Uber Q4 19 – The Adjustment Bureau.

Rides doesn’t really make any money.

• Uber reported reasonable results compared to expectations but losses have remained heavy which I think will continue to weigh on sentiment despite the promise of a break-even this year.
• Q4 19 revenues / EPS was $4.07bn / LOSS$0.64 slightly ahead of forecasts of $4.06bn / LOSS$0.68 while bookings were slightly ahead at $18.13bn and platform users slight below at 111m.
• Despite the income statement being a nightmare of adjusted figures which I think cloud reality, the story remained consistent to previous quarters with ride-hailing in North America making profits which were more than eaten up by everything else.
• The problem is that I do not think that Uber’s reporting structure accurately reflects the true profitability of its businesses.
• When looking at the operating income of a business one has to include all of the costs that are associated with bringing the product or service to market and I do not think that Uber is doing that properly.
• For example, in Q4 19 Uber is reporting that Rides has an adjusted EBITDA of $742m (24.4%) but this does not take all of the costs into account.
• This does not include the cost of the developing and maintaining the platform that allows Uber to allocate drivers to riders nor does it take into account the general and administrative expenses for the company.
• If 81% (Ride’s share of revenues) of these costs are allocated to Rides then adjusted-EBITDA falls to $220m but this still does not include stock-based compensation which was $243m during the quarter.
• If I allocate 81% of this to Rides then it’s true EBITDA becomes a very meagre profit of $23m.
• I think that this is a better reflection of reality which also matches cash flow from operations where a massive $1,799m left the company during Q4 19.
• The income statement is pretty easy to meddle with but cash flow, this is much harder which is why I trust this disclosure far more than anything else.
• To be fair to Uber, $1,199m of the outflow was related to a withdrawal from restricted cash held in trust and does not really represent an ongoing operating cash outflow.
• However, this still meant that $600m left the company during the quarter signalling that Uber’s reporting of adjusted-EBITDA is not a very good reflection of reality.
• The company is still very unprofitable but incremental improvements are being made.
• Q4 19 GAAP EBIT was a loss of $1,057m compared to $1,201m in Q4 19 giving me comfort that Uber is making progress towards profitability, albeit very slowly.
• The biggest problem remains UberEats which is still losing money hand over fist and I think that unless it can become the market leader in its core USA market, the losses will continue.
• This will require a merger with DoorDash which leads most markets in the USA which SoftBank has been trying to engineer (see here).
• I suspect that DoorDash will not be too keen on becoming a subsidiary of Uber, leading me to believe that this merger is unlikely to happen.
• I think that unless this happens, Uber’s promise to turn profitable in Q4 2020 will remain unfulfilled by any proper measure of profitability.
• Hence, I think the outlook remains pretty tough and the valuation of the shares continues to defy gravity.
• I am staying out.