Uber’s IPO and Plans for Future Disruption

As Uber pursues an IPO in 2019, more stories are coming out about Uber’s solvency – and plans for future expansion. Senior RSG contributor John Ince covers the future of UberEATS, Uber’s IPO concerns, and more in this week’s round up.

Uber raises $2 billion in debut junk bond sale ahead of blockbuster IPO [CNBC]

Sum and Substance: The ride-hailing firm confirmed to CNBC that it had raised $1.5 billion through the sale of eight-year notes with a yield of 8 percent — it had initially pitched $1 billion — and an additional $500 million by selling five-year notes with a yield of 7.5 percent in a private placement led by Morgan Stanley. The news was originally reported by the Financial Times.

The embattled start-up is preparing for an initial public offering that media reports have noted could value it at more than $100 billion — far more than its last reported valuation of $72 billion, which it notched after a $500 million capital injection from Japanese carmaker Toyota. It is currently one of the most valuable privately held firms in the world. The fundraising follows a separate report by the FT on Wednesday that said Uber has mulled the sale of minority stakes in its struggling self-driving unit, known as the Advanced Technologies Group.

My Take:  This all happened very quietly, which is the way Uber wants it right now. They don’t want to invite a lot of public scrutiny of their financials, which show quarterly losses in the hundreds of millions. They don’t want to invite questions about the legal status of drivers as independent contractors. They just want to collect the funds from assorted qualified investors who are primarily interested in the nice interest rates on these bond offerings.

What risk could there be in a company at which investors have already thrown billions?  How much risk can there be when the much hyped Uber IPO is just around the quarter in 2019? There’s a lot of money being made in these multi-billion dollar transactions.  And not much of it will ever fall into the hands of the drivers making this all possible.

Munson on Uber: ‘It’s going to be another Facebook’ [Yahoo Finance]

Sum and Substance: Portfolio Wealth Advisors President and Chief Investment Officer Lee Munson thinks history could rhyme if and when Uber becomes a public company. The ride-hailing company was recently valued up to $120 billion by Wall Street banks, according to Wall Street Journal. That’s $50 billion more than previous valuations, and more than General Motors (GM), Ford Motors (F), and Fiat Chrysler Automobiles (FCAU) are worth — combined.

Speaking on Tuesday’s Final Round, Munson predicted that Uber would follow in Facebook’s (FB) footsteps.

“I have to tell you, guys, it’s not that I’m necessarily going to buy this for my clients, but you start to think, how much do I use Uber?” Munson said. “I use Uber all the time. … So I use it. I think my judgment is colored. But bottom line, I think it’s going to be another Facebook.”

The behemoth social media network, founded in 2006 by CEO Mark Zuckerberg, was valued at $104.2 billion as it went into its May 2012 IPO. But out the gate, share prices quickly tumbled from its original $38 offering. The downward trend continued for months, falling to an all-time low of $17.58 in September that year. It took more than a year for the stock to recover to its original offer price.

My Take:  I’m so glad to have come across this article that explains just how some of these big investors view Uber. First they base their business judgement on their personal experience, “I use it all the time.” Okay, did it ever occur to you the reason you’re so happy with the service is that they’re pricing it to you below cost? Drivers aren’t making enough, and even with that Uber is losing money – big time.

As for the Facebook analogy – sorry, Uber is not Facebook. The economics are entirely different.  The incremental cost of adding another user on Facebook is essentially zero.  The incremental cost of adding another passenger is not zero. You don’t have economies to scale here. The network effects are localized. But go ahead and put your money in – you wouldn’t want to miss out on the next Facebook.

Uber Wants To Deliver Groceries, But There Is A Much Bigger Opportunity [Forbes]

Sum and Substance: Uber has announced its intentions to expand into delivering groceries. Uber may choose to expand its already successful Uber Eats to be the service for grocery delivery or the company may choose to manage grocery delivery through another service…

Uber has succeeded as a ride-hailing company that is credited with breaking the taxi monopoly in most major cities. Uber has also morphed into a self-driving trucking company, Otto, and a food delivery company, Uber Eats, that has generated $6 billion in bookings with a 200% annual growth rate.

Uber’s next focus appears to be on delivering groceries, something Uber tested with Walmart under the service UberRUSH. The program ended with Walmart after three months when data verified that delivering groceries, packages and passengers all in the same vehicle didn’t achieve the desired goals in customer experience and revenue.  

Uber CEO Dara Khosrowshahi, however, has identified that given Uber Eats’ success in the delivery of food, it only make sense for Uber to re-enter the grocery delivery market:

“With Eats, we’re getting into the business of moving food around. I think that this product of delivering great quality food to you at home in 30 minutes or less is magical and is going to move into grocery in a way that’s fundamental and a lot more people are going to be eating at home…you can absolutely see grocery as being an adjacency,” he said at Vanity Fair’s New Establishment Summit 2018 on Tuesday, October 9th.

… Uber Economics … With the right business model and strategy, Uber can become a leader in online grocery delivery. However, as UBS and other industry analysts have identified, grocery retailers are facing a future of extreme disruption as consumers shift to ordering more cooked meals for delivery instead of shopping for groceries in stores or ordering groceries online.

My Take:  Since when did delivering groceries become sexy? What’s new about delivering groceries today is that it might make more business-sense since more people are being accustomed to ordering everything.

Okay, Uber has the drivers, but drivers can only be manipulated so long until they wise up.  UberEATS might put some food on the table for a few drivers, but I don’t see delivering groceries ever becoming a significant contributor to Uber’s revenue.

Uber, Lyft, Taxis, Design and the Age of Ambivalence [Subtraction]

Sum and Substance: The massive disruption that ride-hailing apps like Uber and Lyft have visited on the taxi industry stirs up so many conflicting feelings for me. I use these services all the time but the larger impact of my patronage has been weighing on my conscience more and more lately. Not least because, from a certain perspective, it’s clear that design lays at the heart of both the genuine innovation and the disturbing dissonance of this transformation in transportation.

It’s no secret that Uber and Lyft, in order to justify their exorbitant market valuations, are barreling towards a future in which the way we move about cities is reinvented by autonomous vehicles. It’s at that point that they’ll be able to do away with the pesky expense of human drivers. And it’s also at that point that the companies will have decisively made the shift to true technological innovation.

Until that yet-to-be-determined date, the frank truth is that what propels these companies forward is not really technology innovation so much as design…

[Editor’s Note]: A very interesting take on the evolution of the ridesharing industry, its disruption to the taxi industry, and what it means for the future (for passengers and drivers). If you’ve thought the term ‘disruptor’ was incomplete, check out this article and let us know what you think about the author’s conclusion.

Uber takes a detour with plan to provide temporary staff [Financial Times]

Sum and Substance: Uber is developing a new short-term staffing business, dubbed Uber Works, that would help to diversify its business ahead of next year’s planned initial public offering.

Uber hopes to apply its “on-demand” model and large database of contractors to provide a temporary workforce for events and corporate functions, such as waiters or security guards.

Uber Works could help to persuade potential investors in next year’s IPO that Uber is more than just a transportation service, instead pitching it as a broader platform for all kinds of flexible work and on-demand services.

The project has been in development in Chicago for several months following an earlier trial in Los Angeles, according to people familiar with the matter.

[Editor’s Note]: This project is still in the works, and it remains to be seen what exactly it will entail, but it’s certainly interesting. Could this be something drivers do when there are fewer passengers requesting rides? Or will it be more like Amazon Flex, where workers sign up for shifts?

At first glance, it seems like this isn’t really necessary – according to the article, Uber Works could serve as waiters or security guards. It doesn’t seem like caterers or for-hire security companies are suffering for staff. But then again, it didn’t seem like the taxi industry needed disrupting until it happened and we all realized what we had been missing out on.

Readers, what do you think of this week’s round up?

-John @ RSG