Uber has definitely made good on my December prediction (see #16) that it would struggle to live up to its $70 billion-plus, pre-IPO valuation after going public. With shares currently down 32% from their $45 IPO price, the ride-hailing leader is valued at $52 billion, or less than three times its expected 2020 revenue.
Such a decline doesn't suddenly make Uber a low-risk investment, particularly given its current profit and cash-flow profile. But considering what its valuation now looks like, this might be a good time for those who have profited from shorting Uber to take profits.
Here's a quick run-down of some key positives to Uber's story as it tries to please Wall Street:
1. A Very Large Addressable Market
Though Uber's claim that it has a $12 trillion total addressable market (TAM) for its transportation services should be taken with a few grains of salt, it is fair to say that -- between the various ride-hailing, food-delivery, freight shipping and bike/scooter-sharing services it offers in the U.S. and in many cases foreign markets -- its long-term TAM is quite large. That in turn provides Uber with a runway for seeing double-digit bookings and revenue growth for many years to come.
2. An Improving U.S. Pricing and Promotional Environment
Uber and Lyft (LYFT) , who between them have a duopoly in the U.S. ride-hailing market, have each been reporting that pricing and promotional headwinds in U.S. ride-hailing have been diminishing, and (importantly) signaling that they want such an environment to continue. While there's some risk that Uber and Lyft could see a backlash among U.S. consumers and/or drivers if they take things too far, for now this trend is a clear positive for their bottom lines.
3. Cost-Cutting Efforts
Uber has been taking steps under CFO Nelson Chai (hired last year) to restrain its freewheeling spending habits. Among other things, the company has carried out multiple layoffs and implemented a hiring freeze for technical jobs. Chai has also eliminated the $250,000 (!) that Uber was spending annually on birthday balloons for employees.
4. A Unique Platform
Unlike Lyft, Uber operates both a major ride-hailing service and a major food-delivery service, something that in turn gives it the ability to offer loyalty programs and subscription plans that cut across both services (and potentially also cover things like bike and scooter-sharing). Also unlike Lyft: Uber has a large overseas presence, which (on paper at least) helps provide it with greater economies of scale and also gives it more customer data and hands-on experience that it can leverage in various ways.
Key negatives for Uber's story include the following:
1. Significant Losses and Cash Burn
In spite of recent cost-cutting moves, Uber has reported operating cash flow of negative $1.64 billion for the first half of 2019. The company also guided in August for full-year adjusted EBITDA of negative $3.2 billion to negative $3.3 billion. While some of Uber's expenses, such as marketing, R&D and administrative overhead, should decline meaningfully as a percentage of revenue as its top line keeps growing, some others, such as operations and support expenses, might not benefit as much from greater scale.
2. U.S. Share Losses
Both third-party data and a comparison of Uber and Lyft's recent financials indicate Uber has been losing share to Lyft, which was estimated by research firm Second Measure to have a 27.2% U.S. ride-hailing share (to Uber's 71.1%) as of July. In addition, though it has much less scale, Lyft has been doing a better job than Uber lately of reducing its losses and cash burn.
3. Food Delivery Pressures
In both the U.S. and India, Uber's food-delivery business, which is now driving a large chunk of its revenue growth, is dealing with an intensely competitive pricing and promotional environment that's impacting its bottom line. Whereas Uber's ride-sharing operations saw a take rate (defined as adjusted net revenue divided by bookings) of 19% in Q2, its food-delivery operations saw a take rate of just 10%. While the food-delivery wars currently taking place look unsustainable are likely to cool down, for now they're a major profit headwind.
4. Brain Drain and Reported Morale Issues
Uber is three months removed from seeing its COO and marketing chief leave as part of an executive shakeup. And generally speaking, it's pretty common for a unicorn that has finally gone public to see talent losses as employees with vested stock awards decide to bolt. Meanwhile, The Washington Post reported last week that employee morale has suffered at Uber as its stock has slumped and management has unfurled efforts to run a tighter ship.