An Uber IPO in 2017 is Too Risky
Uber Technologies Inc. is not publicly traded, and therefore not obliged to disclose its financial performance, but it organizes a quarterly conference call with some investors. These include some big names in the world of finance, such as Goldman Sachs Group Inc (NYSE:GS). The latest call does not suggest that investors can expect an Uber initial public offering (IPO) in 2017 or anytime soon. That’s because the U.S.-based (but global) smartphone-app-based ride-sharing service managed to lose some $1.27 billion in the first half of 2016. (Source: “Uber Loses at Least $1.2 Billion in First Half of 2016,” Bloomberg, August 25, 2016.)
Uber’s head of finance, Gautam Gupta, said that the second quarter was especially bad. Whereas Uber lost $520.0 million in the first quarter; it lost over $750.0 million in the second quarter. (Source: Ibid). Still, the company’s revenue increased by a dashing 18%, from $960.0 million in the first quarter to $1.1 billion in the second. So what’s the problem then? Why aren’t the revenues transforming into earnings? Indeed, until earnings appear, there seems to be little point in an Uber IPO in 2017.
Uber, which has been valued at some $60.0 billion (as of last December), has relied on the support of major banks like Goldman Sachs (which has a $1.6 billion investment in Uber) and its private wealth management clients. It also gets some support from hedge funds. (Source: “Goldman Sachs confirms $1.6B investment in Uber,” Venturebeat, January 21, 2015.)
Uber is Raising Questions About the Sharing Economy Itself
But Uber’s losses have not just put its own business in question. Uber is the very mascot of the so-called sharing economy. Uber has been investing heavily in order to force-feed itself to grow, but it has a chronic deficit. It has lost some $4.0 billion since its inception seven years ago, and has lost at least $2.0 billion last year. (Source: Bloomberg, op cit.)
Uber left China last month in an effort to end the hemorrhage. After a ruinous battle against the Chinese equivalent of Uber, Didi Chuxing, it finally decided to hand over its operations in the country. Uber got a minority stake in the new merged entity. But experts are questioning whether the biggest unicorn—defined as a startup worth over $1.0 billion—will ever fulfill its profitability promises. Until the company addresses that question, it should avoid going public with an IPO.
For Some Unicorns, IPOs Made Sense. For Others, No
There is no question that Uber has earned its place among once-fellow startup unicorns. Some that immediately come to mind include Facebook Inc (NASDAQ:FB), Tesla Motors Inc (NADSAQ:TSLA), and Alphabet Inc (NASDAQ:GOOG)—against which the company competes in the driverless technology department. Like those companies, Uber has redefined economies of scale, given the sheer disproportion of its ambition. That ambition, as some investors in unicorns that have gone public have found out, do not always translate to profits.
Tesla Motors, for example, has a market valuation that defies the physics of this very planet, considering it has yet to post a profit. It turns out, neither has Uber. Yet its value rises continually. It was $60.0 billion not long ago; now it’s $69.0 billion. But really, who is counting when it keeps accumulating losses. It’s more common than a burro in Mexico than a unicorn on Wall Street.
Losing $1.2 billion in One Half-Year is Unprecedented
Even in the make-believe world of Silicon Valley, losing over a billion dollars and still continuing to push growth is a stretch, including in the new technologies sector. According to the web site Gizmodo, Amazon had suffered its biggest loss in 2000, with a $1.4 billion deficit spread over the entire year. (Source: “Why Uber Is Losing Money Faster Than Any Tech Company Ever”, Gizmodo, August 25, 2016.) Such is the contradiction of growing startups. They lose money and their value goes up.
The explanation, they tell us (the gurus who ensure that this seemingly perverse mechanism continues), is that these companies aim for scalability. They want to develop services quickly and establish a market presence at the expense of short-term profitability. Uber’s dizzying losses were therefore accepted by investors as a gateway to a hegemonic position. In other words, Uber has stayed true to the motto of Silicon Valley: “grow first, then make money.” (Source: Ibid.)
By That Logic, the Subprime Crisis Was a Similar Exercise
We all know how that ended. That’s the risk for companies like Uber if they go public. Uber’s losses are as impressive as its growth. (Source: Ibid.) But, they tell us, Uber’s model will soon be profitable. Yet Uber has had to leave the market where growth should have been fastest, given that it is also the world’s fastest-growing market for cars: China. Perhaps a better strategy might be to leave the markets or cities where it incurs the highest losses, focusing on growth only in cities where the company makes money.
The service is so profitable in hundreds of cities, said its founder Travis Kalanick last June. However, it seems that the company, which is uber-discreet about its finances (hence benefiting from remaining private), also suffered a deficit in the United States: $100.0 million, according to Bloomberg. (Source: Ibid.)
Uber has also found a U.S.-based rival, Lyft, with whom to engage in a price war. This adds to the wars it has already triggered with taxi drivers just about anywhere. Engaged in a price war against its rival Lyft on American soil, Uber has been forced to cut prices steadily to the point of operating at a loss. It simply cannot afford to lose to any other company approaching its business model, like Lyft.
As a private company, Uber is free to pursue a race to the bottom. It does not have to answer to investors in the public markets. But Uber has taken everything a few steps further. Not only does it wish to decimate the competition on price, it wants to invest in a the highly complex and risky technology of driverless cars. That’s the stuff that the big boys of the car industry have yet to perfect.
Driverless Cars the Future of Uber?
Uber has made no secret of its goal to move toward a driverless future. Imagine that the company is pursuing this goal while its drivers, self-employed for now, are trying to assert their rights with the company. Now imagine such a pressure cooker of labor relations troubles in a publicly traded company.
Autonomous cars can run without interruption and Uber is investing heavily in related experiments. Still, there is no proof that the alleged tsunami of autonomous driving technology will actually materialize as soon as the child-like optimists of Silicon Valley want us to believe. Even if this technology gained traction in a decade’s time, it would take yet more time for the public to accept it.
There is a social dimension to the so-called sharing economy after all. Motorists would have to be persuaded to give up ownership of a car in favor of using driverless Uber services—and on a daily basis. It would be an economically rational choice, but out of our current mobility practices. In short, Uber has proved that it can expand into many markets, but it has not proved that it can generate earnings. Moreover, its business model does not yet suit the earnings conditions.
The Bottom Line on an Uber IPO
An Uber IPO in 2017 is unlikely. Uber still has too many risks for investors that generate more questions than answers. That’s why an Uber IPO is not yet in the cards; not for a while yet. Nevertheless, there is something that investors can consider now, which is related to the growth success of Uber and its rivals if not in their profits. It is lithium, the key ingredient for the batteries powering electric cars and the smartphones used with ride-sharing platforms. Read this report to find out more.