Did Pre-IPO Uber ‘Lose’ $1.8 Billion in 2018, Or Aggressively Invest In Its 85% Market Share Dominance?
Uber posted $1.8 billion in losses for 2018, an improvement over its 2017 bottom line, a loss of $2.2 billion. At The Drive Stephen Edelstein says, “That’s bad news for Uber as the company looks to charm investors into an initial public offering (IPO) later this year.”
Maybe. But maybe not.
Focusing on the high tech taxi company’s negative profits in 2018 might be missing the bigger picture of the value it represents over a bump in the road.
It is an understatement to say Uber has no problem making money.
The 2017 and 2018 “losses” aren’t because of bad business. They show a very well-positioned high tech monopoly looking ahead and fearlessly sacrificing profits for growth.
Uber has maintained unrivaled sales while aggressively expanding into new, similar niches to scoop up all the opportunities its scale and capabilities have created. Just like Amazon.
Not only are its sales unrivaled in mobile ride-hailing, but its annual sales growth is also far beyond anything happening in the entire tech industry right now. The only other U.S. tech company currently growing sales at this level is Boise, Idaho-based semiconductor maker Micron.
Here are some more reasons not to worry about the ride-sharing tech titan:
Uber’s Top And Bottom Lines Improved In 2018
A group of ten elite hedge fund managers made an astonishing $7.7 billion between them in wealth in 2018. | Source: Shutterstock
It sold $50 billion worth of bookings for taxi rides and other services in 2018.
The ride-share app is a massive cash gravity well, and its $11.3 billion in revenues were a 43 percent increase in its top line over the previous year’s $7.5 billion in sales.
And with 2018 losses of $1.8 billion, Uber burned through less investor cash than the $2.2 billion it cost to run the service in 2017 or the $2.8 billion it lost in 2016.
Uber was also able to cash out of its businesses in Russia and Southeast Asia for $1.43 billion, mitigating its losses down to a nice manageable $370 million.
Uber Pre-IPO versus Facebook and Amazon Pre-IPO
Amazon, now among the world’s biggest corproations, went public in 1997. Source: Shutterstock
At New York Magazine Yves Smith writes:
“Comparisons of Uber to other storied tech wunderkinder show Uber is not on the same trajectory. No ultimately successful major technology company has been as deeply unprofitable for anywhere remotely as long as Uber has been.
“After nine years, Uber isn’t within hailing distance of making money and continues to bleed more red ink than any start-up in history. By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year.”
But such comparisons reveal that it very well could be on the same trajectory.
Compare Uber’s massive $11.3 billion cash haul for 2018 to Facebook’s pre-IPO revenue of $3.7 billion. And like Uber, Twitter wasn’t profitable pre-IPO, with net losses of $143 million.
Twitter’s IPO was a big success. On November 7, 2013, Twitter shares traded on the NYSE for the first time, opening at USD$26.00 and closing at $44.90 valuing the company at $31 billion.
Facebook’s IPO in February 2012 was the most successful in history, valuing the company at $104 billion, the highest of any newly listed company on the New York stock exchange ever.
And Amazon lost $1.4 billion in 2000 after its 1997 IPO ($2 billion adjusted for inflation). That didn’t stop it from becoming the world’s third most valuable brand by 2018 and making the man who started it out of his garage the richest person in the world.
If you had invested only USD$100 in Amazon at the time of its IPO in 1997, you could have bought 5 AMZN stocks, and if you were able to hold on to your shares until 2018, they would have multiplied to 60 shares after 3 Amazon stock splits and appreciated to a value of over $120,000 by August 2018 for the initial $100 investment.
Uber’s Commanding Market Share
Despite seeing increased competition, Uber is dominant in ruling the ride-sharing industry. | Source: Shutterstock
What’s more, these companies did not have the same market dominance that Uber enjoys over mobile ride-hailing networks, with estimates ranging from 75% to 85% market share.
That puts it in in Google market share territory (92.86% worldwide in February 2019). Google’s August 2004 IPO gave the company a market capitalization of $23 billion. A decade later on January 2014, it’s market capitalization was $397 billion.
Uber is no doubt in a similar position to reap monopoly-level profits from a winning combination of brand, scale, network effects, and technology.
As Silicon Valley king Peter Thiel argues, the unchallenged market dominance of a valuable monopoly is the most massively profitable way to do business.
Google’s search engine monopoly backs him up on that:
- Alphabet annual gross profit for 2018 was $77.27B, a 18.38% increase from 2017.
- Alphabet annual gross profit for 2017 was $65.272B, a 18.39% increase from 2016.
- Alphabet annual gross profit for 2016 was $55.134B, a 17.74% increase from 2015.
Over the past few decades of high tech enterprise, savers and investors who grabbed shares of good tech monopolies and held onto them have reaped enormous rewards.
Uber’s Pre-IPO Loss Leader Offensive
The cryptocurrency market gained over $5 billion during Sunday’s trading with notable gains led by Ethereum among the major-cap cryptocurrencies. | Source: Shutterstock
At the New York Times Kate Conger and Mike Isaac say, “Uber is not doing itself any favors on profits,” ahead of its initial public offering this year, but a paragraph later they point out exactly what Uber’s strategy is:
“The losses were a result of Uber’s increasing its spending as it tries to outmuscle competitors, many of which have intensified their efforts to add riders and drivers. Uber has responded by offering bigger incentives and more promotions to fend off rivals like DoorDash, Lyft and other ride-hailing and food-delivery services.”
It’s doing the right thing. With its size, brand value, and ability to haul cash, Uber actually wouldn’t be doing itself any favors if it didn’t throw its weight around to quash the ambitions of much smaller competitors with vastly smaller economies of scale and capitalization.
They won’t be able to withstand such relentless competition from a far more resourceful rival, as customers scoop up the savings of Uber’s loss leader offensive.
The market for ride sharing and food delivery will continue to grow fast enough to leave room for competitors, just not anything like the room these markets will leave for Uber.
Uber will have the cash to hold market share another day, and will have engendered more consumer good will and created profitable brand loyalty along the way.
Example: Uber Eats vs. Grubhub
An Uber Eats food delivery driver cycles along a very busy Oxford Road in Manchester. One of a growing number of delivery riders for Uber’s food delivery service as demand in Manchester increases. – Photo by: Shopblocks
Food delivery company Grubhub’s stock used to be hot, but now it’s not.
The company is guiding investors to expect significantly slower profit growth over the next year and its stock price has plummeted by nearly half since its previous peak last September.
The reason for the slump? Uber Eats, the ride hailing business’s venture into food delivery using its vast existing network and platform is eating Grubhub’s market share for lunch and cutting into the smaller company’s profits.
The Irony of All These Uber FUD Pieces
Taking the long view, it’s incredible to see how many articles business journalists are writing to spread fear, uncertainty, and doubt about the company’s future prospects while giving nary a mention to the role self driving cars will play in its business model in the near future.
The New York Magazine article referenced above doesn’t even mention automated driving technology. The New York Times article tosses out the briefest of mentions in the very last paragraph of its Uber FUD piece, a fig leaf over the writers’ naked disregard for objectivity.
All they say is Uber’s self-driving car program “will probably not yield revenue for years,” and references the fatal car accident of one of Uber’s self-driving cars in Arizona ten months ago.
Journalists used to complain about late stage capitalism and high volume equities markets creating perverse incentives for big corporations to chase after short term gains for their quarterly earnings reports at the cost of building lasting value into the future.
Now they hassle companies like this for not making cash fast enough, for eschewing short term profits to invest in tech that will bring more long term value to the market.
Are these New York Times writers seriously unaware of how research and development works? So what if Uber’s self-driving car program won’t be profitable for years?
When it is profitable it will be galactically profitable.
Uber IPO Is A Way to Invest in Self Driving Cars
Driverless cars are the most interesting and lucrative opportunity Uber has ahead of it, and yes it might be years before the conditions are ripe for Uber to capitalize on that opportunity, but you can be sure it will be ready when the time comes.
Consider that the corporate cut of its $50 billion in ride bookings last year was $11.3 billion.
When self driving cars start to figure into the calculus, its notoriously high cost structure for its business model will dramatically shift in its favor.
Automated driving will be massively disruptive to the millions of people who drive for Uber globally every week, as well as to the entire driving industry.
This will be a major sea change, because drivers (of taxi cabs, delivery trucks, and long haul semi trucks) do the most common job in a majority of U.S. states.
But there likely are several goods years left of driving work in America before automation takes the wheel, especially if you’re able and willing to do long haul trucking, an industry that is struggling to recruit enough drivers despite awarding highly competitive salaries.
How to Invest in Uber Before It Goes Public
You can take an indirect approach and invest in a currently public company that has a sizeable stake in Uber’s private equity. Big Uber investors include Alphabet, Microsoft, Softbank, and BlackRock.
After its IPO, Uber’s shares will become part of these early major investors’ balance sheets, and their stocks can get some lift out of a successful Uber IPO. You can also take a competitive approach and short Uber’s competitors like Grubhub on the stock market.
The date for Uber’s IPO hasn’t been set, and it, along with rival Lyft, are currently getting feedback from the SEC ahead of the offering, which has been delayed because of the government shutdown.