Tencent & Uber – Soul searching.

Both Tencent and Uber have some thinking to do.

Uber Q3 18

• Uber’s Q3 18 results show that it is not really capitalising on its dominance which increases my fear that the company has lost its aggression and will to dominate the market it created.
• Q3 18 bookings were up 6% QoQ and 41% YoY to $12.7bn and revenue was up 5% QoQ and 38% YoY to $2.95 which are fine but I suspect that Lyft is growing faster.
• The real problem for me is the losses.
• Q3 18 Adj-EBITDA was LOSS ($592)m compared to LOSS ($614)m in Q2 18 and LOSS ($1.02)bn in Q3 17.
• Growth is clearly starting to slow down, and while it is still dominant in the one market that really matters (US) (see here), Uber is not making the money that it should be.
• When most network businesses have over 60% market share, they become to the go-to place to carry out a transaction and in that regard, they become extremely profitable.
• This is because of the loyalty and preference they have generated on both sides that allows them to charge a little bit more to both sides creating excellent profitability.
• Alibaba is a great example of this as is Craigslist.
• However, Uber is failing badly to generate the predicted profits upon which its valuation rests even taking into account the investments it is making in food delivery, haulage logistics, bikes and scooters.
• Hence, I don’t think this company is close to being IPO ready which is going to cause real problems given that it has committed to Softbank to go public before Q3 19.
• This has trouble written all over it.

Tencent Q3 18

• Tencent reported Q3 results that relieved the market in that they were no worse but under the hood, the short-term still looks pretty grisly.
• Q3 18 revenues / Adj-EBIT was RMB80.6bn / RMB22.6bn which were up 24% YoY and 4%YoY respectively.
• Tencent’s revenue growth was mainly driven by advertising which grew 47% YoY but the average hampered by the core games division.
• Smartphone gaming revenue grew by just 7% while PC gaming fell by 15%.
• Tencent is hanging on in gaming as its pipeline has games in it that have already received regulatory approval but pretty soon this pipeline will run dry.
• Even if the regulatory issue has been solved by then, there will be a gap in the release schedule that will hurt the revenue outlook.
• I fear that the regulatory problem could persist for some time and so I think that the next 3 quarters at least are going to be difficult which is going to pressure Tencent’s valuation further.
• Furthermore, profitability is under pressure as Q3 18 margins fell as spending plans for 2018 had not anticipated the regulatory contingency.
• I still think that things will get worse before they get better for Tencent and see any relief rally as an opportunity to take profits.