When I was in business school, I learned that most companies were often not in the “business” they appeared to be. It is indeed comfortable to categorize a company’s business by its industry: transportation, financial services, manufacturing...etc.But, if you truly want to understand a company’s direction and build an investment strategy that aligns with it, then you’ll want to connect the company’s ‘trade’ to the value it delivers to its customers.
You might have invested in Uber (NYSE: UBER) or Lyft (NASDAQ: LYFT) recently. Would you have been better off if you had bought some Tesla stock (NASDAQ: TSLA) instead?
You might argue these companies are not in the same industry: Uber and Lyft don’t own cars, they compete with taxi cabs. Tesla is a car manufacturer. It competes with the likes of Ford, Volvo...etc.
Or do they?!
Why is Uber’s momentum not Lyfting your spirits...yet
It is too early to tell if Uber, Lyft or similar ride-hailing companies will become investment successes…?
Lyft has had nothing but a bumpy ride since its April IPO: as of this writing, the company has lost close to 20% of its value and, this past Friday, it got sued by investors who claimed that the company misled them.
Uber, which was hailed “one of the biggest technology IPOs ever”, went public last week and lost 16% of its value within days. Dara Khosrowshahi, the company’s CEO, sent employees a memo to remind them that “sentiment does not change overnight” and that the company will be judged long-term for its performance, rather than its start.
There is a lot to say about Khosrowshahi’s statement. The industry is going through a massive transformation and a short-term market view is not a good way to assess the future of an industry.
Case in point: if you had invested 1 dollar in Tesla when it went public in 2010, your investment would now be worth 11 times that.
Rewriting The Rules of The Road
Back in early 2015, I wrote in this very column about the end of driving. I argued then that driving would evolve “from an art mechanically operated by humans, to a science programmed by machine learning algorithms”I explained that it was a good thing. For the first time in the history of the automobile, we have a chance at making individual transportation more reliable, more convenient and more safe (if you’re not convinced about safety, listen to Chris Urmson’s TED talk)
Many of those who contacted me were skeptical of the reality of this trend or its timing. Well, time for the skeptics to reconsider!
As Uber and Lyft went public on the promise of delivering more convenient and personal transportation to all of us, here came Tesla’s emblematic CEO, Elon Musk, to announce how his company would introduce “Robo-Taxis” by 2021...
Listen to his short speech here. It’s well worth it. Why? Because it’s a great showcase of the irrelevance of the term “industry” when categorizing a company’s playing field.
When Tesla went public almost 10 years ago now, many of us thought of it as a car manufacturer with a “twist”. Tesla’s approach then appeared to be driven by its belief in a high-end all-electric vehicle which challenged the idea that “driving electric” meant driving an uglier and inferior car.
As Tesla matured and developed its charging network, we saw in Tesla a utility player who had to build strong batteries and an electric charging network to support its growing number of drivers and fans. Many asked at the time: did Tesla have to go into the power business because it was its ultimate goal, or did the company do so because it was the only way to support its growth?
It turns out that none of this debate was relevant. Tesla is a software company. And it believes that software can unlock new opportunities in the “end of driving” business. When you listen to Elon’s speech, you’ll get a view into his brilliant thinking.
He exposes the issue with how we evaluate industries in the age of big data and analytics: “we are used to extrapolating on a linear basis” but “the software is getting better at an exponential rate”.
So, while it’s hard for us to imagine that a car manufacturer like Tesla could be competing with companies that don’t manufacture cars like Uber and Lyft, it become easier to understand their similarities in trying to bring the same value to customers: convenient, reliable and safer transportation.
When looking at investing in disrupting companies, I invite you to think about the above examples and broaden your views beyond industries. Think about customers’ problems first and work backwards to the way those problems are being resolved.