Uber certainly isn't making a profit yet, which isn't the worst thing in the world, considering the mammoth market opportunity. Still, investors in its initial public offering should know it could take several years before that red ink turns black.
With Uber tentatively set to price its initial public offering at a valuation of $80 billion to $90 billion, some takeaways from the company’s roadshow are sobering, but they also portray the broad opportunities ahead.
1. Uber Assumes Competition Will Ease
In a video released in connection with the Uber roadshow, Chief Financial Officer Nelson Chai, who joined the company last summer from insurer Warranty Group, said Uber notched a $1.8 billion adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss in 2018, and he expects that red ink to grow larger this year because of increased investment in global growth.
Uber’s core platform, which includes ridesharing and UberEats, but excludes “other bets” such as self-driving cars, saw a contribution margin of 9 percent for 2018, but it fell to negative 3 percent in the fourth quarter. That’s because of higher incentives paid to drivers in the United States and Latin America, and increased consumer promotions.
Uber projects an adjusted EBITDA margin of 25 percent of adjusted net revenue over the long term, Chai said, but that rests on a huge assumption: that competitive fires will be doused.
“We expect these pressures to abate over the long term, assuming our competitors choose to focus on profitability,” Chai said.
That could be a reasonable supposition if a tremendous amount of further consolidation occurs. After all, for example, Uber took minority stakes in China’s Didi, Southeast Asia’s Grab, and Russia’s Yandex, and its proposed acquisition of Careem for $3.1 billion in the Middle East is pending.
But with what Uber Chief Operating Officer Barney Harford estimated is a $2.5 trillion addressable market for personal mobility, including ridesharing, electric bikes and scooters, it may be many years before competitors ease up on growth and emphasize profitability. There is an argument to be made that the ridesharing market is still in its beginning stages.
2. Ridesharing and Food Delivery Synergies
It’s no wonder that companies ranging from Uber to Meituan and Grab see tremendous opportunities in combining ridehailing and food delivery.
Jason Droege, who heads Uber Everything, which includes Uber Eats, said customers who turn to Uber both for personal mobility and food delivery take 11.5 trips per month, on average, compared with customers who use rideshare service alone. They average just 4.9 trips per month.
China’s Meituan has reported that it sources a large swath of its hotel bookers from its own ridehailing services.
Uber uses rideshare drivers to supplement food delivery during periods of high demand, and Uber Eats provides an opportunity for drivers to make money if they choose not to deal with passengers, officials said.
Uber, by the way, Droege said, is the largest food delivery service globally — except for China. That’s a large exception, however.
3. Drivers do have a future
In addition to opportunities for drivers to trade off between transporting passengers and delivering mango avocado salads, Eric Meyhofer, the head of Uber’s Advanced Technologies Group, had good news for drivers who might fear that autonomous vehicles might automate them right out of the gig economy.
Meyhofer said that Uber, which has built around 250 autonomous vehicles and has related partnerships of various types with major automobile brands, only plans to use such vehicles on standard, well-mapped routes in good weather.
Uber will continue to rely on drivers for many of the other trip types, and they would also supplement self-driving cars during high-demand periods, such as at concerts, he said.
Uber, of course, is dealing with the substantial brand hit it faced after one of its self-driving cars ran down and killed a pedestrian in Arizona last year.
4. Men still run the show at the ‘new Uber’
Talk of the “new Uber” permeates the roadshow presentation. Uber’s independent board chairperson, Ron Sugar, details changes in corporate governance since CEO Dara Khosrowshahi came on board in summer 2017.
The reforms include one share/one vote, annual director elections, an independent board chairperson, and diversity sought throughout the company, such as in hiring and the nomination process for directors.
But of the 11 Uber executives who spoke about the departments they run during the roadshow video, only three, namely Rachel Holt, head of New Mobility, Nikki Krishnamurthy, chief people officer, and Bo Young Lee, chief diversity and inclusion officer, are women.
While Holt runs the division that operates electric bikes and electric scooters, Young Lee and Krishnamurthy head the type of business units that women have often been relegated to for many years. Uber hasn’t conquered much new terrain here and should be doing much more.
5. the competitive overhang
COO Harford outlined six countries, including Argentina, Germany, Italy, Japan, South Korea, and Spain, that Uber designates as priorities for expansion. They account for 800 billion vehicle miles annually and a market opportunity of around $500 billion.
But Harford also acknowledged that Uber faces significant regulatory hurdles in each of these priority countries.
In its march to an initial public offering, and in order to get the share price the company is looking for on the opening day of trading, Uber will have to convince investors that the regulatory headwinds are not overly imposing.
6. Not a bad position to be in
Through the operations that it fully owns and other markets where Uber has a minority stake in other brands, the company claims to have leading positions in all of them. It has a “leading category position” of at least 65 percent in the U.S. and Canada, Latin America, Australia and New Zealand, and Europe, Khosrowshahi said.
In India, Uber has 50 percent of the category, and the company is poised to boast a 65 percent share in the Middle East when its Careem acquisition closes, he added.
Despite that share, Uber estimates that its operations represent fewer than 2 percent of all miles driven globally.
That’s a lot of open road.
Corrections: The core Uber platform’s 2018 contribution margin was 9 percent, not 18 percent, which was merely for the first quarter of 2018. Uber’s estimate of a $2.5 trillion serviceable addressable market is for services such as ridesharing, electric bikes, and electric scooters, and not just for ridesharing.
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Photo credit: Uber is on its roadshow, heading for a presumed initial public offering. Eric Newcomer / Bloomberg