Is Uber the next Facebook?
Uber went public on Friday, to celebration and consternation. The $70 billion initial public offering is one of the biggest ever. And the shares promptly dropped 6% on their first day of trading, and even more over the next few days. The company has been growing their revenues by around 50% per year, but unlike many hot growth companies, their expenses have been growing just as fast. As a result, they don’t have a clear path to profitability for their current ride-sharing business, as the other major platform, Lyft, keep prices low and compete for drivers with wages and special bonuses. The gig economy lets drivers switch at will from one employer to another, and lets customers switch from service to service. I don’t much care and can’t much tell if I’m taking an Uber or a Lyft.
So why buy the stock? They don’t make money now, and don’t look like they can make money anytime in the future, given the dynamics of the taxi business. Or, as Uber’s management likes to put it, the “personal mobility service” business. Essentially, Uber’s appeal is the same as any other growth company: call options. Growth companies are essentially call options on a disrupted future. Uber’s potential lies in its ability to envision a different future than the one we have today and execute a strategy to eventually create a stream of free cash flow from that new reality. To make that happen, companies need four things: vision, users, management, and resources.
The vision they’ve got. Founder Travis Kalanick saw Uber as key to transforming cars from garage and parking-lot sitters to continuously moving, working, carrying mobility providers. There’s no reason a car should spend only a small fraction of its existence actually moving, nor is there a good reason that people should have so much of their personal capital tied up in a nonproductive asset. And with their side businesses, like Uber freight and Uber eats (and eventually Uber Air?), they can extend mobility-as-a-service to more and more areas around the world.
Management seems to be solid. After ousting founder Travis Kalanick, they recruited Dara Khosrowshani, a serious executive with significant experience at Expedia, Ticketmaster, and other innovative travel companies. He’s put in place sober human resource policies that befit a major company with global reach.
And the user base is growing. Last year they had 90 million riders user the service for 5.2 billion trips. Those numbers are growing around 50% per year, as I mentioned above. Weighed against that is the fact that they don’t have a clear path to profitability, and even if driverless cars become a reality, the capital structure or licensing fees needed to use autonomous vehicles make their profitability questionable.
All this is reminiscent of Facebook, whose stock went public in 2012 and promptly fell 50%. But they figured out a path to profits and now the stock is over 4 times the value of its IPO.
So is Uber the new Facebook? Shareholders can only wait and see. And hope that their call options don’t expire worthless.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”