Post-2012 IPOs are a scam. There is nothing enjoyable about being a public company. Between audited SEC filings, exchange regulations, and analysts in the peanut gallery, public offerings are all downside.
Emerging growth companies are dragged kicking and screaming into the public markets when their early investors finally want to cash out. And an institutional investor only wants to cash out if the emerging company isn’t showing much growth anymore.
Uber’s still growing, which means it’s cool to stay private. But it needs more investor classes to draw from, so it went straight to the retail investors. Okay, the retail investors are Goldman Sachs clients, which makes them the top 0.1% of retail investors, but still: this is the same investor class that would be subscribing to an Uber IPO.
Uber has made a general solicitation, it’s acquired retail investors — Uber has done everything but list on NASDAQ. According to JOBS Act requirements, Uber can have up to 2000 accredited shareholders of record. It could even have up to 500 non-accredited shareholders. But why would Uber want your pocket change when it can have the pocket change of Goldman Sachs clients?
I won’t speculate on when and whether Uber will file for IPO. Maybe someday growth will have steadied and better investment opportunities will have emerged for its existing shareholders. Maybe it will have been so many years that Benchmark and First Round step in and say, Listen, our LPs are long dead and their heirs really need to cash out to pay their estate tax.
And then there will be a road show where institutional clients get first dibs on the Uber IPO. And there will be much fanfare, and a huge pop, and all the investors to date will walk away with fistfuls of money.
And after that, after everyone else has cashed out, that’s when Uber sells its shares to you.
You haven’t written about Uber in a while. Any thoughts on whether it will manage to IPO before its valuation crashes? (It’s inevitable, since a company that owns capital equipment like robo taxis looks very different financially than a software company, and competition wise, all the car companies are coming out with their own robo taxi services by 2020…)
You think their valuation will crash? They seem to have monopoly status in a lot of international markets already. At worst, they’ll do what they did in China and merge with the competitor (https://www.bloomberg.com/news/articles/2016-08-01/uber-said-to-merge-china-business-with-didi-in-35-billion-deal).
Plus I think self-driving cars are much farther away than 2020, but who knows 🙂
Well, talking to R&D at Ford and G&M, they both plan to have their own taxi services by 2020 and level 4 autonomous cars available to consumers by 2025 (so I imagine the designs will be done by 2020). Although Toyota is working with Uber. Maybe Uber will work with these other guys as the dispatch service, but it might be easy for them to disintermediate Uber. And I know Uber put in that order for 100,000 Mercedes cars back in March. If they plan to own their own vehicles, they should be valued like Avis rather than Google.
So Uber will be buying/leasing autonomous cars from auto manufacturers? If car ownership is completely replaced with autonomous ridesharing, then Uber might be valued more like General Motors than Avis. $60 billion is a little rich, although Uber’s access to China and India might be worth more than I give it credit for.
My understanding is that GM and Ford may want to just operate the services themselves. Who needs Uber when you can make your own app, and you can control the branding, quality control, and liability? Uber’s value is the chicken-and-egg problem of having both a network of drivers and a network of users. Remove one side of that equation and things get a lot easier.
I’ve heard Didi is making bank now that they’re a monopoly (and raised their prices.) So Uber could milk that just like Yahoo and Alibaba.
Okay, if GM and Ford could just operate a network themselves by deploying a fleet of autonomous cars, then Didi’s position is in danger too, right? I don’t know how easy it is to deploy a network of autonomous cars. Maybe they’ll all end up merging, like the airlines.
Didi’s postion? I guess that depends if the Chinese government lets there be competition or not.
This series of articles matches up with some of my thoughts: http://www.nakedcapitalism.com/2016/11/can-uber-ever-deliver-part-one-understanding-ubers-bleak-operating-economics.html
It does sound pretty dire, but this post from Stratechery points out a number of errors in the NakedCapitalism posts: https://stratechery.com/2016/uber-losses-but-china-gains-uber-and-unit-economics-reconsidering-uber/
This guy says that the financial figures actually do include Uber China, which made the losses look much bigger.
Pay wall
Good morning,
Sometimes Daily Updates mushroom; that kind of happened today, about Uber naturally, so this may be a bit of a first draft on a topic that deserves more focus in the new year.
For now, though, it’s nearly Christmas, and there are only three days left to buy Stratechery gift subscriptions here; details of how gifts will work are here.
On to the update:
Uber Losses (But China Gains?)
New Uber financial numbers from The Information:
The first takeaway from these numbers is confirmation of what we already knew: Uber was not making any revenue in China; whatever money came in was passed directly back to drivers as subsidies. This explains the big jump in net revenue (ex-driver payments) relative to gross revenue (total rider payments).
Secondly, with the caveat that it is not clear how to square “Uber lost $800 million” with “the company booked a $2.2 million net profit for the quarter”, it sure seems like Uber not only received 17.7% of Didi Chuxing but was also paid around $3 billion for the privilege. If that’s true Uber China achieved an even more amazing outcome than it first seemed: I’ve already said that a 17.7% stake of Didi Chuxing is a great return for the ~$2 billion (or more) that Uber spent in China; if the company got its cash back too that is really remarkable. Again, this is presuming that the $800 million loss is referring to operating losses, and that the “net profit” includes financial transactions — if I’m wrong I suspect I’ll hear about it and will let you know in a future update.
Beyond that, what do these results tell us about Uber’s viability as a company and prospects going forward?
Well, nothing, because we don’t know the unit economics.
Uber and Unit Economics
A series of posts from the site Naked Capitalism have made one of the most in-depth cases to date that Uber is a bad business. They are quite long but in my opinion worth reading:
At the beginning of Part 4, the author Hubert Horan summarizes his case:
The conclusion in part 4 was that Uber’s goal was to wipe out all taxi companies and become a monopoly provider that could exact rents significant enough to generate a meaningful return to investors, and that given this, in Horan’s opinion, was the only plausible positive outcome, Uber was on net destructive to overall economic welfare and constituted a planned “transfer of wealth from consumers and suppliers to Silicon Valley billionaires.”
I first encountered this series when only Part 1 was posted, which I immediately dismissed due to two significant errors, one factual and the other analytical:
To understand why the second point is critical consider Uber’s financials for a new city:
Figuring out the revenue side is similarly tricky:
The ultimate equation looks something like this:
If this number is negative — as it assuredly was for Uber in China — your business is in big trouble; if it’s positive, then it’s not only acceptable to be generating overall losses, it can in fact desirable if there are the aforementioned network and scale effects to be had (subject to other factors I didn’t get into here, the most important of which are customer acquisition costs and churn).
The issue with analyzing Uber is that we — including the author of these blog posts — simply don’t know what the company’s unit economics are; that the author attempted to make pronouncements about the company’s financial viability anyways was, in my estimation, an error just as significant as falsely claiming that the numbers did not include Uber China.
Reconsidering Uber
Part 2 is far better, and in many respects redeems the series: here Horan does get into the unit costs of pre-existing taxi companies and makes the compelling case that Uber has the highest costs in the industry because car depreciation and maintenance will always be higher for individuals than it will be for fleets. The implication — which I suspect is valid more often than Uber would admit — is that whatever advantage Uber has stems from its drivers not properly calculating their costs (and by the time they do some are locked into new car payments “helpfully” arranged by Uber). Horan goes further, accusing Uber of not just taking advantage of drivers but of leveraging venture capital to engage in predatory pricing to drive companies with better cost structures out of business with the goal of charging monopoly rents that would otherwise be captured by incumbents.
I don’t agree, at least not completely: I think it is fair to say that Uber has leveraged both bad driver math and consumer subsidies to achieve critical mass quickly, thus giving them leverage to rework decades-old regulations that artificially limited taxi service to the benefit of incumbents. That was a necessary condition to create the level of liquidity that would drive more usage, increasing driver revenue (and costs, to be clear), further increasing liquidity in a positive feedback cycle. Indeed, there is significant evidence that in Uber’s oldest cities this is exactly what has happened — there is far more demand for Uber than there ever was for traditional taxis. It is bizarre — and perhaps telling — that Horan flatly denies this market expansion in Part 3.
I’m not going to argue that Uber wouldn’t like to be a monopoly; of course they would, and clearly the current plan is to spend Lyft into the ground (in a price war that was initiated by Lyft). But I don’t think it’s correct to say that investors put money into Uber with the express goal of funding predatory pricing.
I’m going to stop there; this update is already far longer than I intended, and should probably, along with a summary of Uber’s San Francisco self-driving adventures,
be refined into a Weekly Article (I suspect it will be soon). Ultimately, while I spent most of my time pointing out where I disagreed with those Naked Capitalism posts, the reason I addressed them here is that it represents an argument there about Uber’s viability that is worth taking seriously — and it’s especially important for me to take it seriously, given I’ve generally been an Uber bull. After all, back when I first started writing about Uber in-depth most observers couldn’t grok how the company could be valued at $18 billion; now that the company is worth nearly 4x it is more than fair that the burden of proof start running in the opposite direction.
The Daily Update is intended for a single recipient, but occasional forwarding is totally fine! If you would like to order multiple subscriptions for your team with a group discount (minimum 5), please contact me directly.
Thanks for being a supporter, and have a great day!
Thanks for sharing that. Maybe next quarter’s results will give more clarity on what the subsidies are without China. I don’t think the author makes a convincing argument that Uber is best placed for rolling out the self driving cars though versus their competitors. I think fleet operators like zipcar and car companies like Ford have some advantages.