Is Uber’s stock a good investment?
In a rude shock for investors, Uber’s stock stumbled on its first day of trading as a public company. The closing price was below its initial public offering price — an inauspicious start to a highly anticipated tech IPOs in recent times. To make matters worse, the shares debuted amid a volatile market agitated by the ongoing US-China trade wars.
At the time of posting this the stock is hovering around the $41.5 mark, well below its $45 IPO price.
Uber’s “Zero to one” tryst
The stupendous growth over the last few years can be attributed to the offered incentives, freebies, and promotions. Subsidizing drivers to adopt their platform, subsidizing the riders to drive passenger growth while patiently hoping that The Economics of Scale would kick in some time — all in a market where neither the winner would take it all, nor the winner would take the most.
Uber has relied on relentlessly acquiring customers at any cost which was responsible for its strong valuation and fast growth but the tricky part is to be profitable, which would not be easy at all even though there’s a lot of scope for growth.
Operationally Uber posted losses of $3 billion in 2016 which increased to $4.1 billion in 2017 before being trimmed to $3 billion last year. The model is incentive driven which is basically subsidizing the price to the driver in Uber Incentives, meaning if Uber ramps up the incentives, it would start losing money/trip.
However, things aren’t very sour if we look at its revenues— which nearly tripled to $11.27 billion in ’18 from ’16. This is impressive, especially in a market created by Uber itself. And it still dominates it with the total value of trips rising to ~$50 billion in ’18 up from $19.2 billion in ’16.
True, it’s challenged in multiple geographies — Lyft in the US, Didi in China, Grab in SE Asia, Ola in India for example — but none of them have been to match its scale. Considering it pioneered the ridesharing industry, one which is among the most transformational growth sectors of the global consumer markets, led to many speculating Uber achieving a $100 billion valuation.
While the market remains the ultimate judge and shall ultimately determine if the lower valuation (~$82 billion) is still high given the company is still in a bloodbath, Uber does draw parallels with Amazon — Retail and Facebook — Social Media, albeit in parts.
Current global footprint
Uber operates in 63 countries and 6 continents serving over 700 cities, all of which enable it to complete 10 billion+ trips globally. It served 91 million MAU and partnered with 3.9 million drivers. Moreover, since 2015, Uber Associates (drivers) have earned over $78 billion excluding tips.
The growth opportunities, in commute only, are enormous as it accounts for <1% of the total distance driven globally only. Of the 4.1 billion population it serves in the six continents, barely 2% have used Uber.
‘Uber’ cool in future?
Uber started with people in the bay area using a phone to message Uber with the drop location which would then be responsible for sending a cab their way and has pivoted to riders using a smartphone app to summon associates (drivers) who use their own cars as taxis. However, terming Uber as just a ridesharing platform would be undervaluing the worth of the entire company given it also offers meal delivery, freight, electric vehicles, and hopefully self-driving vehicles in the near future.
Uber has a strong potential to create a network effect that piece by piece will be replaced by other elements once the market and technology is ready. A classical example would be Netflix which always wanted to change how people consume content but as the right technology wasn’t in place, it began by renting out DVDs via mail. While the business model doesn’t sound great (because of the associated delivery costs and short life cycle), it ensured Netflix was in every household.
Therefore, a thesis centered around its ability to shapeshift its unrivaled ridesharing platform and user network into broader consumer markets with Uber Eats, Uber Freight, Autonomous, and Electric Vehicles might argue a bull case for the stock. A lot (seriously A LOT) will depend on execution but if you shift your lens to the assumption of Uber being the future of transportation, it may only be scratching the surface of a plethora of potential monetization opportunities.
Undifferentiated core business, Bloodbath and Bertrand Competition
The core business is an undifferentiated product and its business model leads all the players to a bloodbath as the entry of even a single player in the market causes a drop in the prices to marginal costs and a further drop would kill profits. This model of selecting prices to maximize profits in an undifferentiated market is called Bertrand Competition and Uber’s example, comically, might displace the traditional Coca-Cola v/s Pepsi example given in the Managerial Economics.
That being said, there’s a huge chicken and egg problem (as is the case with building any platform) which acts as a huge barrier to entry — you don’t get riders if you don’t have sufficient drivers and vice versa.
Another interesting point to note here is that while competitors are more focused on being a ride-sharing company, Uber is striving to be a platform for global transportation. Credit is also due to leadership — Dara Khushrowshahi — who refocussed Uber into ride-hailing while running complementary strategic investments like meal delivery and electric scooters/bikes.
Closing notes
Uber had hoped to become a monopoly by transferring their product into every local market. But despite having a headstart, they’re challenged in every market they operate in, much to their anguish. It definitely is a transformational company which has singlehandedly changed the future of transportation but to justify that kind of valuation, Uber needs to generate a lot of cash and real quick.
However, they’re merely brokers for a bunch of low margin transactions without owning the physical equipment (cars), laborers (drivers), and the riders (who’ve zero loyalty to their service). In fact, they even have to pay a fortune to Google for using their Maps API and also the payment processors.
For them to have any chance at all, they would need to exclusively control a part of the transaction — the labor or the customer — which will be possible with relentless innovations (of the kind discussed here). Expectations are high and opportunities are aplenty for Uber could join the hallowed ground of stalwarts of Amazon and Google over the course of the next decade. A lot will ride on its ability and the speed with which it generates positive cash flow, the chances of which are very, very slender right now.
You can follow Pratyush Choudhury for breakdowns of the hottest technology trends, translations of the business use cases involving tech buzzwords, and analysis of the business strategies that power the tech industry.
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Views expressed in this post are my own and don’t reflect the views of my employers, present or past.
