Uber. WeWork. I'm at a loss - the real 'growth' story

Ahead of its much hyped IPO (Initial Public Offering), Uber was being touted in some circles as a US$120 billion business.

Thankfully, common sense (and I use that term lightly) prevailed. In May 2019, Uber hit the market at a more 'realistic' value of…US$76.5 billion.

What does that sort of money buy you?

In Uber's case, it appears to be a whole lot of red ink.

This is part of Financial Times Alphaville's coverage of Uber's second quarter 2019 results (emphasis is mine)…

The quarterly net loss, which hit $5.2bn vs $878m a year ago and included $3.9bn in stock based compensation expenses related to the IPO, was spectacular in its own right. (On an adjusted basis the EBITDA loss came in at $656m, which marks an improvement on Q1.)

'But the thing that really hit market sentiment was the slowdown in revenue growth at 14 per cent to $3.2bn. Analysts had been expecting a 20 per cent rate which would have taken the top line to $3.4bn.

'This is important because Uber's investment case is based on the thesis that the continuous net losses don't matter because it's still a growth company, and its pathway to profitability is through market domination and, of course, revenue growth.

Uber tears up - in adjusted terms - US$656 million in a three-month period, but the real bummer is a modest slowdown in revenue growth.

Talk about skewed priorities.

But that tells you all you need to know about the 'value' proposition associated with these so-called unicorns.

As long as it's a 'growth' story, we'll keep placing an over-over-over inflated price to these perpetual cash burners.

The punters expressed their disappointment with Uber's slowdown in revenue growth. Shares in the ride-sharer fell almost 25%.

When it comes to value, I'm a little old school. Just to humour myself, I had a look at what the US 10-year government bond was yielding in May 2019. The rate was 2.4%.

If you'd entrusted Uber's value of US$76.5 billion to Uncle Sam, you'd be paid US$1.84 billion annually…without lifting a finger.

But I digress, Uber is a growth story.

Therefore, any comparison with something so boring and staid as a government bond is completely irrelevant…at least that's the narrative during this period of complete and utter disconnect from reality.

So how does Uber increase revenue growth?

More people hailing an Uber? More people wanting lukewarm food to be delivered? That's one way.

But there's a fair bit of competition out there.

Lyft. DiDi. Ola. GoCatch. Taxify. Scoot. HOP. Deliveroo.

Each of these is offering loss-leading deals to attract customers.

Bump up prices? Not so easy with all that aforementioned competition.

Another way is to take a greater cut from your 'independent contractors'.

It appears that's already happening.

An investigative report published by Jalopnik (an auto-based website) on 26 August 2019, found that…

Of all the [14,756] fares Jalopnik examined, Uber kept 35 percent of the revenue, while Lyft kept 38 percent. These numbers are roughly in line with a previous study by Lawrence Mishel at the Economic Policy Institute which concluded Uber's take rate to be roughly one-third, or 33 percent.

Uber refutes the findings…surprise, surprise.

With consumers tightening their belts and looking for better and cheaper deals, that trend in slower revenue growth looks set to continue.

If you're an Uber shareholder who needs a dose of reality, or you have a passing interest in reading a common sense perspective on this 'confidence trick', then you should read Hubert Horan's 'Uber's Path of Destruction'.

The report is prefaced with…

…based on Horan's 40 years of experience in the management and regulation of transportation companies. Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants.

For those who don't have the time or inclination to read the 26-page report, here's a couple of extracts…

An examination of Uber's economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate.

And

Uber pursued a "growth at all costs" strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares.

As a beneficiary of those subsidised rides, I'd like to personally thank the punters who've ponied up US$20 billion. But will they continue to be taken for mugs?

While the fanciful growth story is still their reality, you bet they will.

When Uber rattles the tin, those who are destined to learn that 'a fool and their money are soon parted' will pony up again.

And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard-earned money.