DKODING UBER IPO: Speed Bump Before The Big Race?

UBER-IPO-Cab-Newsline-Dkoding — DKODING STUDIO

UBER is experiencing a sharp slowdown in growth, while continuing to post high losses just before its upcoming IPO. This could impact its valuation badly.

HEADS UP:

Taxi hailing startup UBER is looking forward to its IPO this year, which is expected to fetch it a valuation of upto US$ 120 billion.
However, in the run up to the IPO, the company is showing worrying signs of a slowdown in revenues even as losses persist.
The taxi hailing business seems to be hitting a wall primarily due to regulatory issues and intense competition.
UBER Eats appears to be a crucial growth driver for the company at this stage, but too much investment into unchartered territories may not be a wise strategy.

Taxi hailing app UBER is preparing for a mega IPO this year, for which optimistic bankers told it to expect a valuation of up to US$ 120 billion. For comparison sake, the market cap of Reliance Industries was around US$ 110.5 billion at close on February 15, 2019. In its last private funding, UBER was valued at around US$ 76 billion.

But just before it takes the big stage, UBER seems to be going through performance anxiety issues. UBER’s bookings for the quarter ending December 31, 2018 reached US$ 14.2 billion, including its various businesses – UBER Rides, UBER Eats and other UBER services. Net revenue after paying off drivers and delivery people, etc stood at US$ 3 billion, and losses reached US$ 865 million. In comparison, losses during the previous quarter ending September 2018 stood at US$ 1.07 billion.

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Revenues grew by just around 2% compared to the previous quarter and by 25% on a yoy basis. In comparison, revenue growth in the third quarter grew by 38% yoy, which was again just half of what the company achieved six months earlier.

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For the entire year, UBER posted revenues of US$ 11.3 billion, growing by 43% yoy. In comparison, revenue growth for 2017 was a much higher 61% yoy. Losses, on the other hand stood at USS$ 1.8 billion, a drop by 15% yoy.

David Brophy– Professor of Finance at University of Michigan’s Ross of School of Business, commented:

“UBER needs to show it can control costs and can make money, basically provide a strong argument that its business model is not broken and that it can achieve and sustain profitability despite issues with drivers, customers and politicians.”

CAB BUSINESS FACES TIPPING POINT?

The fact that UBER is slowing down in terms of revenues while still maintaining losses of close to US$ 2 billion for the whole year casts a shadow over the company’s valuations with respect to its upcoming IPO. At the moment, since it is still privately held, UBER is not obliged to give finer details of its business metrics. For instance, a major tax benefit brought down fourth quarter losses, which would have otherwise reached US$ 1.2 billion.

UBER, CFO Nelson Chai commented on the results:

“Last year was our strongest yet, and Q4 set another record for engagement on our platform. In 2018, our ridesharing business maintained category leadership in all regions we serve.”

“UBER Freight was getting exciting traction in the U.S. and Uber Eats had become the largest online food delivery business outside of China, based on gross bookings.”

One key concern for investors would be that UBER’s share from customer paymentsis coming down. UBER’s gross bookings across businesses stood at US$ 50.2 billion in 2018, growing by 45% yoy. But due to the competition in markets like US, Latin America and India, UBER’s margins are being impacted. Its major competitor Lyft is planning its IPO in March 2019.

Professor Howard H Yu, LEGO Professor of Management & Innovation, IMD Business School, Switzerland cautioned in an interview on UBER’s road to profitability:

“More troublesome for Uber is that its business model is relatively easy to imitate. The company has few fixed assets besides an algorithm. Most of its money is spent on marketing and sales. Uber faces fierce competition from companies like Didi in China, Grab in South East Asia, and even Lyft in the US”

FOOD FOR THOUGHT:

UBER Eats appears to be quite crucial to the company’s plans at the moment, because food delivery does not have the kind of regulatory restrictions and growth constraints being faced by the cab hailing business.

In New York itself, the company has sued the administration for capping licenses awarded to ride hailing apps last August. Both UBER and OLA are facing a sharp slowdown in the Indian market. Growth in rides in 2018 reached 20%, compared to 57% in 2017 and 90% in 2016. In Japan, it has only managed to launch a pilot service last year after a protracted struggle with the regulatory authorities.

A report by Forbes projects that UBER Eats could deliver around US$ 10 billion worth of foods across markets globally, implying additional revenues of US$ 1 billion for UBER. However, UBER was overtaken by delivery startup DoorDash in terms of sales in the US in November 2018.

PARTING SHOT:

A major issue facing UBER is that it continues to invest heavily in growth – food delivery, autonomous vehicles, scooters, shared bikes/buses/trains/freight/air etc. Especially for a company entering an IPO, real numbers of its core businesses would be far more crucial, compared to newer business models that are more in the realm of potential as opposed to reality.

UBER needs to seriously curb its instincts for high growth and start talking about a timeline for profitability. Be it investor patience or finances, nothing lasts forever.