Uber again missed revenue expectations and reported a record loss of $5.24 billion in the last quarter, but while CEO and investors don’t care, this is a trajectory it will find hard to shed.
The Rockstar of the world’s ride hailing companies, Uber is a case study of exaggeration and unrealistic hope. Led by a charismatic CEO Dara Khosrowshahi, Uber’s trajectory of world domination is ridden with tales of insurmountable losses. After stuttering in a disappointing IPO, Uber again missed revenue expectations, as a record loss of $5.24 billion surfaced in the last quarter. The company stock is 11% below its IPO price. Recently, the ride-hailing giant revealed it was cutting 400 marketers globally.
After stuttering in a disappointing IPO, Uber again missed revenue expectations, as a record loss of $5.24 billion surfaced in the last quarter.
Multiple articles in the years have pointed out the abstract concepts, CEO Khosrowshahi’s speeches revolve around. He calls the chronic loss-making “a meme that’s out there” and claims with conviction that Uber will grow into a “spectacular business” in the long-term, basing his belief on an abstract $12 trillion “total addressable market” (TAM), that it has “only just begun to penetrate”.
But this lack of clear positive trend but extraordinary projects are more of just castles in the air. As per the World Bank, the world’s entire GDP was around $80 trillion in 2017. This means that Uber’s defence plays up the possibility of capturing 15 percent of all global economic activity. While this would excite a lot many investors and future suitors, it sadly is far from the real scheme and scope of things.
How much money is Uber actually burning?
Since the founders started Uber wayback in 2009, it has lost around $12 billion in totality. The recent quarterly loss of an unprecedented $5.2 billion comes down to actual loss of $656 million when excepted for one-time stock-based compensation payments of $3.9 billion, and adjusting for EBITDA (earnings before interest, tax, depreciation and amortization).
The alarm is from how its revenue grew ($3.1 billion for the quarter at 14 percent) at a rate lower than expected. The billions burnt at Uber is a constant, even as the company is on a gigantic growth trajectory with 91 million users, and a total travel distance of 26 billion in 2018. The company is venturing into new businesses like food delivery, personal mobility, and freight shipping.
Uber is no Amazon
Uber’s early investors often cite Amazon as an example and comparison for Uber’s loss-making trajectory. Amazon invested heavily in the early years and hit profitability only after IPO after remaining unprofitable for over two decades.
Uber’s early investors often cite Amazon as an example and comparison for its loss-making trajectory.
Amazon’s Bezos like Uber’s Khosrowshahi focused on long term profitability in projections. Amazon is also a pioneer in the low-price customers entrancement. It fiercely reinvested any earnings into fulfillment centres, logistics and new product initiatives. The investments enabled Amazon to globally dominate the retail sector and venture out into new avenues like cloud computing, online entertainment and hardware.
Amazon’s big year was 2015, when its annual sales surpassed $100 billion for the very first time. The world’s biggest e-commerce company has not reiterated profitability for eight straight quarters. An early Uber investor once said, “People saw what Bezos did. Uber’s one of the few other companies capable of doing the same thing.” But sadly, Uber is no Amazon. And here’s why.
Uber has a similar strategy wherein it aims to beat competition in price, dominate major urban markets and invest heavily in the autonomous future technologies to reduce manpower. But Uber’s gameplay has come around as far more expensive than Amazon’s market shaping phase.
While Amazon reported loses of $2.3 million in the quarter it went for IPO, Uber’s crossed billion. In its last unprofitable year, Amazon lost $241 million in 2014. Uber lost $2.8 billion in 2016. Combine this to the fact that Amazon hardly had to indulge in intensive fund accumulation from investors.
In its last unprofitable year, Amazon lost $241 million in 2014. Uber lost $2.8 billion in 2016.
Bezos raised less than $10 million at the start, a little over $50 million at the IPO, and around $2 billion in convertible debt during the dot-com boom. This difference is due to the fact that Bezos’ business-model was manageable through self-financing with the company’s positive cash flow. His model made more sense: Customers pay first, Amazon gets all, and then shares with vendors.
Problems for Uber that shall never go away
But apart from the economic dynamics, there’s a far bigger factor, which might result in profitability remaining a mirage for Uber. Ride-hailing services might contribute to the convenience and cultural ripening of urban consumers, but the sheer number of increased petrol/ diesel polluting four-wheelers on the streets.
Most such cabs carry one or two passengers, majority of times and contribute to around 10% of the traffic in major cities. How Uber wants to grow will amplify this traffic to tens. On the macro level for a city, it messes up traffic, congests streets and adds to the already overpowering menace of air pollution.
Cab-aggregators like Uber focus furiously on reducing private car ownership but expanding transportation for all. This is already creating traffic crisis in major world cities. As per urban analysts, there’s a huge gap in the investor narrative of ride-hailing services and their importance to cities and how the city itself reacts to the effects of app-based ride-hailing.
Uber and likewise have often been reprimanded by authorities for choking roads and inability to provide basic income environments for their driver partners.
While issues like traffic congestion, air pollution and union laws do not interest take rate and gross bookings focussed investors, governments have no soft spots for Uber and its compatriots in the space. Uber and likewise have often been reprimanded by authorities for choking roads and inability to provide basic income environments for their driver partners.
This results in regulations getting stricter with time. Policies like congestion pricing, vehicle caps, rejecting driver unions and driver reclassification are attempts to gains an edge in profitability, such moves often illicit the wrath of governments. In fact, ride-hailing tech firms do contribute to the progress of societies much like urban public modes of transport. But similar to the treasury funded projects, companies like Uber are highly likely to struggle to make a stable profitable business environment.
With the fat purse, how long can Uber brace?
While the ride-hailing giant keeps suffering monumental losses, it still holds a tremendous war-chest of $13.7 billion in its bank account. The sum also includes a $8 billion boost from the IPO. With the exemplary kitty, Uber can continue burning money as per its world-domination model for more than a couple of years at least.
But now in the public domain, the company will see increasing pressure from investors to spur out of losses and into profitability. CEO Dara Khosrowshahi’s opinion in this regard is the strong expansions that are seen as growth for the company, “We are pleased to report another quarter of strong growth, demonstrating the continued success of our platform strategy.”
While the ride-hailing giant keeps suffering monumental losses, it still holds a tremendous war-chest of $13.7 billion in its bank account.
Uber’s monthly users grew at 33 percent Y-o-Y to reach 93 million. This figure amounts to roughly two percent of the potential target customers in Uber’s 63 operational markets. There is surely plenty of scope and avenues for Uber to go, but profitability in the short term isn’t a phrase coming out of Khosrowshahi’s mouth.
Profitability is not for this Unicorn
Uber’s CEO and investors hope that driver subsidies and passenger discounts can help the company reach a scale of operations which will catalyse profitability where it will be able to slash incentives and spur pricing. Uber hiking fares regularly – it hiked fares in the Indian market by 10% in 2017, and 15% in 2018 as per research firm RedSeer Consulting. Similarly, when autonomous vehicles become mainstay, companies like Uber will be able to substantially upscale their business models by breaking up with driver partners. But that might be too far in future for Uber to keep up on its trajectory.
In the invisible profitability scenario, it is about time how long ride-hailing giants like Uber can survive without making profit and still somehow manage to retain market confidence.
At the current rate, Uber has burned upwards of $6 billion in just the last 3 years on expenditures like R&D, expansion to new geographies, new business avenues like meal delivery and freight. This expansion where it will need to create a mark, Uber will depend on business tactics like promotions, driver incentives, refunds, and taxes. This will ensure that profitability stays off limits for some years.
Add to that the social liability and regulatory hurdles galore for ride-hailing firms right from traffic congestion, underpaid drivers, anti-competitive ruling and air pollution. This is further solidified by the fact that none of the world’s major ride-sharing firms be it China’s Didi, India’s Ola, Southeast Asia’s Grab or the American counterpart Lyft have been able to make their businesses turn profitable. In this unforeseeable and invisible profitability scenario, it is but about time how long ride-hailing giants like Uber can survive without making profit and still somehow manage to retain market confidence.