The Uber IPO – Imaginary Profits Only

Last Friday night, I did a TV interview on ABC regarding Uber’s long awaited IPO. An IPO is when a company first becomes a publicly traded stock that anyone can buy and hold. To put it bluntly, Uber is a terrible investment for anyone who didn’t already own the shares in it before it went public. But I do think this IPO is very instructive from a technology business strategy and investment perspective, so I thought I’d lay it out in clear terms why I don’t think Uber has a bright future as a publicly traded stock. So get ready for some finance meets tech nerdocity below.

The Valuation: Uber was priced at $45 USD per share giving it a valuation of  around $82 billion USD. This means Uber is a more valuable company than Ford and GM combined. It closed its first day of trade down 8% at a price of $41.60. To be clear, the founders, early investors and many employees ended the day very rich indeed. And yes, they have a terrific service many of us enjoy more than we ever did taking the traditional taxi cabs. It might also be that many investors, hungry to get their hands on ‘high tech’ stocks like Uber will irrationally push the share price up – especially given most tech companies stay private for much longer these days.

  • Amazon IPO 1997 – 2 years after it was founded
  • Google IPO 2004 – 5 years after it was founded
  • Facebook IPO 2012 – 8 years after it was founded
  • Uber IPO 2019 – 10 years after it was founded

Even though retail investors have far less access to high growth companies these days, I can’t help but think Uber will never be achieve the long term profitability serious investors will require. Here’s why:

Profit: Uber currently loses $10 for every $30 ride transaction. The more it grows, the more money it loses. And this problem can’t be fixed easily. It’s not like other software businesses, because every ride has a real and unavoidable marginal cost. The difference between it and companies like Google and Facebook is that new users come with very little cost increase, if any. Uber, on the other hand, doesn’t.

Cost Cutting: The main opportunity for Uber to cut costs is to simply remove its drivers and replace them with autonomous vehicles. It seems pretty clear to me that Uber regards its drivers as ‘holding places for robots’. The problem however, is that as soon as Uber can reduce operating costs by employing autonomous cars, so can Ford, GM, Tesla, Google and every other car manufacturer in the world. All of whom already have autonomous car projects and eyes on the market of transport as a service.

Adjacent Businesses: Again Uber has done well to create offshoots including Uber Eats, but just like the example above, as soon as autonomous cars and drones become possible for local eateries, and much cheaper, I don’t see why any of them would hand over that margin to Uber when they could simply do it themselves. It also should be said that if they become a ‘logistics company’ then they better get good at competing with Amazon.

Low Barriers to Entry: Of all the large technology businesses going around, Uber is the least complex – evidenced by the increasing number of its competitors around the world, including Ola and Didi. The low barriers to entry aren’t just because of the simplicity of the software model, but counter to popular belief, there isn’t a dramatic network effect. A network effect is present when a service gets better when more people use the same service, like Facebook. In real terms, users just need enough cars on the service they choose and most savvy drivers operate on all the rideshare apps simultaneously. In my view, it’s only a matter of time before we see ridesharing drivers cut out the middleman and develop their own app so they won’t have to pay extortionate fees to a third party like Uber. This just might make the difference for the work to be fair economically for the drivers.

Legal Issues & Regulation: On top of all its general business challenges, Uber is fighting dozens of legal cases. It is also highly likely government regulation will further impact its business model as its drivers become legally recognised employees. While tech used to be everyone’s darling, there has been a clear sentiment shift recently to question their ethics and impact on wider society.

If there is anything the Uber float points out, it’s that a business that’s good for consumers, doesn’t always result in a good business.