Quora Answer: Is It Worth Buying Shares in Uber if They are Available?

The following is my answer to a Quora question: “Is it worth buying shares in Uber, if they are available in 2019?”

Before putting your money anywhere, here are some numbers to consider, and they are all available online.  We know that net revenue is projected to be US$14.2 billion for the year.  I think this is a tad optimistic.  Uber sales as that amount in 2018, double their revenue in 2017, but these numbers do not tell the whole story, and neither are they sustainable.  The economy is expected to slowdown in all the major markets Uber is involved in, including the US.

In 2018, analysts concluded that Uber made a loss of US$1.7 billion, before considering interest payable, taxes, depreciation and amortisation.  Between 40% to 50% of that loss arose from Uber’s investments outside their core business, particularly its discredited autonomous vehicle project.  In addition to that loss, the company has close to US$5 billion in debt.  Uber’s management claim that at the current rate of spending and revenue growth, they expect to be profitable by 2020.  This discounts the fact that their revenue has been flat for the last two years, and the aforesaid market conditions.

The question is how does Uber expect to make that level of profit?  I have no faith in their business model.  Uber attempts to barge into markets and lower ride costs to an unsustainable level for competitors, and once they exit, they have a near monopoly of the market, allowing them to raise prices.  The things is the same market conditions that allow them to enter and try to outmuscle competition is the same market conditions that allow other players to engage in a price war once Uber raises ride hailing prices.  In effect, Uber is engaged in a perpetual price war.  It will always make a loss because them optimum conditions for profitability never arise for an extended period of time.

Secondly, Uber is engaging with regional competitors in all its major markets, putting it at a disadvantage.  Whilst Uber overall has a larger war chest due to constant fund raising, it has to spend that in multiple fronts just to keep market share, not gain it.  Regional rivals are engaged in only one or two markets.  That burns through its funds at an unsustainable rate.  As such, Uber invested enough in many of these markets solely to prevent it tipping to rivals.

Thirdly, even developed economies in Asia such as Singapore and Taiwan have low starting fares.  There is little room for revenue growth without losing market share.  In markets where overall fares are higher, such as in Western Europe, Uber faces the obstacle of unions and regulatory pushback.  Class action suits on both sides of the Atlantic by drivers asking for employee benefits are not good for optics, and cost money to fight.

Essentially, Uber is trying to convince potential investors that it can build a sustainable revenue stream by the end of 2020, and address all these myriad issues in the short term whilst burning through a billion and a half a year.  I am not convinced.  The fact that Uber are trying so hard to diversify and take hits is because their management is not stupid, and they know it is unsustainable.  That is why they tried to get into freight, and why they are pushing so hard for driverless cars.  No drivers means no employee or partner costs.  Driverless cars will come too late for Uber in its current growth model.

Uber’s touted valuation is about US$70 to US$100 billion for the IPO.  This is far below previous estimates of between US$120 to US$150 billion.  And as they wait, it will keep getting smaller.  In a sense, Uber functions a bit like a legal pyramid scheme.  There is no intent to defraud, but they are desperately seeking good money to throw after bad, and convince banks and major financiers that they can maintain that level of debt and loss.  Banks are not going to call it in as long as there is hope that enough smaller investors can be taken in by the hype because putting billions in bad debts is not the thing banks want.

I would not recommend buying into the IPO until we have verified numbers, because Uber has to release the actual figures before they go for IPO.  All numbers above are either taken from Uber management and industry estimates.  I find them far too optimistic.