a piece of the action.

This is one of the drastic side effects of PayPal’s meteoric rise that has been buttressed by dovish Fed policy.

Investors are literally praying to the skies for any softness in tech earnings reports because for the best of the bunch, there have been no moderate pullbacks of note since last winter.

PayPal did offer a slight data point that might be construed as disappointing when total payment volume (TPV) of $161 billion was slightly lower than the consensus of $163 million for the quarter.

It’s slim pickings for the bear camp with not much to feast on in an otherwise pretty solid earnings report.

As PayPal expanded by 9.3 million new active accounts, bringing its total up to 277 million, management has super charged this legacy fintech company into an outright renaissance.

Doing even more to shed the tag of a legacy company, PayPal invested half a billion dollars at $47 per share into the upcoming Uber IPO signaling possibilities that their payment software could at some point integrate into Uber’s network down the road.

Alphabet (GOOGL) has shown that if you get in early with these Silicon Valley unicorns, synergistic effects are plenty with Alphabet lapping up revenue charging Lyft (LYFT) for providing digital ad capabilities on top of the appreciating value of their investment stake.

And if you remember that way back, PayPal was tied to eBay before it was spun out.

Better to attach future hopes and dreams to a leading visionary and innovator instead of a legacy e-commerce platform.

Illustrating the tough task of turning around eBay, eBay clocked in negative TPV growth of 4% in the past quarter.

PayPal offered us more detail into active-account numbers for its Venmo peer-to-peer service with more than 40 million people using Venmo for at least one transaction in the last 12 months.

Venmo processed $21 billion in TPV last quarter, mushrooming by 73%, while the core PayPal platform’s TPV grew 41% to $42 billion.

The success paved the way to raise its full-year EPS outlook from $2.94 to $3.01 ensuring that its prior forecast on revenue and TPV will be met.

PayPal previously guided lower with an expected $2.84 to $2.91 in adjusted EPS and $17.75 billion to $18.1 billion in revenue.

When we tally up all the positive points, it’s hard to ignore the 12% YOY increase in revenue to $4.13B and the more impressive 37% YOY rise in EPS growth signaling the company is applying its giant scale to maximum effect.

Customer engagement of 37.9 payment transactions per active account rose 9% YOY while the TPV which came in lower than consensus was still growth of 22% YOY.

I love that PayPal has migrated towards the heart of innovation while being a legacy fintech company.

Venmo and the Venmo card are rapidly infiltrating the center of consumer’s daily financial lives wielded for groceries, gas, and restaurants.

In February, PayPal introduced a limited-edition rainbow card which became the fastest adopted Venmo card.

I want to reiterate how the proof is in the pudding with Venmo volume increasing 73% to approximately $21B in the quarter.

Not only does this legacy fintech have super growth drivers, they have become quasi venture capitalists applying a horde of capital to snap up attractive assets.

An example is a $750 million investment in the e-commerce and payments leader in Latin America called MercadoLibre which creates a network effect to PayPal’s core business in the region.

If the steady drip of news wasn’t good enough, PayPal announced a partnership with Instagram to process payments when customers are shopping on Instagram in the U.S.

Management is convincingly delivering the goods with 110 basis points of operating margin expansion.

PayPal’s flawless performance is a great model in how to survive the volatile times of rapid tech shifts, and the best way to alter a model to reduce existential threats.

The company has growth drivers, have migrated capital into growth tech, are innovating with the best of them, and management is executing surgically taking advantage of a massive install base.

Buy on any weakness, entry points are few and far between.

May 3, 2019

Diary, Newsletter, Summary

Global Market Comments
May 3, 2019
Fiat Lux

Featured Trade:
(LAST CHANCE TO ATTEND THE LAS VEGAS MAY 9 GLOBAL STRATEGY LUNCHEON)
(APRIL 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (LYFT), (TSLA), (TLT), (XLV), (UBER),
(AAPL), (AMZN), (MSFT), (EDIT), (SGMO), (CLLS)

May 1 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader May 1 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Your old target for the (SPY) was $292.80; we’re clearly above that now. What’s your new target and how long will it take to get there?

A: My new target on the S&P 500 (SPY) is $296.80. You’re looking at $295 on the (SPY), so we’re almost there. However, we’re grinding up too slowly so I can’t give you an exact date.

Q: Will Fed governor Jay Powell give in to pressure from Trump who wants him to drop rates? Does he have any sway over the process?

A: Officially he has no sway, but every day Trump is tweeting: “I want QE back, I want a 1% rate cut.” And if that happened, the economy would completely blow up—an interest rate cut with the market at an all-time high and 3.25% GDP growth rate would be unprecedented, would deliver a short term gain and long term disaster.

Q: What do you think about the Uber (UBER) IPO?

A: I wouldn’t touch it with a 10-foot pole—they’ve been cutting valuations almost every day. At one point they were going to value the company at $120 billion dollars, now they’re at $90 billion and they may even lower it from there. The last car sharing IPO (LYFT) dropped 33% from its high. I would stay away from all of the IPOs once they’re listed. The rule is: only buy these things when they’re down 50%. Warren Buffet never buys IPOs, nor do I.

Q: What do you think about buying or selling Lyft?

A: I would wait a couple of months for Lyft to find its true price. Then you’ll have something to trade against.

Q: Do you think the bad news is over on Tesla (TSLA)? Is it time to buy? Or is it going bankrupt?

A: The whole world knew that the electric car subsidy would be cut in January, so what customers did was accelerate their orders in the 4th quarter, which took us all the way up to $380 in the shares, and then created a vacuum in the Q1 of this year. It reported the first quarter last week—they were disastrous orders, and the company is cutting back overhead as fast as possible as if it’s going into a recession, which it kind of is. The question is whether or not sales will bounce back in Q2 with the smaller subsidy. I happen to think they will. But we may not see 2018 Q4 sales levels again until 2019 Q4.

Q: Why has healthcare (XLV) been so awful this year?

A: There’s an election next year and both parties promise to beat up on the healthcare industry with drug control pricing and other forms of regulation. Of course, the current president promised free competition in drug prices; but then he moved to Washington DC and found the drug industry lobby, and nothing was ever heard again on that front. It’s a very high political risk sector, but there is some great value at these levels in the healthcare industry in the long term. I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently.

Q: Should I buy the (TLT) $120-$123 call spread now?

A: That's a very aggressive trade, I would wait and go with strikes for in the money, and then only on a big dip. Don’t reach for a trade when the market is at an all-time high.

Q: Should I be shorting Tesla down here?

A: Absolutely not, your short trade was at $380, $350, $330 and $300. Down here, you run the risk of a surprise tweet from Elon Musk causing the stock to go $50 against you. Buy the way, he’s already announced that he’s buying $10 million worth of shares in his next capital raise.

Q: What do you think about CRISPR stocks long term, like Editas Medicine (EDIT), Sangamo Life Sciences (SGMO), and Cellectis (CLLS)?

A: These are probably the best bunch of 10 baggers long term. Short term they are afflicted with the same problems impacting all of healthcare—promises of regulation and price control on all of their products ahead of an election. So, hold for the long term; short term I’d only be buying the really big dips. Did I mention that I’m about to start the Mad Hedge Biotech and Health Care newsletter imminently?

Q: Is your May 10th market top forecast still good?

A: Well we’re getting kind of close to May 10th. I made this prediction based on an inverting yield curve two years ago. However, that target did not anticipate interest rates topping out for the 10-year US Treasury bond at 3.25%. Nor did it consider the Fed canceling all interest rate hikes for the year. Without the artificial stimulus, the market would certainly have already rolled over and died. That said, I still have a week to go.

Q: Should I be selling my long term holds in the FANGS, like Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT)?

A: For the long term, no. However, we know from December that these things can get hit with a 40% drawdown at any time. As long as you can handle that, they always bounce back.

Q: What will happen to Venezuela? Any trades?

A: The only related trades would be in the oil market (USO). If we get a coup d’ etat which installs a new pro-American president, which could be at any time, that could lead to a selloff in oil for a couple of days as 1 Million barrels of crude per day come back on the market, but probably no more than that.

Q: With current national debt and budget deficits, when will interest in gold kick in?

A: Very simple: when the stock market goes down, you want to buy gold. It’s the hedge that everyone will chase after, and inflation is just around the corner.

Q: Do you need me to place any Kentucky Derby bets?

A: Me being the cautious guy I am, I pick the horse with the best odds and then I bet him to show. That almost always works.

Q: What about pot stocks?

A: I’ve never liked them very much; after all, how hard is it to grow a weed? The barriers to entry are zero. All of these pot companies coming up now are not really pot stocks as much as they are marketing companies, so you’re buying their distribution capability primarily. That said, I’m having breakfast with the CEO of a major pot company next week, so I’ll be writing about that once I get the inside scoop.

Q: Will the Fed be the non-event?

A: Yes, as stated in the Mad Hedge Hot Tips this morning, it will be a non-event and the news is due out in about an hour.

April 29, 2019

Tech Letter

Mad Hedge Technology Letter
April 29, 2019
Fiat Lux

Featured Trade:

(A TESLA ENTRY POINT IS FINALLY OPENING UP)
(TSLA), (LYFT), (UBER)

A Tesla Entry Point is Finally Opening Up

Tech Letter

CEO of Tesla Elon Musk touting his company’s ability to deploy robo-taxis in the next 12 months miffed many industry analysts.

Few tech CEOs would have the balls to get on stage and put themselves out there in that type of manner.

But many tech CEOs aren’t Elon Musk.

I believe Musk calling for these bold predictions will help bend the world in his favor, maybe not right away, but before Tesla burns through their horde of cash.

Of course, there is no way in hell he could pull this off today, regulatory hurdles and in-house capability are two severe constraints.

But confidently proclaiming audacious initiatives that become self-fulfilling prophecies is a smart way to align the stars in the way you want.

Musk certainly believes the scent is in the air for the wolves to go in for the killer blow, he just needs a few miracles and a tad bit of luck on his side.

Tesla is now on record hyping up a custom-made robo-taxi capable of running about a million miles using a single battery pack, with all the sensors and computing power for full autonomy, costing less than $38,000 to produce.

They believe this will come out in 2020.

The combination of low vehicle cost, low maintenance cost and an expected powertrain efficiency of 4.5 miles per kWh should make this the lowest cost of ownership and will be the most profitable autonomous taxi on the market.

Using this state of the art robo-taxi to build a ride-sharing service business would effectively mean an Uber or Lyft without drivers.

Tesla would receive 30% of each fare, with the other 70% sent to Tesla owners that would deploy their own cars into the ride-sharing network.

I respect that Musk can feel sentiment behind Tesla's brand slipping away after heavy criticism, personal backlash from a spat with the SEC, and a boatload of competition hoping to smash him in the mouth.

Musk needed to shift the narrative into Tesla’s brand being the most innovative and publicly letting investors know there are more irons in the fire that will entrench Tesla supporters further while giving the Tesla haters more fodder to terrorize Musk.

Tesla is a luxury brand and constructed in the image of Elon Musk - making the impossible possible ethos needed a facelift and Musk gave what his supporters wanted in spades.

His showmanship is not misplaced and is part of who he is. But more importantly, if Tesla makes serious headway in the robo-taxi business in the next 12 months, Musk will be able to stand on the podium to whip up enough support needed to nudge this over the line.

Musk is very much from the mold of build it and they will come, and he has what few other CEOs have – vision.

The vision comes with a pricey premium.

And Musk must nurture this vision and urge believers to keep believing to carry on this act.

I was surprised that one of the most applicable pieces of news in the shareholder letter was something that nobody excavated.

Tesla will build a second-generation Model 3 line in China that projects to be at least 50% cheaper per unit of capacity than the Model 3-related lines in Fremont and at Gigafactory 1.

The cost to produce Model 3's is about to crash all while Tesla is still considered a premium, luxury vehicle.

This will free up space at the Reno Gigafactory and Fremont to focus on the robo-taxi challenge.

The latest news in Shanghai was an explosion at the half-built Gigafactory parking lot, but not much will come of that.

For investors on the sideline, the nadir of Tesla stock is approaching, another more shakeout might give investors the green light for a trade, that is if they aren’t already long-time holders.

Tesla mentioned they had trouble delivering new Teslas to foreign countries because of headwinds putting the logistics in place for the first time.

This one-off write-down will come off the balance sheet in next quarter’s earnings report and more information on the Shanghai Gigafactory will start to filter in aside from its boost to Tesla being able to produce 500,000 cars in 2019 once it comes online.

The Shanghai Gigafactory will unlock substantial value for shareholders once it's fully operational and finishing the construction ahead of time would be a boon.

Part of the plan to go into China results from snapping up more of a battery supply which Musk feels is the Achilles heel right now in Reno.

He continues to fault Panasonic for not delivering enough cells which, in turn, is holding back the power wall business creating a backlog in orders.

Many of the talking heads appearing on major networks were too trigger-happy in tearing Musk to shreds because of the way he speaks in hyperbole.

Musk even came out with another zinger that could pick up traction - an insurance product to marry up with Tesla vehicle purchases because Tesla believed Tesla owners are being price gouged by insurance companies.

As the impact of higher deliveries and cost reduction take full effect, Tesla expects to return to profitability in Q3 and significantly reduce losses in Q2.

Most of the bad news is baked into the stock and there could be another leg-down before this stock starts to look compelling.

Whether you love them or hate them, visionary tech CEOs get a lot of slack because the upside is so lucrative for shareholders.

That is part of why it is excruciating trading the stock led by a moody visionary with a larger-than-life persona, better to buy and hold if you are a Tesla believer.

April 16, 2019

Tech Letter

Mad Hedge Technology Letter
April 16, 2019
Fiat Lux

Featured Trade:

(UBER’S DARK AND DIRTY SECRETS)
(UBER), (LYFT)

Uber's Dark and Dirty Secrets

Tech Letter

The granddaddy of IPOs awaits us – Uber has filed an S-1 with the SEC detailing plans to go public.

Uber can’t do this any sooner as they preside over a decelerating ride-share operation and its high margin Uber eats division, food delivery business, that has experienced slowing margins.

Once helmed by swashbuckling entrepreneur Travis Kalanick, Uber was infamous for its cultural problems that played out in real time in the media with sexual harassment accusations amongst other things.

They were castigated for its environment of testosterone overload that current CEO Dara Khosrowshahi has rooted out.

Khosrowshahi is pinning the blame on the past leadership in the S-1 filing explaining they are still fine-tuning these problems and its inherent risk could be detrimental to the growth model.

The Iranian-American CEO needs as many outs as he can find because Uber is a high-risk, high-reward model that has revealed no possible way to becoming profitable.

Sequentially, Uber’s core growth has stagnated with revenues last quarter of 2018 coming in at $2.314 billion, decelerating from $2.315 billion in the third quarter.

This is a sensitive spot for Uber because it correlates to 91% of its revenue.

Its Uber Eats division has also presided over two sequential quarters of deceleration indicating the low-hanging fruit has been picked.

The company is shifting towards higher volume, lower margin restaurants in more competitive locations hinting that the gangbuster years of high margin food delivery service growth is over.

The proposed $90 billion IPO also marks the high-water mark to the Silicon Valley IPO parade with only smaller fish from the sea debuting after them.

Uber has altered economic and consumer habits as we know it and the size of the business means it’s no Lyft (LYFT) – Uber is global, and its revenues are six times larger than its American competitor.

Becoming an enormous start-up also means heavier losses, the company had $3 billion in operating losses last year while its smaller competitor Lyft had only $911 million.

Lyft is solely focused on the ride-share industry capping upside potential while Uber has more gunpowder to load if it wants to ammo up in the business world.

One direction Uber hopes to explore is under the banner of Uber Freight which plans to monetize the deeply fragmented logistic industry.

It can take sometimes days for suppliers to deliver shipments with most of the process conducted over the phone or by fax.

Uber Freight mitigates logistical risks by providing an on-demand platform to automate and accelerate logistics transactions end-to-end.

The software smoothly connects carriers with the most appropriate shipments available, and offers carriers upfront, transparent pricing and the ability to book a shipment with the touch of a button.

As of the end of 2018, Uber Freight delivered $125 million in annual revenue and they hope to ameliorate many of the same logistical pain points that occur around the world.

This division of Uber is one that Lyft lacks, thus Uber should be granted a higher multiple when shares go public.

A huge addressable market awaits Uber Freight, but as many know, logistic routes have been formed over many years, and disruptors won’t be able to come in overnight and sign up new contracts.

Revenue should be slow but steady, and not the sugar high rush of revenue management is wishing for.

Uber’s heavy cash burning enterprise needs to offer some glimmer of hope of becoming profitable in the future whether it's five or twenty years out.

Without this x-factor of potential profitability, committed capital could become strained as investor will shy away knowing that a solid balance sheet might be a pie in the sky.

Since 2015, Uber has paid drivers $78.2 billion in renumeration - Uber will need to curtail heavy costs like these to raise operating margins.

One upside to its model is that its software platform possesses synergetic effects cutting costs for rolling out newer software for Uber Freight and Uber Eats.

Uber is still growing, albeit at a slower rate, 2018 Gross Bookings grew to $49.8 billion, up 45% from $34.4 billion in 2017.

The growth contributed to revenues of $11.3 billion in 2018. While a mammoth number, Uber still needs to absorb capital hits from M&A when they acquired Careem, the Uber of Middle East, North Africa, and Pakistan, for $3.1 billion last year.

Uber clearly choreographed a future strategy in the S-1 filing saying, “Our strategy is to create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage.”

Details of this strategy include more drivers, more riders, more rides per hour, lower fares, and smaller waiting times.

I believe Uber is biting off more than they can chew on this front.

To overcome the regulatory hurdles and the social backlash while offering cheaper fares and simultaneously increasing driver payout will be impossible unless drivers start shuttling around 5 or 6 people in one ride.

I do acknowledge that Uber has massive scale, first move advantage, and a handsome margin advantage working on their side.

But will this be enough if Uber adds more drivers and effectively piles more money into the same strategy?

I would say no and that could mean that growth rates could slip severely which leads me to suggest that Uber has a problem with the quality of growth.

On the bright side, the business model with be compensated by enhancements in the routing algorithms, payment technologies, in-car user experience, and user interface.

These incremental gains won’t help offset the relative weakness in the growth numbers that possess less and less quality in them.

The overarching theme of what to do when the low-hanging fruit is picked off the branch is a tough one, because any further incremental gain is negated by higher costs or competition.

Uber’s get out of jail free card is the eventual paradigm shift to aerial ride sharing, and if they are the leaders in that transition, it could offer another massive pay day and steeper growth trajectory that would propel the company into a realm of many more possibilities.

Whether Uber can complete this tectonic shift is too far away to predict, time could become a significant headwind in this case since mainstream adoption of autonomous driving has been relatively sluggish.

Expect heightened volatility as the main characteristics of Uber’s price action - it’s certain to be a bumpy ride.

Abstaining from Uber shares would be the smart play here while some more detective work can be deployed.