Harry here. I’ve been meeting with lots of friends in the start-up space over the past few months, and one thing that’s stood out to me is how few companies care about profitability. Even the most successful private companies are spending every dollar they make and then some in order to keep growing. That might work for the big guys, but I think it’s a bad example for most entrepreneurs to follow.
Today, senior RSG contributor John Ince looks at all those Uber losses, an interesting way to bet against Uber and more. Btw, I’ll be in San Francisco this week for some meetings so I may be a bit slow to respond to emails.
Uber Loses at Least $1.2 Billion in First Half of 2016 [Bloomberg]
Sum and Substance: … In the first quarter of this year, Uber lost about $520 million before interest, taxes, depreciation and amortization, according to people familiar with the matter. In the second quarter the losses significantly exceeded $750 million, including a roughly $100 million shortfall in the U.S., those people said. That means Uber’s losses in the first half of 2016 totaled at least $1.27 billion.
Subsidies for Uber’s drivers are responsible for the majority of the company’s losses globally, Gupta told investors, according to people familiar with the matter. An Uber spokesman declined to comment. “You won’t find too many technology companies that could lose this much money, this quickly,” said Aswath Damodaran, a business professor at New York University who has written skeptically of Uber’s astronomical valuation on his blog. “For a private business to raise as much capital as Uber has been able to is unprecedented.”
Bookings grew tremendously from the first quarter of this year to the second, from above $3.8 billion to more than $5 billion. Net revenue, under generally accepted accounting principles, grew about 18 percent, from about $960 million in the first quarter to about $1.1 billion in the second.
… Uber’s losses and revenue have generally grown in lockstep as the company’s global ambitions have expanded. Uber has lost money quarter after quarter. In 2015, Uber lost at least $2 billion before interest, taxes, depreciation and amortization. Uber, which is seven years old, has lost at least $4 billion in the history of the company.
It’s hard to find much of a precedent for Uber’s losses. Webvan and Kozmo.com—two now-defunct phantoms of the original dot-com boom—lost just over $1 billion combined in their short lifetimes. Amazon.com Inc. is famous for losing money while increasing its market value, but its biggest loss ever totaled $1.4 billion in 2000. Uber exceeded that number in 2015 and is on pace to do it again this year.
The second quarter of 2016, which ended in June, could represent a nadir for Uber. The company’s losses will likely fall. In July, it cut a deal with its largest global competitor, Chinese ride-hailing behemoth Didi Chuxing, washing its hands of its massive losses in that country. Didi gave Uber a 17.5 percent stake in its business and a $1 billion investment in exchange for Uber’s retreat. Uber lost at least $2 billion in two years in China, people familiar with the matter told Bloomberg in July. Uber won’t see any losses from China on its balance sheet after August, the company said on Friday’s investor call.
Uber’s backers range from venture capital firms like Benchmark Capital to the investment bank Goldman Sachs. Altogether, Uber has raised more than $16 billion in cash and debt. Its latest valuation is a whopping $69 billion.
My Take: These are mind blowing numbers. To put this in perspective: in its lifetime, Uber has lost well over 4x what Webvan lost in its lifetime. Until this, Webvan was generally regarded as the poster child for losses by a tech startup. Where is all this money going? Uber’s strategy, for better or for worse, is to jack up growth figures by offering bonuses, subsidies and other unsustainable incentives to drivers and passengers.
At some point, Uber has to turn the corner towards profitability or be relegated to the trash heap of history. I can’t imagine investors will keep putting more money in a company that is losing money at this pace. The good news for Uber is that they still have a lot of cash on hand – estimated to exceed $3 billion. At this rate, that gives them a window of 18 months to start running a profit.
Investors have placed a one-way bet on Uber—which made us want to find a way to short it [Quartz]
Sum and Substance: In its first seven years of existence, Uber has irked cities, flouted regulators, and petrified whole industries. It has yet to make money but is worth a fifth more than BMW and almost a third more than General Motors, both the owners of tons of futuristic technology, tens of billions of dollars in capital equipment, and big profits.
In recent deals resembling famous speculative bubbles, rich investors eager for a piece of this juggernaut have poured hundreds of millions of dollars into custom funds that provide exposure to Uber but no equity or financial disclosure. Which is to say that investors have made a one-way, uber-bullish bet on Uber, forecasting that the company will be at the center of an utter transformation of our collective lifestyle.
If not everyone is betting on it, they’re at least not betting against it. We can state that with some certainty because even if you want to short Uber—which you might wish to if only to hedge or to take on a bit of high-end risk—it is generally thought impossible to do.
But what if the consensus has miscalculated? What if the coming trends expected to propel Uber—primarily a decline in private vehicle ownership and the rise of self-driving, clean-powered cars—do generally unfold, but not quite transformationally? What if they take much longer to materialize than anyone is expecting? And what if Uber’s dramatic decision to surrender the pivotal Chinese market to local rival Didi Chuxing, announced on Aug. 1, halts the momentum that has heretofore been a crucial piece of the American startup’s story?
Until now, auto and tech giants, investment banks, think tanks, and expert consultants have generally agreed that, just as Google appeared out of the blue to own search, Apple to revolutionize smartphones, and Amazon to capture online commerce, Uber was likely to be the singular name in shared transportation. But in light of its retreat in China, it seems more likely that the company will be, at best, part of a shared triumph.
My Take: In light of the numbers reported in the first article, this is now the question du jour: will investors stick with Uber and continue to justify its stratospheric valuation? Expect to see more articles like this, questioning Uber’s overall strategy – a Silicon Vally mindset that elevates growth of the user base over profitability.
Until now, investors have bought into Uber’s contention that this is going to be a winner-take-all space. Investors and Uber execs are all buying the notion that the ridesharing industry exhibits classic network effects and whoever owns the dominant network wins. But some analysts are now questioning whether this network is like other networks, say telecom or social networks like Facebook.
Network effects only apply if each individual member has incentives to stay with the network. but in ridesharing it’s not difficult to switch platforms, or even create entirely new networks – witness Austin, Texas after Uber and Lyft pulled out.
Maybe you passengers can answer this question: if Uber’s prices start to rise, will you stay with the Uber platform over an alternative that might be cheaper or safer or more convenient? Maybe drivers can answer this question: will you stick with Uber if they discontinue driver subsidies like bonuses and guarantees? And the big question: will you remain loyal to Uber if Juno comes to town and starts offering you equity in the company you drive for? These questions become relevant – especially if IPO rumors start heating up – which they inevitably will at some point in the future.
Massachusetts to tax ride-hailing apps, give the money to taxis [Reuters]
Sum and Substance: Massachusetts is preparing to levy a 5-cent fee per trip on ride-hailing apps such as Uber and Lyft and spend the money on the traditional taxi industry, a subsidy that appears to be the first of its kind in the United States. Republican Governor Charlie Baker signed the nickel fee into law this month as part of a sweeping package of regulations for the industry. Ride services are not enthusiastic about the fee.
“I don’t think we should be in the business of subsidizing potential competitors,” said Kirill Evdakov, the chief executive of Fasten, a ride service that launched in Boston last year and also operates in Austin, Texas. Some taxi owners wanted the law to go further, perhaps banning the start-up competitors unless they meet the requirements taxis do, such as regular vehicle inspection by the police. “They’ve been breaking the laws that are on the books, that we’ve been following for many years,” said Larry Meister, manager of the Boston area’s Independent Taxi Operator’s Association.
The law levies a 20-cent fee in all, with 5 cents for taxis, 10 cents going to cities and towns and the final 5 cents designated for a state transportation fund. The fee may raise millions of dollars a year because Lyft and Uber alone have a combined 2.5 million rides per month in Massachusetts.
The law says the money will help taxi businesses to adopt “new technologies and advanced service, safety and operational capabilities” and to support workforce development. Regulations for how the fee will be collected and a plan for how it will be spent still need to be drawn up, said Mark Sternman, a spokesman for the state’s MassDevelopment agency, which will be in charge of the money. Riders and drivers will not see the fee because the law bars companies from charging them. Instead, companies themselves will pay the state, although Evdakov said it will be passed on to riders or drivers one way or another.
The 5-cent fee will be collected through the end of 2021. Then the taxi subsidy will disappear and the 20 cents will be split by localities and the state for five years. The whole fee will go away at the end of 2026.
My Take: Uber and Lyft may not be happy about the fee, but they’re wild about the overall bill. The amount outlined in this fee is chickenfeed to Uber. A small price to pay for everything else they gained in this bill. Uber and Lyft’s lobbyists put an all out press on Massachusetts legislators and it paid off big as lawmakers yielded on almost every other major plank in the ridesharing platform. No fingerprinting and pickups at the airport were the major wins in for redialing in this bill.
It’s just one more sign that the taxi medallion system is quickly becoming a vestige of the past. It’s also a prime example of how Uber and Lyft, working together in the public domain, have been able to flex their muscles and steamroll over the opposition (i.e. taxis) But the strategy doesn’t work everywhere… (See Article Below)
Uber, Lyft spent nearly $1M on NYS lobbying so far in 2016 [NY Daily News Finance]
Sum and Substance: Ridesharing companies Uber and Lyft spent nearly $1 million combined during the first six months of 2016 to lobby for a bill that would have allowed them to expand to upstate. But the spending didn’t pay off as the lawmakers ended the state legislative session in June without taking action on the bill.
The bill died, according to sources, after the powerful state trial lawyers pushed for more comprehensive insurance coverage that Uber opposed. Lobbying expenditures between January and July by opponents of the bill paled by comparison. John Tomassi, president of the Upstate Transportation Association, which opposed the bill, called the ridesharing industry’s spending “kind of mind-boggling.“
My Take: What Uber and Lyft spent and lost in New York lobbying pales in comparison to what they spent in Austin, Texas. In the Lone Star State, they spent an estimated $7 million, and all they got to show for it was a huge black eye. Sometimes having a deep war chest doesn’t insure victory.
Readers, what do you think of this week’s stories?
-John @ RSG
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