Uber filing for IPO

[Spekulatius]

Largest privately subsidized public transportation company files for IPO:

https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm

[shalab]

Good one to read.

 

91 million users of the platform, 3.9 million drivers, 15 million use uber eats.

 

This can really challenge/disrupt AMZN - it is only a matter of time before they can use advertising and deliver other products.

 

[Broeb22]

I would think after seeing so many tech-focused companies generate tremendous returns that were or perhaps still are money-losing, there would be fewer snide remarks about businesses that have clearly changed how a vast amount of people move, buy, sell, work, etc.

 

Whether valuation makes sense or competitive position is strong is always a worthy topic of discussion, but there are a lot of people on this board who have totally missed the boat (myself included) on how software business models generate losses up front but can become very profitable very fast when growth slows and maturity is more within sight.

 

In a world where "getting to scale" is realistic globally and the winner of that race earns the vast majority of the profits in an industry, it makes sense to spend aggressively to be that ultimate winner.

 

We have a lot of Malone fanboys on this board, myself included. What do you think he was doing when he wasn't generating any profit for decades but he guided investors towards EBITDA? He was saying "when I stop spending so much on cable and set-top boxes, we're going to have a business that gushes cash".

 

The tech companies are essentially saying the same thing, except now their sales, marketing, and R&D expenses are high relative to long-term plans. Please help me and others understand these companies that are changing all of our lives better so we can properly value them before they are large mature companies.

 

saasbusinessmodel3-150508030541-lva1-app6892.pdf

[Jurgis]

Broeb22: Just MHO, but you are probably better off looking at NFLX or STNE (or maybe PINS) than Uber. In fact, there are tons of other software companies that are expensive, growing and still probably better than Uber. I can post ticker soup if anyone is interested. (Some of the names have been discussed on CoBF, some maybe not).

[SHDL]

Yeah, I’d be very careful about buying this one.  To me it looks pretty terrible.

 

More generally, I must not be the only one who sees this recent wave of IPOs as yet another ominous sign.

[Spekulatius]

Yeah, I’d be very careful about buying this one.  To me it looks pretty terrible.

 

More generally, I must not be the only one who sees this recent wave of IPOs as yet another ominous sign.

Lyft looks really terrible now compared to Uber. Uber doesn’t look pretty either but shows economies of scale, while Lyft basically doesn’t. I can see why Lyft is selling off, it’s not just supply and demand of shares in that sector but inferior economics relative to Uber.

[SHDL]

Yeah, I’d be very careful about buying this one.  To me it looks pretty terrible.

 

More generally, I must not be the only one who sees this recent wave of IPOs as yet another ominous sign.

Lyft looks really terrible now compared to Uber. Uber doesn’t look pretty either but shows economies of scale, while Lyft basically doesn’t. I can see why Lyft is selling off, it’s not just supply and demand of shares in that sector but inferior economics relative to Uber.

 

Right, although, if you look at the very recent quarterly numbers (2017 vs 2018) it looks like Uber’s revenue growth is starting to stall whereas Lyft’s is still going strong.  So maybe Lyft will catch up to some degree over time.

 

I see quite a few issues with this investment, but one of them is that ride sharing looks very much like a commodity in that the end product is undifferentiated and there are no switching costs.  (I literally have the Uber and Lyft apps installed side by side and I use whichever is cheaper.)  In an industry like that, head-to-head price competition is a very real possibility (even if it’s a duopoly), and the numbers seem to indicate that that is exactly what is going on.  Not good if you are, say, a VC who provided the initial capital that got the business up and running … unless you manage to do an IPO at the right moment and sell your shares at a great price.

 

That is not to say that the business can’t evolve over time into something better (for investors), but my guess at the moment is that those who buy the stock at or near the IPO will likely end up just bailing out the insiders and early stage investors who didn’t quite get what they were hoping for, namely monopolistic profits in a new disruptive industry.

[Cigarbutt]

Yeah, I’d be very careful about buying this one.  To me it looks pretty terrible.

 

More generally, I must not be the only one who sees this recent wave of IPOs as yet another ominous sign.

 

Uber is out of my league at this point, I respect what Broeb22 said above for the tech/scale space, maybe this time is different and ominous is a strong word but I've followed biotech IPOs for the last 20 years+ and what is going on now feels really bizarre. It feels like the casino has fudged the odds in their direction?

 

It appears that being unprofitable is seen as a positive attribute.

https://www.recode.net/2019/3/6/18249997/lyft-uber-ipo-public-profit

https://www.recode.net/2019/3/21/18274843/unprofitable-tech-unicorn-ipo-stock-market-profit

 

Anyways, it looks like Uber timed their IPO in relation to their adjusted cashflow measures reaching some significant milestones soon but the call for funds also happens in an environment when investors really want to share the ride.

[Spekulatius]

I would think after seeing so many tech-focused companies generate tremendous returns that were or perhaps still are money-losing, there would be fewer snide remarks about businesses that have clearly changed how a vast amount of people move, buy, sell, work, etc.

 

Whether valuation makes sense or competitive position is strong is always a worthy topic of discussion, but there are a lot of people on this board who have totally missed the boat (myself included) on how software business models generate losses up front but can become very profitable very fast when growth slows and maturity is more within sight.

 

In a world where "getting to scale" is realistic globally and the winner of that race earns the vast majority of the profits in an industry, it makes sense to spend aggressively to be that ultimate winner.

 

We have a lot of Malone fanboys on this board, myself included. What do you think he was doing when he wasn't generating any profit for decades but he guided investors towards EBITDA? He was saying "when I stop spending so much on cable and set-top boxes, we're going to have a business that gushes cash".

 

The tech companies are essentially saying the same thing, except now their sales, marketing, and R&D expenses are high relative to long-term plans. Please help me and others understand these companies that are changing all of our lives better so we can properly value them before they are large mature companies.

 

The SAAS model does not apply here, because for a customer, there is virtually no switching cost. One can use Uber and I can use a competitor 30 min later without issues. These business are great for the customer, but it remains to be seen what the ultimate profitability will look like.

[Broeb22]

By no means am I saying UBER is attractive as a stock, but I have been guilty of dismissing too many companies out of hand because the FCF yield wasn’t at least high single digits.

 

We have seen many companies at this point create massive equity value while generating relatively minimal cumulative cash flow. CRM, AMZN, NFLX come to mind but there are certainly others. The companies going public these days are not fly by night companies of the late 90’s but real businesses with millions of paying customers.

 

Essentially, all I’m saying is I am trying to be open-minded about these companies and being aware of my (our?)bias for a preference for assets cash flowing now vs. assets cash flowing in the future (but creating massive value along the way).

 

Regarding the minimal switching costs and competitive dynamics driving down profits, sure there are minimal switching costs, but you still have only two real options. What happens if you try Uber, are dissatisfied, try Lyft, are dissatisfied? Are you really going to call a taxi service or use whatever taxi app there is and wait 30 minutes for your ride?

 

The end state for this market is still a duopoly (or maybe even monopoly), a market structure that usually generates rational pricing over time. Given the scale at stake and the benefits to scale/density in tech/route-based businesses, it wouldn’t be surprising for Uber and Lyft to duke it out for market share. Eventually, which is what’s important if we’re truly thinking long-term, rational pricing will probably prevail. How many duopolies don’t end up with rational pricing?

 

I’m far more concerned that someone would get to self-driving cars before Uber and Lyft can, and push them out of the market by offering a superior product (autonomous driving) at lower cost (no labor, better safety). I worry these companies are kind of a stepping stone to something even better.

[Jurgis]

Anecdotally, Lyft has been offering discounts for quite a while. Possibly in preparation for IPO, possibly to grab market share, possibly to show growth, possibly all of these. I don't have preference, so I've been using Lyft predominantly, except when I see surge pricing on Lyft, but Uber has no surge pricing at the time.

 

Although I somewhat agree with Broeb22 about duopoly pricing, there seems to be an issue that to pay drivers "normal" wage and to be profitable, Uber/Lyft will have to drive up  8) prices a lot. Which will likely drop the number of rides which may drop the number of drivers, which ... - not a positive cycle. Unless the riders are so hooked up that they'll tolerate way higher prices. Or companies will find a way to profit without driving the prices up. But it's not easy to see how they would do it apart the magic "self-driving cars" spiel.

 

"Self-driving cars" is not really an answer. First, the development is taking longer than expected. Second, it's not clear that Uber/Lyft will dominate self-driving car ecosystem.

 

As a customer, I'm afraid of the bearish predictions that either Uber/Lyft will drive up prices to close to old taxi pricing or they'll go out of business and we'll go back to old taxi pricing anyway. I'd like to hope that this won't come true. But Spekulatius was right in his initial post - investors are subsidizing the riders so far.

[wachtwoord]

Why are they IPO'ing now? Do they think they reached their ceiling, do they need investments and can't borrow cheaply enough or do insiders simply want to cash out and diversify their risk?

[DTEJD1997]

Hey all:

 

I've said it before and I'll say it again.

 

I'm not sure there is a viable business model here.  The possible exception would be that the business model is simply to go public and cash out on bag holders.

 

If Uber can double their sales, do they make a profit?  Probably not.  What level of sales do they need to grow to get profitable?  Hard to say...but it is incredibly higher than what it is today.

 

Another factor is how do they increase profitability?  Pay drivers less?  Call me crazy, but I just don't think that is going to work.  There are all sorts of problems now with drivers & reporters & studies saying that drivers make less than minimum wage.

 

Do they get more efficient on the back end?  Stop churn of drivers and new driver bonus?  Sell the data?  Maybe?  They are losing so much $$$ as a percent of revenue, it is hard to see how they close the gap to profitability.

 

As to self driving cars, why would Uber want them?  They would have to buy them, and insure them, and maintain them.  Why would you undercut a minimum wage driver who is providing their own vehicle?

 

Bottom line is that I don't think there is much profit to be captured here, and thus no business model.

 

 

[Pelagic]

Why are they IPO'ing now? Do they think they reached their ceiling, do they need investments and can't borrow cheaply enough or do insiders simply want to cash out and diversify their risk?

 

While I'm inclined to go with the investors want to cash out while the market is hot, the S-1 does sort of answer this, they need money to grow and don't have many other options.

 

Page 41

 

We will require additional capital to support the growth of our business, and this capital might not be available on reasonable terms or at all.

 

To continue to effectively compete, we will require additional funds to support the growth of our business and allow us to invest in new products, offerings, and markets. In particular, our dockless e-bike and e-scooter products and autonomous vehicle development efforts are capital and operations intensive and we may require additional capital to expand these products or continue these development efforts. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders may suffer significant dilution, and any new equity securities we issue may have rights, preferences, and privileges superior to those of existing stockholders. Certain of our existing debt instruments contain, and any debt financing we secure in the future could contain, restrictive covenants relating to our ability to incur additional indebtedness and other financial and operational matters that make it more difficult for us to obtain additional capital with which to pursue business opportunities. For example, our existing debt instruments contain significant restrictions on our ability to incur additional secured indebtedness. We may not be able to obtain additional financing on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges and competition may be significantly limited.

 

I enjoyed reading pages 25-74 where they discuss risk factors as its a good look at the industry and the challenges they face. They were surprisingly forthright including stating that they may not achieve profitability, are highly dependent on high growth rates to scale the business, and will continue to compete for market share using rider/driver incentives to match their competitors in certain markets, even if said incentives lose money for the company.

 

When we look at businesses benefiting from network effects we try to determine what it's costing them to acquire additional customers relative to the lifetime value of that customer. However in Uber/Lyft's case I think a more telling metric might be what it's costing them to acquire drivers relative to the value of that driver. In my mind their pool of drivers in cities across the world is their most valuable asset. Customers are fickle, I switch between Uber and Lyft for a few pennies and will almost always comparison shop my ride between the two. Having some indication of the costs involved in maintaining sufficient driver supply and how long a driver can be expected to last relative to what they bring in, would be useful.

[wabuffo]

There are no economies of scale in the taxi business.  Each and every current Uber/Lyft trip is uneconomic and has to be "sold" to the rider at below its cost.  Uber/Lyft are the quintessential examples of losing money on every ride but trying to make it up on volume, LOL.

 

The only way Uber/Lyft can make money is to take more of the gross billing from the driver.  But this is problematic since even at current pricing levels, the average Uber driver makes less per hour (<$10/hr) than working at McDonalds (with no benefits) based on this detailed study of Uber driver earnings.

https://www.ridester.com/2018-survey/

 

I'm not sure how much more Uber/Lyft can take from drivers without losing them (even though there is some informational asymmetry between these companies and their drivers).  And of course, raising gross fares to allow both the driver and the company to make money will drive away consumers/invite more competition.

 

I seriously doubt that these are viable businesses.  There's zero innovation here, just a huge subsidy that is unsustainable - though the IPO proceeds will keep it going for a little while longer.  But going public now also exposes the financials to the light, so we'll see if they can continue to defy the laws of economics.

 

wabuffo

[vinod1]

I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

 

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

 

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

 

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

 

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

 

Vinod

[DTEJD1997]

I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

 

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

 

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

 

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

 

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

 

Vinod

 

Vinod:

 

If prices for Uber/Lyft are raised 30% or so, then would they only be just a LITTLE cheaper than a regular cab?

 

Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

 

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

 

Is that enough to achieve profitability?

[vinod1]

I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

 

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

 

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

 

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

 

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

 

Vinod

 

Vinod:

 

If prices for Uber/Lyft are raised 30% or so, then would they only be just a LITTLE cheaper than a regular cab?

 

Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

 

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

 

Is that enough to achieve profitability?

 

It might be easier to look at it this way:

 

1) Uber/Lyft are a much better experience than Taxi service from a user perspective. They are easier to use in almost every respect for users.

 

2) Uber/Lyft are also from a business model perspective, structurally more efficient and can be operated at lower cost than Taxi service. No need to operate a bunch of people to operate the phone banks to route and coordinate between users and drivers. You are automating the intermediation between users and drivers. That by definition should be lower cost. The software to develop and run is expensive but it is a fixed cost. You know the drill - scale, operating leverage, etc.

 

3) We know that Taxi service is profitable at least before Uber/Lyft.

 

It follows from the above three points that Uber/Lyft would be profitable at some point. We have an existing business that is profitable and if you can find a better way to do that same business and at a lower cost, why is it such a stretch to think it would not be profitable?

 

Put valuation aside, I did not look at S-1 so have no comments on that.

 

Uber/Lyft should be reporting losses at this time. In fact, they should be willing to lose as much as they can afford to while the growth opportunity is still available.

 

Not my style of investment, but I can understand why they are doing what they are doing.

 

Vinod

 

 

[SHDL]

Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

 

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

 

Is that enough to achieve profitability?

 

Some back-of-the-envelope calculations using numbers from the S-1 (in billion $):

 

- Revenue = 11.3

- Total costs and expenses = 14.3

- Interest expense = 0.6

 

So if Uber had a way to magically increase its revenue by ~30% (without incurring additional costs or expenses) they could stop losing money.  That should be enough to keep the company alive, but not much more.

 

Now if Uber could charge its customers 30% more per ride AND not lose any market share AND keep the entire 30% without sharing any of it with its drivers, it’s a totally different story.  Their gross bookings (i.e., the cash they get from customers before paying drivers) for 2018 was 49.8B, so under this scenario their revenue and pre-tax income should go up by 15B or so.  If you think this is what is going to happen, it should be pretty easy to justify the 100-120B IPO valuation.  This scenario strikes me as way too optimistic, but anyway. 

[Broeb22]

Lyft and Uber could frankly be priced at parity with taxis and I would still go with them every time. They offer a better service, so even at pricing parity I'm getting a better value.

[Guest cherzeca]

I live in NYC.  uber is about the same price as taxis. if there are taxis on road, of course they are better.  you hail them and you are in them. with uber, you wait, and then it gets diverted when you think it is coming to you, and you wait, and then he is down the road and the app says he is there etc. only better than taxis when taxis are not on road.

 

then there was the time my uber account was hacked.

 

when will uber be profitable?  I'd say 1999...

[Jurgis]

Lyft and Uber could frankly be priced at parity with taxis and I would still go with them every time. They offer a better service, so even at pricing parity I'm getting a better value.

 

I would push back on this from two sides:

 

1. You could argue about "better service" as defined by ease of calling Lyft/Uber vs. calling taxi. This is mostly US phenomenon though. In a lot of countries there are taxi apps/etc. that offer the same convenience. Also, I'm not really pro-taxi person, but security/quality of cars/drivers is arguably better in taxis. Of course, I've got recency bias of using Uber/Lyft mostly, but I've had pretty scary and pretty lousy drivers. And I gave them all 5 stars since OTOH you don't want to kill poor person trying to make a living with bad reviews. If taxi service had Japanese/Finnish car quality/driver professionalism and charged the same as Uber/Lyft, I'd take taxi all the time period.

 

2. Regarding raising prices 30-35% and not losing riders: currently Uber/Lyft is somewhat competitive with driving to destination, parking in paid parking and driving back, so I may take Uber/Lyft instead of driving and parking. With 30-35% raise, this use case economics are killed completely.

 

 

[Broeb22]

When it comes to seeing this company could be a real business, i.e. generate free cash, they have shown some operating leverage in their business over the last few years. The losses have more or less stayed flat as the revenue rose.

 

Dara already reined in G&A expenses in 2018 somewhat (they actually declined 10%), so its clear 1) that the company was spending like a drunken sailor prior to his arrival, and 2) he understands G&A can't be 25% of sales in a 50% + GM business.

 

I still have a very hard time justifying a $100+ billion valuation, but I can get to $2 billion in operating profit in about 4 years assuming most expenses as a % of sales continue their decline. For perspective, over 2016-2018 Ops and Support fell from 23% to 13% of sales, Sales and Marketing fell from 41.5% to 28%, R&D fell from 23% to 13%, and G&A fell from 26% to 19%.  So it is pretty reasonable to expect that trend to continue.

 

Additionally, I don't have all the details on their equity stakes in other companies, notably Didi Chuxing, but they made a sell their China operations in exchange for an 18% stake in Didi, which according to some sources was valued at $65 billion in 2018 ($11.7 billion attributable to Uber). At a 50% haircut to get closer to a reasonable valuation, that stake alone is worth $6 billion.

 

I'm no bull on Uber, but it's a real enough business to analyze, and it certainly doesn't lose money on every ride as some have suggested.

[Liberty]

https://stratechery.com/2019/uber-questions/

[fareastwarriors]

Lyft and Uber could frankly be priced at parity with taxis and I would still go with them every time. They offer a better service, so even at pricing parity I'm getting a better value.

 

I would push back on this from two sides:

 

1. You could argue about "better service" as defined by ease of calling Lyft/Uber vs. calling taxi. This is mostly US phenomenon though. In a lot of countries there are taxi apps/etc. that offer the same convenience. Also, I'm not really pro-taxi person, but security/quality of cars/drivers is arguably better in taxis. Of course, I've got recency bias of using Uber/Lyft mostly, but I've had pretty scary and pretty lousy drivers. And I gave them all 5 stars since OTOH you don't want to kill poor person trying to make a living with bad reviews. If taxi service had Japanese/Finnish car quality/driver professionalism and charged the same as Uber/Lyft, I'd take taxi all the time period.

 

2. Regarding raising prices 30-35% and not losing riders: currently Uber/Lyft is somewhat competitive with driving to destination, parking in paid parking and driving back, so I may take Uber/Lyft instead of driving and parking. With 30-35% raise, this use case economics are killed completely.

 

 

 

You should rate honestly and provide feedback. I think if you leave one star (or maybe 2 or lower), you won't ever be matched with that driver again. Yes, I know the chances is tiny to be rematched with same driver but it does happen if you use the service a lot. Some drivers won't care about the ratings but if I see a driver with like 4.7 and below ratings, I might cancel and try to get another driver since I know the the driver has had some issues (could be driving skills or older/smelly car).

 

From my experiences in SF area and NYC, the Ubers/Lyfts are usually newer and cleaner than taxis... Don't get me started on NYC taxi drivers, they are constantly on the phone and driving like maniacs.

 

 

I've given about 100 rides on Uber and Lyft as a driver and used their services as a customer a few hundred times.