Uber IPO

Uber IPO

How has Uber operated in the past few years

Uber’s IPO has been hotly anticipated for many months now, and in April, the company filed its S-1 with the SEC in preparation for going public. The filing confirms some details about the company that had been guessed by outsiders for some time, and reveals other more telling signs. The overall picture painted by the S-1 does not inspire confidence in the company or its future. Uber has so far failed to turn a profit and admits to possibly not being profitable in the foreseeable future, if ever. This should raise an eyebrow for potential investors on how risky investment in the company might be. All information for this report is drawn on from the S-1 fillings the company made when it applied to the SEC to undergo the IPO.

Uber’s primary business is the one that it got famous for—connecting passengers with drivers in a cab service. It has accounted for 83% of all of Uber’s bookings and 90% of all of its revenues. The service is popular with users as it is convenient and is often cheaper than a regular cab. However, this business is highly competitive and has low barriers to entry. This creates downward pressure on the prices that Uber can charge its customers. Furthermore, the relationship between the company and its drivers is already fraught and is set to continue to deteriorate as the company seeks to turn profitable. Uber treats its employees as independent contractors. By doing so, they are exempt from regular labour laws and may avoid providing benefits such as healthcare and minimum salary. Regulators are already examining this treatment as possibly misrepresentative of the true nature of the relationship between drivers and the company. It has also led to disgruntlement among drivers, some of whom have even recently called for a strike (CNN Business, 2019) in demand for better working conditions and compensation terms. If disgruntlement continues, that could spell disaster for the company as it will have to offer further incentives to drivers (already being cut in preparation for the IPO) or it will have to deal with the repercussions of further disruptions to its service. In a highly competitive environment that the company operates in, raising prices can lead to a loss of market share. The company expects that the pressure on it to offer lower prices or better driver incentives will ease as competitors are under the same pressures in terms of prices and driver compensation. They expect that if other companies are similarly focused on short-term profits, they will be just as averse to offering competitive compensation to drivers.

Uber’s financials showed a negative EBITDA all through 2018, which was turned positive on gains from divestitures and gains in the value of investments that the company made. This is clearly not sustainable gain, and thus the company appears little prepared to show profits to investors. This lack of profitability is seemingly consistent across all business segments. A big part of the lack of profits associated with the company is the margins on the gross bookings (that is, the amount charged to customers), much of which goes to the drivers. While margins on bookings have averaged a healthy 20% over the past two years, that still does not seem enough to offset the fixed costs of the company and expansion is the name of the game here. Neither is Revenue per Trip showing the growth expected from a company that will soon have to turn a profit as it bounces between positive and negative growth in the financial data available. The fierce competition and drive for quick expansion have seemingly put the company in the red.

What are some of the challenges the company is facing, and do they look likely to solve them

This has driven Uber to look for other ways to expand. The company’s decision to acquire one of its competitors, Careem, which operates in the Middle East, thus seems aimed to overcome some of the problems associated with its business. It first consolidates their network with that of Careem in the jurisdictions in which the latter operates. This gives them strength in their market share and allows them to counteract the lack of barriers to entry in both the market and the industry. It remains to be seen whether such a commanding market share will allow Uber to turn a profit. Furthermore, acquiring competitors is not a widely replicable strategy. This hints to the strategy that Uber has focused on—gaining market share in the hopes that it will translate to an eventual ability to exert its market power to gain a superior return on its investment.

Uber has also expanded to other businesses lines, including food delivery (Uber Eats) and commercial delivery (Uber Freight). By doing so, the company hopes to make bets on several markets and divest away from its main Ridesharing business. By doing so, the company also believes that it is able to reach synergies it previously would not have been able to do, namely, drivers of Ridesharing services can also work as delivery workers if they need, especially in slow ridership times. This is an advantage that Uber may have over competitors—by providing drivers with alternative sources of income while working for the company; it is less likely that they find downtime and will be more likely to make money during their time compared to working in other companies.

Given the lack of profitability, the company is unsurprisingly looking to reduce one of its main cost points—driver fees. To this end, it is investing heavily in the development of autonomous vehicles. Uber spent 13% of its 2018 revenue into R&D and has partnered with Toyota and Denso Corporation (a Japanese car parts manufacturer) to further help in developing their self-driving vehicles. By doing so, the company hopes to enlist the help of others in the development of those vehicles. It also hopes to reduce the risk associated with any possible bad publicity if their vehicles were to have another accident which, after the death of a pedestrian in Arizona due to an Uber autonomous vehicle, may be disastrous for the firm’s public road tests. By spinning off its autonomous vehicle subsidiary and enlisting the help of others, Uber hopes to distance itself from any negative publicity that may result from another accident.

Uber also faces hurdles from regulators to operate its business where it wants. The company cites key markets in Argentina, Germany, Italy, Japan, South Korea, and Spain, where it has been blocked or otherwise required to change its business model to comply with labour laws. Similarly, Uber was blocked from operating in London, England and had to re-apply for a license to operate which was granted on a probationary basis. It has suspended its service in Barcelona. It also faces specific regulations aimed to reign in its more egregious practices in New York City, one of its largest markets.  Those issues underline the hostility that regulators have to the way in which the company has behaved itself in the past with regards to regulations in place. This does not bode well for the future growth of a company that seems focused on growing its business at all costs, including operating as a loss leader. Regulatory issues will only slow down future growth and make it more difficult for the company to tenably operate as it continues to bleed cash.

The business of ridesharing is not as glamorous as it first appears. Beyond the convenience driven by technological progress lay the hard realities of operating a business that is still driven by real-world fundamentals. Uber still has employees to pay and capital to invest in even while it depreciates rapidly. Until the company is able to increase its margins (a tough ask in the low barrier industries in which it operates), it remains unlikely to turn its investors any returns and only those with an appetite for high-risk should be looking into getting involved in the company.

Appendix, Financial Data