Uber has performed rather poorly in the first quarter of the year. However, the CEO of the company, Dara Khosrowshahi, is focusing on timing and trade war as the reasons behind their abysmal performance on the public market instead of focusing on their profitability. At the time of their IPO filing, Uber’s S-1 filing shows that the company recorded an operating loss of roughly $3 billion annually. The latest earnings report published on May 30th reveals that the loss is growing to $1 billion per quarter. In addition to that, revenue growth is also on the decline. In the last quarter, revenue grew by 20 percent at $3.1 billion, which is lower than the 25 percent growth recorded in the same quarter the previous year. This is the slowest growth the company had recorded since it started disclosing its financial results two years ago,
Despite its poor performances, Uber received a unanimous buy rating from financial analysts and a host of positive headlines from the press. In this analysis, I will take a closer look at why Uber’s current stock price doesn’t reflect the poor growth and diminished value from the newly reported losses in the Q1 earnings report.
I previously analyzed the IPOs of both Uber and Lyft. In my analysis, I gave accurate predictions on the two IPOs before the market knew how the companies would fare. Keep in mind that I discussed the risks involved with both stocks before Lyft fell by $20 from its IPO price and before Uber received the accolade of the worst IPO performance of all time.
Previously, Uber’s prospectus shows a combined deficit of $7.8 billion in fiscal years ending December 31, 2017, and 2018. However, in 2017, Uber posted an operating loss of only $4 billion with negative $2.6 billion adjusted EBITDA while it recorded losses of roughly $3 billion last year. In the current fiscal year, Uber is poised to record operating losses of around $4 billion and no improvement in profitability even though it has a large market cap. Side note: if you go through Uber’s prospectus, you will notice that the company sold some operations in Asia and Russia, which brought in one-time income.
The ride-hailing company’s Platform Contribution Margin is also worse, plunging from negative 3% in the last quarter of 2018 to negative 4.5% in the first quarter of the year (most recent quarter not shown on the graph below).
According to Uber, the competition in the ridesharing space is the catalyst behind the periodic decline of the Core Platform Contribution Margin. In my previous post, I pointed out that Uber needs to subsidize rides so it can boost demand. Doing so could lead to an artificial supply, which is the critical risk factor for investors.
In their earnings report and sometimes by the press, Uber Eats is mentioned. However, Uber Eats brought in just $165 million in adjusted net revenue to the company in Q4 2018. This is inconsequential compared to the $2.3 billion in adjusted net revenue by the ridesharing arm.
Does Declining DAU and MAU Matter? Yes!
The major risk involved in the ridesharing venture cannot be countered by new businesses, although Uber had tried to cover up those losses by combining Uber Eats and Uber Freight users into a platform. The apps for those services are not a platform; rather, it is a loophole used by Uber to cover up (what I suspect to be) declining figures behind ridesharing.
At this point, we don’t know the exact cost of ridesharing since customers don’t pay fair market value. Rather, funds from venture capitals are allowing people to get cheaper rides in relation to the demand and supply laws. Knowing this is crucial to understanding the metrics in the image below (you can basically flip the chart upside down to visualize the losses)
Keep in mind that mobile apps break down some metrics for investors to analyze, such as daily active users and monthly active users. Uber doesn’t offer metrics that shows MAUs or DAUs. Instead, it provides gross bookings, which currently stands at an astounding figure of $50 billion in gross bookings annually. This high figure, however, doesn’t address the problems as to why Uber is experiencing staggering losses.
Back in February, Adam Blacker of Apptopia, a provider of app intelligence, wrote a blog which talked about the various means of transportation. In the article, Blacker estimated a decline in the active usage of ridesharing services stating, “From January 2018 to January 2019, Uber and Lyft lost a combined 1.2 million average DAUs in the United States.”
Since Uber is a much bigger company than Lyft, it is estimated that a large portion of the DAU loss would have been from Uber. We can estimate that Uber did lose 600,000 DAU or roughly 50 percent of the figure reported by Apptopia. Data compiled from other sources indicate that Uber completes roughly 14 million rides per day. Thus, losing 600,000 DAUs is substantial as it means a 5% decline in their daily trips (this percentage of DAU likely higher as not all 14 million trips come from DAUs).
Andrew Chen, a former growth marketer at Uber, noted that the DAU and MAU for the company is not a meaningful metric. He cited an example saying that infrequent airport rides are important in driving revenue growth, and the users are not recorded in DAU or MAU. Despite that, comparing the previous DAU and the current one, it is a very important figure since it reveals the relative churn and retention metric.
Uber Lock-Up Expires in November
The S-1 numbers indicate losses of $3 billion and the first quarter earnings reports were even worse, with the company losing $1 billion in each quarter. Despite that, Uber’s stock price is trading higher.
Before Uber and Lyft had their IPOs, I pointed out that both would be liquidity events, and I advised people to be cautious, especially of the press. For the initial investors, buying good press is cheap to help protect the $60 billion they have sunk into Uber, so far.
Uber’s lockup period will end in November, and the true valuation of the company and its stock will become apparent a few months afterward. Following the lockup period, it could take a year or two for an IPO to settle.
Although I don’t believe Uber whales will dump the stock immediately after the lockup period expires, I believe the stock will dip in the months that follow. As more Uber shares are made available, the stock price will see a correction. However, if you believe that I am wrong about the overall fundamentals and you wish to invest in Uber and Lyft, I would suggest to be patient and wait until after the lockup period (or if you are an active trader, get out before November).
Check out my analysis on Zoom published prior to the IPO, where I called it the Best Silicon Valley IPO of the Year.