Opinion: Beware of Uber’s IPO

Disclaimer: The views expressed in this article are that of the writer, and do not reflect those of Ridester or Uber. Additionally, this is an opinion piece and should not be taken as investment advice or recommendations.


The financial press is salivating over Uber’s anticipated 2019 IPO.  Everywhere you turn, articles are touting the widely-perceived long-term promise of Uber, along with its presumed financial strength.

Even though Uber has been losing money hand-over-fist, the financial media seems to think that’s a good sign.  They liken it to Amazon or Facebook and all the companies that had not yet turned a profit when they went public.  Amazon, it is well known, lost money for years and years before they became profitable and many reporters seem to think Uber is made in the same mold.  However, there are significant differences.

Geocities, remember them?  They’re gone.  What about Broadcast.com?  They’re gone too.  Oh and what about Onsale.com?  I don’t even remember what they did – but they’re gone too!  Pets.com, eToys, Webvan – all gone.  All of these were once the talk of the town when it came IPO time.  They all had big plans and they all had a great track record.  The problem was, they either weren’t profitable at all or they weren’t very profitable.

But hey, Amazon sustained steady losses for 14 years before they made their first profit.  Or, did they?  Actually, memories fade, and legends take their place.  I remember hearing people say that Amazon “has never made a profit”!  And when you hear these things, if you don’t bother to check it out, you just accept it.  After all you heard it from more than one source, so it must be true.

Here’s a headline from a 2014 story in Investopedia (reliable, right?) that says Amazon never makes money

Actually, Amazon has been quite profitable for quite some time.  In fact, it turned its first annual profit in 2003, just nine years after it was founded.

But why are we talking about Amazon here?  This article was supposed to be about Uber’s IPO.  Well, it’s because Uber’s public relations machine has been hard at work spinning tails likening money-losing Uber to the original money-losing Amazon which then became massively profitable.  Their spin to reporters and journalists is – ‘Don’t worry about our loses.  Amazon had loses too and look at them now.’

According to Inc, Yves Smith of NakedCapitalism says the problem is, “Uber’s PR-savvy leadership and gullible journalists who have bought the story that Uber offers groundbreaking tech whose value will only grow as the company expands.  Current losses, they insist, are just the price of reaching a point where economies of scale or so called “network effects” will make the business profitable.”

But economist Hubert Huran adds that, “The pattern of early losses followed by massive profits might be true for other tech success stories like Amazon and Facebook, but when it comes to Uber, it’s baloney.”

Smith adds, “After nine years Uber isn’t within hailing distance of making money and continues to bleed more red ink than any other start-up in history.  By contrast, Facebook and Amazon were solidly cash-flow positive by their fifth year.”

Smith explains that Uber, “bears almost no resemblance to internet superstars it claims to emulate. The app is not technically daunting and does not create a competitive barrier, as witnessed by the fact that many other players have copied it. Apps have been introduced for airlines, pizza delivery, and hundreds of other consumer services but have never generated market-share gains, much less tens of billions in corporate value. They do not create network effects. Unlike Facebook or eBay, having more Uber users does not improve the service.”

Uber Has No Economies of Scale

Companies like Amazon benefit from economies of scale.  In other words, the larger their customer base the more profitable they can become because they can lower per-unit costs such as shipping and warehousing.  Higher volumes bring on greater efficiencies and those increased efficiencies will incrementally lower costs – thus making Amazon more profitable.  In the case of companies like Amazon or Facebook they do in fact become more profitable as they add more customers.

A key area that would work in Uber’s favor if economies of scale applied is insurance.  Uber’s insurance costs are huge.  But every time an additional passenger mile is driven – Uber’s cost of insurance goes up instead of down.  If economies of scale worked with insurance, then the cost of insurance per mile would go down as the number of miles driven went up.  But it doesn’t.  The per-mile cost of insurance stays exactly the same.  So, no savings there.

Uber’s PR-savvy execs like to throw out comparisons to Amazon and Facebook, which are companies that like Uber were not profitable at first.  But unlike Uber, their business model at least showed a credible path to profitability.  Uber’s business model shows no such path.  Nor has their ten-year-old real-world track record. They’ve had ten years to work on it and right now they’re still losing more than a billion dollars a quarter!

Note – that’s not a billion a year, that’s a billion every quarter.  They’re losing upwards of $5 billion a year now.  And they’ve been losing money at that rate for several years in a row now.  So not only does their business plan show no path to profitability, their track record proves it.

Uber’s business model precludes greater efficiencies based on higher volume of customers.  There are no economies of scale that can ever come from Uber’s business model.  The fact is, if Uber grows its business it will lose even more money.  The larger it grows, the more it will lose.  Each and every driver costs them exactly the same whether they have 100 drivers or one millions drivers.  They still have to pay each driver that 75 to 80 percent of the fare.

The cost per trip does not go down when Uber does more trips.  Each trip costs Uber exactly the same percentage of its revenue whether they do one trip or a million trips.  So, there are no economies of scale which means for their particular business model that getting bigger is never going to make them more profitable.  In fact, each new customer actually causes them to lose more.

So if things are so bad, how has Uber been able to survive and seemingly thrive?  Yves Smith put it well when she said, “Uber has enjoyed a long subsidy in the form of drivers’ financial illiteracy: drivers failed to account for their cars’ depreciation in figuring their take-home pay, and as they wake up to a take-home pay that is lower than a starting wage at McD’s, expect them to bail. Of course, Uber might be able to replace all those drivers with autonomous vehicles — a dream that, like AI, will likely be ten years away for the next forty years.”

Investor Sentiment

It’s amazing how positive investors can be when they really want something to be true.  It feels like they’re pulling so hard for Uber to do well that they’re fooling themselves into believing that it will.

The Information (paywall) has painted a rather rosy picture for Uber’s IPO.  With a constant stream of articles basically saying that Uber is on path to hit a $90 billion valuation.  But even they list all the negatives that you’d think would make an investor extremely reluctant to place big bets on Uber.

For instance, they say Uber has pinned great hopes on Uber Eats.  Uber Eats is growing at a 100% annual rate (of course, because it’s still relatively new).  So, while growth in Uber’s passenger transportation services is stalling out – Uber is telling investors and the media that it doesn’t matter about that – because Uber Eats is going to come in and save the company with its massive growth.

But, just like Uber’s car services, Uber Eats loses money on every order too.  And Uber Eats can’t benefit from economies of scale any more than uberX can.  Plus, Uber Eats is up against some well-entrenched competition from the likes of Grubhub, DoorDash, Instacart and Postmates.  Those companies were all around before Uber Eats and already have well-established names and customer bases.

We have to ask, why is it again that Uber is pinning such high hopes on Eats – when Eats loses money on every order and has some serious rivals that got there first?  It’s unclear at best.

But perhaps the biggest sign of all that Uber is desperate and investors aren’t paying attention – they’re also pulling out the Scooter/Bike business as another lever they could pull to grow to profitability.  But this market too, is very sketchy and at best questionable.  The economics on scooters are just not adding up.

It seems that investors are waiting breathlessly for something new and exciting to come along.  And Uber is that exciting thing.  Uber – the company that popped up out of nowhere and revolutionized urban ground transportation.  The company that started in one city and is now in cities all over the world.

A superficial glance at these basic facts about Uber does make it appear exciting.  But you don’t have to look far beneath the surface to see – there isn’t much there in terms of potential future profitability.

Uber’s Questionable Financial Reporting

Then there’s the problem with Uber’s integrity in their financial reporting.  Uber shares select bits of financial data with investors and reporters but each quarter they change what they share.  In order for people to get an accurate picture of a company’s financial strength, they need to see the same data reported in each period.  But Uber only reports whatever makes them look best during each period.  Keep that in mind the next time you see that $4.5 billion annual loss figure – that’s Uber’s finances cast in the very best possible light!

Cory Doctorow says, “Uber’s figures are totally untrustworthy. Every financial report from Uber picks a different set of accounting practices, selected to cast their dismal finances in the best possible light (and even with that cherry-picking, Uber is still losing $4.5B/year!). So things are likely much, much worse.”

And Hubert Horan who has done some of the best reporting on Uber’s financial shenanigans says,

“All previous releases of Uber revenue data were limited to the top-line “Gross passenger payments” (the total money paid by passengers) and “Uber revenue”, the 20-30% of that total retained by Uber. In past analysis, I had assumed that the difference went almost entirely to drivers, but the newly released data shows this assumption is not true, and that Uber may be inflating the top-line revenue number.

In 2017, roughly $3 billion[8] of this revenue was “Refunds, Taxes and Fees” or “Rider Promotions.” Government charges and fares that are refunded should not have been included in the original gross revenue number. The “Rider Promotions” item is more problematic.

If Uber offered discounts, the higher fare (that the passenger did not pay) appears to be included in gross revenue, while the promotional discount is a separate offset.[9] These numbers do not affect bottom line P&L calculations, but inflating the top-line gross revenue number directly supports Uber’s desire to show the strongest possible passenger demand numbers. Uber has steadfastly refused to release any numbers (such as market-specific fare and yield trends) that would meaningfully document whether (or where) its revenue performance might actually be improving.”

Should You Invest in Uber When it Goes Public?

As a long-term play, I would definitely say no to buying much Uber stock.  But as a short-term play, anything can happen.  All those companies I mentioned at the beginning of this article that went public in the early 2000’s and are now out of business… that didn’t prevent some investors from making some money off the stock.  Stocks go up and down and it is certainly possible to make money, for a time, off of even losing stocks.

My personal advice would be to watch the media frenzy that will pick up as Uber’s IPO gets closer.  Pay attention to how critical they are of Uber.  If they’re not very critical and if you hear them saying things like, ‘Uber certainly has a lot of growth left’ and ‘They can easily cut some expenses and they’d be profitable’, then it’s likely there could be a post-IPO bounce in their stock price.

If, on the other hand the financial media turns negative on Uber, pointing out how they’ve been routinely dishonest in their financial reporting, and how they’ve always selectively presented the best case or how their business model hasn’t really proven that they can ever be profitable… if you begin to hear any negative stories along those lines, then I would be very careful about jumping in on the IPO.  That could be a sign that people are coming to their senses and that the stock won’t do well.

However, my guess would be that everyone will be positive and more positive as the IPO gets closer.  If that’s the case then there could be a short-term good run which could last for several years before reality eventually kicks in.

What are your thoughts on Uber’s IPO? Let us know by dropping a comment below!