The good, the bad and the app

It’s lonely at the top – The strengths of Uber

Let’s be honest, if you live in a fairly large city, how many of your friends say: “Let’s grab a Taxi!” anymore? It’s Uber this and Uber that whenever you want to come home after that one pint of beer too many. In a span of ten years, Uber went from a promising start-up in the US to being one of the most recognised brands. You, your partner, your boss and his cousin, all of them have most likely used Uber at least once. So, let’s take a look at what makes the company strong:

Both the number of riders and drivers have been steadily going up these past years. For 2018, the company has reported roughly 75 million passengers served by roughly 3 million drivers, 750.000 of which are in the United States. Customers took roughly 5.2 billion trips over the course of ten years. Now, to be completely fair, there is some nuance into how Uber counts those trips, as if 3 people took a ride with Uber Pool, the company reports this as 3 separate trips.

Nevertheless, the number of riders and drivers is steadily growing every year, as people prefer to save money on gas, find the service more convenient, green and cheaper and are less and less inclined to rely on their personal car in very large metropolitan areas. Being stuck in traffic is no fun.

With only 2% of people who live in the 65+ countries where Uber operates have used the service as of 2018. There is a lot of room for potential.

Rides themselves aren’t the only forte for Uber. Diversification is an important part of any long-term sustainable and mature business. Not having 100% of one’s operations rely on a single sector provides protection in case of a massive blow to performance. And one of the strongest revenue generators for the company has been Uber Eats

In 2018, Uber Eats delivered over $6 billion of food and is on track to deliver $10 billion. With an estimated revenue of $1 billion for 2019, the food delivery service will bring 7-10% of Uber’s total revenue.

Diversification doesn’t stop at food, as the company also has Uber Freight, its bet in the $750 billion trucking industry. The freight broker is gaining decent ground in the market with competitors like NEXT Freight or Convoy. The company reported roughly $500 million in revenues in 2018

Uber’s acquisition of bike-sharing start-up Jump in 2018 opened up the company to alternative transportation methods. A lot of R&D is going into making high quality (and eventually self-driving) electric bikes and scooters.

We can’t talk about Uber without mentioning its hefty investments in autonomous driving. Uber is one of the most important players in an industry packed with huge names like Waymo (Google’s former self-driving car project), Tesla, Lyft, GM, Apple, Audi and Mercedes Benz. Uber’s goal is to have a fleet of 75,000 autonomous vehicles on the streets of 13 cities by 2022.

After former CEO Travis Kalanick resigned in 2017 the ride-sharing giant had to make changes to its perception. And new CEO Dara Khosrowshahi has managed, with relative success, to make the company more inclusive, and not be constantly dominated by allegations of sexual harassment and introducing zero fee tipping options for drivers.

There is a Japanese saying: A man is whatever room he is in. And Uber is in a room with some pretty strong investors. Just to give an example, the Vision Fund owns a 16.3% stake in Uber. Vision Fund is the largest of its kind in the world, totalling a pool of $100 billion from Japan’s SoftBank, Saudi Arabia and the UAE. Saudi Arabia’s sovereign wealth fund also owns a direct stake of 5.3% in Uber.

With Uber being as strong as it is in the transportation business, moving around food, cargo and people, it all seems to go in the direction of CEO Dara Khosrowshahi’s ambition of making the company into the “Amazon of transportation”.

All the King’s horses and all the King’s men – The vulnerabilities of Uber

As strong as the ride-sharing giant could be, you might want to hold on a bit before getting a second mortgage on your house in order to buy up Uber shares.

Let’s start with the elephant (or SUV) in the room: Uber isn’t profitable. In fact, it’s losing an immense amount of money each year and according to themselves, they might never be profitable. Operating expenses will reasonably continue to grow and when you add the truck-loads of money that the company burns on acquisitions and R&D for various projects, the numbers just don’t add up. Uber doesn’t make enough money from rides to upset its expenses.

In 2018, Uber lost around $3.3 billion. And the worst part isn’t even net losses. What should concern investors more is the slowdown of revenue growth. In Q4 of 2018, revenue grew by 2% compared to the Q3 38% rise. Strategies to fend off competitors in Latin and Lyft in general are taking a toll on how the company grows from month to month.

(graph courtesy of New Constructs LLC)

Looking at the broader picture, it seems as though Uber has a simple conundrum: It is way too big to be profitable. If it wants to be profitable, it has to squeeze its driver’s earnings. Companies like Bolt in Europe show that ride-sharing can be profitable, however at the cost of aggressive expansion. Be big or make money, Uber can’t have both. Not yet at least.

Trying to dominate the market while being affordable? Services this cheap have to burn money from somewhere. Most likely from the funding piggy bank. So yes, indirectly, the ride you took in that Mercedes Benz for £8 is in part subsidized by multi-millionaire investors.

The hopes that investors have for the ride-sharing behemoth are also fuelled by the dream that they are sold. According to Uber, they are at the beginning of a journey which will take them to capturing a $12 trillion total market that will include personal mobility, ride-sharing, food delivery, freight shipping and autonomous driving. It might sound good until you realise that the World Bank estimated global GDP at $80 trillion in 2018. Uber is stating that it will capture 15% of the global economy. Good luck!

Before becoming one of the largest economies in the world, Uber still has to access or survive in certain markets. In 2016, Uber had sold its operations in China, ceding the reigns of “one-button-pushing-car-pickup” to Didi Chuxing. All for a $1 billion deal and an 18% stake in Didi.

But let’s also remember that Amazon was not profitable for over 20 years. Today its market cap is over $1 trillion and made $2.5 billion profit in 2018. Another similar example was Facebook’s disastrous IPO. After a 60% drop to its all-time low, today Facebook stock is doing quite nicely. Trading at $198 per share, close to an all-time high. However, this IPO was all for a company which had reported $1.8 billion in operating profit, an 88% revenue growth and 900 million users.

One of the more constant pains for Uber was the bad press it kept getting itself into over these past years. From allegations of sexual harassment in its offices, to not promoting women, booking thousands of fake rides from Lyft, an executive reportedly digging for dirt on a journalist, spying on politicians and celebrities, one of its autonomous cars killing a pedestrian in Arizona or its CEO and cofounder Travis Kalanick resigning. For a public company, every scandal is an excuse for its share price to fall.

Another potential problem would be the status of its drivers. Uber being forced into considering its drivers as employees would present an issue for the company. Imagine all of the minimum wage laws, taxes and benefits that Uber would have to abide by. All of them eating into its revenue even more.

There is also its reputation of being a very reckless spender. Uber’s ambition for a fleet of autonomous trucks that was supposed to take over the freighter industry cost a total of $250 million. Now, that investment didn’t all go to waste, as Uber is well on track to making its self-driving car. A venture which is apparently burning through $20 million each month.

Speaking of regulators and bad PR, do you know what they all have in common? Taxi drivers. First, there is the image problem. All those violent riots in Brussels or Paris generate uncertainty and controversy around the company. Also, drivers will be less inclined to go out with the risk of getting their car smashed. When you are publicly listed, people tend to buy or sell based on these factors. Second, the pressure that Taxi companies can put on their national regulators to force Uber into operating as a taxi provider. This means certificates, medallions, insurance policies and a whole other level of bureaucracy.

The road to hell might be paved with good intentions but the road to success is definitely paved with a special type of brick called “make-more-money-than-you-spend”.