Why Uber Keeps Partnering Instead of Building Its Own Tech -- And What It Means For Investors

Uber Technologies (NYSE: UBER) has established itself as a leader in the ride-hailing market. The stock has significantly outpaced broader equities over the past three years as revenue, earnings, and free cash flow have soared. However, some will argue that Uber faces significant risks from several companies working on self-driving vehicles, which could undermine its entire business model as competitors that don't rely on human drivers offer cheaper rides. That said, Uber is well aware of this threat, and instead of building its own fleet of self-driving cars, the company is taking a very different approach. Let's consider why this matters for investors.

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Uber's attractive long-term prospects

Uber has partnered with several companies working to build fleets of autonomous vehicles. The list includes Waymo, which Alphabet owns, as well as a recent deal it signed with Rivian. Rivian does not yet operate level 4 self-driving vehicles, but it is working to build the required technology to make it happen. But why doesn't Uber just build its own self-driving cars?

There are at least two reasons. First, it would be an incredibly capital-intensive activity that goes beyond the raw materials required to put a car together. Reaching level 4 technology would require extensive real-world testing. The whole thing would likely harm Uber's profits and margins in the short-run. Second, Uber has tried to build its own self-driving vehicles before, but it abandoned the project and sold that division after a fatal accident.

The advantage of Uber's new approach is that it will gain access to a fleet of self-driving vehicles without having to spend the money to develop them from scratch. The costs Uber will incur under its partnerships should be much lower overall than those of building its own. And eventually, the company could reduce its reliance on human drivers, thereby increasing margins.

Uber's partnerships also protect the company against the threat autonomous vehicles would otherwise pose. Uber's advantage is that it has built a strong brand and an ecosystem of users who regularly use its services. Partnering with Uber to connect with people looking for rides in the cities where it operates grants a company like Waymo instant access to plenty of potential customers.

Uber can leverage its economic moat to maintain a strong market share even as fully self-driving vehicles gain significant adoption. What does all this mean for investors? Uber is still performing well, and the company's penetration remains low, with only about 10% of adults in its most advanced markets using its services monthly.

That grants Uber significant white space. And in the meantime, Uber has found a way to turn the threat of self-driving vehicles into an opportunity that will hopefully lead to lower expenses, higher margins, and higher profits in the long run. For all those reasons, the stock is a buy.

Prosper Junior Bakiny has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Uber Technologies. The Motley Fool has a disclosure policy.