Summary:
Uber (UBER) seems to be in trouble, and at the root of this is a lack of a path towards profitability (that hurts even more because it’s 2019), a disastrous diversification of the business, and a cash problem.
Path to Profitability:
This is taken from Uber’s S-1
“We have incurred significant losses since inception…We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
This is no way helps the company in an environment today that has punished unprofitable companies, and has been exposed to the debacle of WeWork.
Additionally, if we take a look at some of the data from their Q3 report, we can see that the company continues to show that they are not making a profit
One other thing to note from their Q3 report was that they did beat out analyst expectations. However, despite what might seem like a positive, their share price dropped ~5.5% after hours (after earnings report).
- Loss per share: 68 cents vs. 81 cents expected, according to Refinitiv estimates
- Revenue: $3.81 billion vs. $3.69 billion expected, according to Refinitiv
Source (CNBC)
Maybe this has something to do with the fact that:
“Excluding interest, taxes, depreciation and amortization, Uber’s loss widened on an adjusted basis to $585 million, compared with a loss of $458 million in the year-earlier quarter. The huge losses have been a drag on valuation. Uber shares closed at $31.08 Monday, down about 8% from last week’s high and about 31% from the IPO price of $45. Shares fell around 5% in after-hours trading.”
(WSJ)
Losses are piling up and investors do not like that.
Furthermore,
“Uber reported a net loss of $1.16 billion for the quarter, topping its $986 million loss during the same quarter last year.”
(CNBC)
What this data shows us is a trend downwards that can only be achieved in one of two ways.
- Ride-sharing component transforms into a monopoly
- Uber’s smaller ventures become huge successes
Let’s talk about the first of these aspects in this section here. The problem with the rides-sharing aspect of Uber is competition, and high cost.
Competition comes in the form of Lyft in the U.S., Didi Chuxing in China (where they had to exit entirely), and Ola in India. All these competitors stand in the way of Uber being able to become a monopoly and raise their prices as such. Additionally, Uber could find a way to make the service less costly. However, there is a major problem with this. For one, driver compensation is only going to be going up. Places like California have already begun passing laws that would classify Uber drivers as employees, not independent contractors. This would make Uber provide their drivers with higher compensation and benefits, and this would hit their bottom line. I personally expect this to continue in places like Europe, and in the huge marketplace that is New York. To counter this, Uber has chosen to go in the direction of driverless transportation. They said as much in their S-1
“Drivers will become obsolete.”
Uber has pursued this by already investing $1 billion plus into this venture. However, they are far behind the leaders in this pursuit.
(The Verge)
If they fail to be the ones to break through in this aspect, I expect that their business will suffer tremendously by making it really hard to make a profit from a technology that they themselves do not own.
Yet, despite my worries, Uber CEO Dara Khosrowshahi expects that Uber will achieve adjusted EBITDA profitability come 2021. We shall see.
Business Diversifications:
Something that a company like Amazon did very well was that it made up for its losses from the core business through its other ventures and acquisitions like Amazon Web Services (AWS), which happens to be its most profitable unit based on their reports. On the other hand, there is Uber. Uber has chosen to enter very competitive, low margin industries where it can’t really stand above the crowd. Most notably is Uber Eats that has to face off versus DoorDash, GrubHub, Postmates, and others for food delivery services. (For a more thorough explanation of Uber’s side ventures, reference the chart in https://seekingalpha.com/article/4302186-uber-starting-look-desperate). The one that might be able to do a lot of good, and this article on Seeking Alpha talks about this, is their Uber Health venture. This is mostly attributed to the lucrative nature of the industry, and I can’t make a judgement based on its numbers because I have not taken a look at them.
Cash Flow:
As a general rule, a company in a good state is a company that is cash flow positive. Just take a look at Apple (AAPL). Everyone loves Apple and its enormous piles of cash. Having plentiful cash means that the company can run its operations for a good period of time and is not in immediate danger. A good cash flow means that the company is effective in generating cash, and that it can effectively manage its operating expenses and CAPEX. Additionally, a rising free cash flow would indicate that sales are increasing, costs are decreasing, or both, and this is necessary for greater profits. With all that being said, it appears that Uber has a cash problem.
Uber has lost $2 billion in cash the last two quarters, and a total exceeding $3.4 billion over the last 12 months. Not a good sign. Additionally, they have roughly $12 billion in cash or cash equivalents at hand, which would last them a little over 3 years. This is not enough time, it seems, to make their operations profitable (unless their CEO can pull it off). What this then means is that Uber will be forced to obtain cash through some form of debt. However, their debt to equity ratio stands at 36%, which is high enough already. Any more and it’ll prove to be an even more serious red flag, given that too much debt can pose a risk to a company (if they don’t have the earnings or cash flow to meet its debt obligations, which Uber very obviously does not have right now).
Conclusion:
Sell
Disclosure: I purchased 2 shares of Uber stock the day it went public, and I gotta say, that was a terrible decision.
Update (11/7/19)
Apparently Uber is being sued by drivers in New York for allegedly having wrongfully deducted taxes and failing to pay the full income earned from rides to the drivers. Another possible red flag.
Update 11/21/19
It seems that Uber’s social impact is coming into question. Something that Uber prides itself on is reducing drinking-and-driving incidents, which it undoubtedly does. However, if at the same time it is, indirectly, allowing for more binge drinking, is it really doing a net positive. Just something else to think about, and something that could be bad PR for Uber.
Update 11/26/19
The bad news just keep on coming for Uber. Recently, London revoked Uber’s license to operate in the city, citing safety concerns as the primary factor in this decision. The worst part about it is that this is Uber’s most lucrative market in Europe, and it could seriously their outlook heading into 2020.
Here is the link to a post from the New York Times about it.
