Recently tech companies have been eager to go public and unload shares from the insiders to the less knowledgeable retail. Some have been successful, some have not. Zoom has seen success in their IPO thus far, but a more salient company (LYFT) has not shared the same story. Shares of LYFT have retraced from their IPO -25%. Will the same happen to UBER?
In This Article I Will Discuss The Following
- Future Opportunities For Uber
- Risks To Uber
- Key Players
- Overlooked Key Insights
Based out of San Francisco, UBER is a ride sharing network service, pairing drivers with riders. The company has largely taken hold of this disruptive opportunity and has operations in 785 metropolitan areas globally. Uber has since began to stretch its operations into new opportunities such as food delivery and autonomous driving. It is largely argued that these key pieces of Ubers offering are the backing behind their valuation. Although Uber initially was able to leverage the upper hand in this new transportation service strategy, competition has been close behind. With companies such as LYFT finding success in the field and UBER facing many media nightmares, investors are questioning their ability to attain profitability and return value to shareholders.
Future Opportunities For Uber
Let’s take a step back from the negative aspects surrounding UBER and take a look at the exciting opportunities they are attempting to scale. Uber has largely relied on its differentiation from LYFT and market share to support its massive valuation. Uber Is the second largest “Unicorn” in the world and is largely valued on innovative approaches they are cultivating. “Uber eats” is a key component of Ubers portfolio, utilizing their driver network to deliver food to those who wish to stay at home. Uber Is able to leverage this service due to their massive reach inherent with being in operations in 785 metropolitan areas globally. Although this has brought them success, many risks are rising to this approach with the likes of “Grubhub” etc. As the space gets more crowded, one would expect Uber to take the typical “M&A” (mergers and acquisitions ) approach commonly found among the tech industry. This strategy may be threatened if Uber continues to run the loss they have historically.
Uber has begun heavily investing in the exciting autonomous vehicle opportunity. If this is scaled properly, it may place Uber in a much more admirable financial position. Although this new field has many investors excited and is largely a key component in their valuation, the research underway hasn’t been free of headwinds. In March of 2018 one of Ubers self driving vehicles struck and killed a pedestrian. While this new field presents a great deal of opportunity, Uber has a lot left to prove in their viability to take hold of the new field.
Risks To Uber
While Uber has attained an impressive portion of market share in this new opportunity, they have done so with their fair share of bad press. 2014 is a starting point in the scandals. In this year Emil Michael (Uber exec) was reported to have disclosed to BuzzFeed (in what he had thought was off record) that he had plans of spending millions to spread dirt on critical journalists. The firm was also said to have begun a strategy of covering up alleged rapes committed by Uber drivers. The theme continued in 2017. This year saw consumers taking to social media with the #deleteuber campaign. This campaign resulted in hundreds of thousands of users deleting the platform within days, allowing Lyft to further their reach in the market. Soon after fielding this fiasco, Uber was faced with high profile lawsuits on allegations that the firm had developed a tool to evade and deceive authorities. In addition to all this bad news, Susan Fowler (an ex employee) wrote in regards to her early experiences at Uber. She is said to have been propositioned by her manager which led to her complaining to HR. HR told Susan to take another job in a different department or potentially face a poor performance review. The boss in this story wasn’t disciplined and she soon found similar stories among fellow female employees at Uber. There’s several other stories here, but the point remains; can Uber shake this tradition of bad news? Historically investors would be wise in remaining skeptical of that feasibility.
A closer look at Uber reveals a disappointing financial story. 2018 saw Uber lose ($3 billion) from $11.2 billion in revenue. Along with this loss, Uber sold its stake in several other ride services which assisted in its ability to look somewhat profitable. This sale of stake should be critically viewed as the remedy inherent in all tech behemoths is one of buy outs and well placed investments in potentially disruptive competition. In addition, a major threat looming to Ubers hopeful profitability is it’s ability to underpay and price gauge traditional Taxi services. Minimum wage and other compliance are sure to be close to Uber with the significant volume of bad press surrounding the firm. Uber is appearing to have grossly under priced services to lure consumers and has relied on a bonuses strategy to attain drivers. Should Uber be faced with regulations requiring them to recognize drivers as employees as opposed to independent contractors, the adverse financial impact would be immense. Although the timeline of such possibilities in wage concerns for drivers is unclear, the general consensus for pay in the nation as a whole is under a critical lens. Uber will need to recognize their risk exposure in pay and independent contractors to attain profitability. The business will need to shift into a strategy which is more sustainable to alleviate these immense and growing strains on their financials.
Lyft is traditionally viewed as Ubers primary competition. Having beat Uber to bat at the IPO stage, investors may have been presented with a glimpse into Ubers future in a measure of stock price. Shares of Lyft appreciated nominally and have since dropped in the -25% range from listing. At their core, the companies are essentially the same. Lyft beat Uber to IPO, but not to the ride sharing opportunity. The fourth quarter of 2018 saw Lyft reporting $2.3 billion while Uber reported $14.1 billion. A yearly perspective put Lyft at $8.1 billion and Uber at $50.1 billion. Although Uber has more impressive bookings, Lyfts story reveals one of growth. Bookings we’re up 58% in a recent quarter versus the previous year where as Uber had only seen a 30% increase. A revenue view reveals the same story as seen above, Lyft booking $670 million and Uber booking $2.2 billion in 2018. The narrative remains on this measure with Lyft witnessing 94% growth on revenue year over year in the previous quarter while Uber saw only + 25%. This is likely why consumers have been witness to the conglomerates massive investments in less crowded areas such as their scooter service. Moving on to profits, both firms are unfathomably unprofitable. Uber witnessed a protfit in 2018 due to the sale of one of their interests to competitor which is traditionally received as a bearish move. Without this sale of interest, Uber posted a $312 million loss prior to taxes and other expenses in the quarter. Lyft was witness to a $249 million loss, bringing it to a $911 million loss for the year and Uber to a $865 million loss at quarter 4. This brought Uber to a $1.8 billion loss for year 2018. While both companies provide a bleak picture on profitability, Uber has expressed more confidence in its ability to cut expenses.
Outside of financials, investors in these new opportunities should be critical of market share. Lyft was reported to have achieved 39% of market share in 2018. This has since been argued to be more around 29% for Lyft and 69% for Uber. With this in mind, the general trend appears to favor Lyft, partially due to the bad press Uber has received as witnessed in the chart.
Although Lyft is clearly Ubers primary competitor, it would be unwise to fail in identifying competition to Ubers future opportunities. Tesla is perhaps the greatest threat to Ubers massive investment in autonomous driving as their massive fleet of cars is providing Tesla with an unmatched volume of driving data. Tesla is essentially able to dip its toes in the big data business due to the communication of its vehicles to better improve autonomous driving. Not only does Tesla currently have working models (which haven’t killed people) they have more data and as a result better understand the challenges in this opportunity. The result, current vehicles sold offering the ability to be autonomous once regulation catches up. Tesla in essence is largely ready to implement. Users will simply wake up and their cars will be enabled with this ability due to their current software update strategy. This is best left for another article, but it is worth paying attention to as a threat to Ubers massive investments.
The data strongly suggests Uber is poised for a growth in stock price with a rebound from the tech sector. Outside of this tie, there is decent support in favor of their price per share being perceived as bearish. Many questions remain unanswered, such as their bad press tradition, massive losses and threats to future opportunities. Investors will likely be more happy to invest should the above discussed risks be properly addressed. In the meantime, the data is at odds to a bright future for Ubers share price and seems to suggest downside in the future.
As an alternative to the risky IPO business, click here to read about other equities with material events ahead of them.
I do not own any interest in Uber or Lyft and was not compensated by either to write this article
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