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Last Updated : Apr 24, 2019 03:30 PM IST | Source: Moneycontrol.com

Uber's upcoming IPO has raised more questions than it has answered - here's why

Read on to find out why investing in Uber is batting on a sticky wicket

Suyash Maheshwari @Suyashm9

Ride-hailing company Uber on April 11 filed for an Initial Public Offer (IPO) and may be listed on the New York Stock Exchange (NYSE) from May this year, as per media reports.

The IPO is touted to be one of the biggest technology debuts, and multiple media outlets have reported Uber's proposed valuation to be around the $100 billion mark.

This is a staggering 25,000 times higher than the $4 million it was valued about a decade ago, during the initial round of funding. To put this into perspective, if you had invested $1,000 in Uber's seed funding, it would be worth $25 million today, as per the proposed valuation.

While many rejoiced at the thought of one of the most globally renowned companies going public, a closer look at Uber's prospectus hoists major red flags.

Though it is common knowledge that the company is a loss-making entity, the prospectus reveals a decelerating business that is burning through cash.

Uber's revenue growth rate declined from 106 percent in 2017 to 42 percent in 2018.

Even these figures are bloated as they don’t account for the extra incentives given to the drivers. According to the prospectus, if we strip driver incentives, Uber’s Core Platform Adjusted Net Revenue grew 39 percent in 2018 from $7.2 billion in 2017. Moreover, the conglomerate's revenue declined quarter-over-quarter in Q4 2018.

According to Uber, driver incentives are payments made to the drivers which are separate from and in addition to the driver’s portion of the fare paid by the consumer.

"For example, driver incentives could include payments we make to drivers should they choose to take advantage of an incentive offer and complete a consecutive number of trips or a cumulative number of trips on the platform over a defined period of time. Driver incentives are recorded as a reduction of revenue to the extent they are not excess driver incentives," noted the company.

In the prospectus, Uber declared a net income of $997 million for 2018. However, investors must note that this includes one-time transactions such as the sale of assets in Russia and South Asia and the increase in the value of its shares in China's ride-hailing leader, Didi Chuxing.

However, the most alarming thing about the company is the lack of sustainable competitive advantage it holds in each of its businesses, despite its size, something Uber has tried to sell hard in its prospectus; perhaps way too hard.

According to Uber, it aims to capture a $12 trillion total addressable market across all its businesses that include personal mobility, Uber Eats, and Uber Freight.

This is about 15 percent of the entire global economic activity of $80 trillion estimated by the World Bank in 2017.

In reality, the company is struggling to compete across most of its businesses.

The company faces serious competition in the ridesharing business, for both drivers and riders, from companies such as Ola, Lyft, Taxify among others.

Moreover, factors such as low switching cost (the only switching cost involved for users of these platforms is the time it takes to close one app and open another) and no scale effects, as the majority of its ridesharing business comes from just five cities: New York, San Francisco, Los Angeles, London, and Sao Paolo, negate the company's claims of holding a significant competitive advantage in its premier business.

Uber, in the prospectus, noted that 24 percent of their Ridesharing Gross Bookings came from the aforementioned five cities. So if a startup can capture some of Uber's market in these cities, its overall network will take a massive hit. Thus, further diluting its competitive advantage.

Uber Eats, whose overall revenue grew from $103 million in 2016 to $1.46 billion last year, faces stiff competition from the likes of Zomato, Swiggy, DoorDash, Amazon, Postmates, and others.

The food aggregation line of Uber has failed in India, given the market position of Swiggy and Zomato.

According to a report in The Economic Times, Uber is planning to offload its food aggregation line in the country,  after Uber Eats India racked up a cash burn of around $25 million on an average 9 million orders a month.

Reports also made rounds that Swiggy is in the final stages of negotiations to acquire the Indian operation of Uber Eats.

As for Uber Freight, which exists in limited markets, it trails behind the likes of Total Quality Logistics, XPO Logistics, CH Robinson and many more.

Toyota, DENSO and SoftBank Vision Fund (SVF) announced on April 18 that they will invest another $1 billion in Uber Technologies' Advanced Technologies Group (Uber ATG). The investment, in a newly formed ATG corporate entity, aims to accelerate the development and commercialization of automated ridesharing services, the company said.

The deal values the new Uber ATG entity at a whopping $7.25 billion on a post-money basis.

The fact that Uber is selling its self-driving unit as pixie dust to investors makes little sense, as there are no signs yet that indicate the business will make money in this industry, especially with auto majors such as  Volvo, Mercedes-Benz, BMW among others, investing heavily in the self-driving space.

Investors should keep in mind that SoftBank is a major investor in the Uber conglomerate, and will willingly invest more money if it helps boost the IPO price.

Moreover, the company, in its prospectus, has accepted that Uber is a bad publicity magnet.

"In 2017, the #DeleteUber campaign prompted hundreds of thousands of consumers to stop using our platform within days. Subsequently, our reputation was further harmed when an employee published a blog post alleging, among other things, that we had a toxic culture and that certain sexual harassment and discriminatory practices occurred in our workplace," Uber notes on page 29 of its prospectus.

The only thing going Uber's way is ironically something that has bothered most potential investors - its profit-making ability.

The company has gotten less unprofitable over time, as in 2014 its operating expenses were a whopping 230 percent of the revenue, while in 2018 that figure had dropped to 127 percent.

With that said, it would be hard for Uber to achieve profitability without squeezing its drivers, and if it tries to cut on driver incentives it will lose market share, as most drivers jump ships depending on which aggregator pays more.

While Uber might still manage to pull off the IPO with a $100 billion valuation, a deep dive into its prospectus reveals a decelerating company, with a questionable competitive advantage, that is quickly burning through cash.

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First Published on Apr 23, 2019 04:53 pm
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