Uber IPO – Big but not beautiful

A profitless platform isn’t worth anything.

• Uber is asking for a much higher valuation than Lyft which it is trying to justify through its dominant position in its home market.
• However, Uber seems to have a chronic inability to make money in spite of its dominance, leaving me wondering when or if real earnings will ever grace the income statement.
• A platform, even a dominant one, isn’t worth anything unless it can generate a consistent stream of profit.
• Uber’s S-1 (see here) which was made public yesterday reveals a dominant company that has already reached scale but one where the ravages of cut-throat competition are leading to a deterioration of profitability.
• I continue to believe that this is a very bad time to go public and that Uber is going to suffer similar, if not worse, agonies than Lyft, whose financials are actually in better shape.
  • First, profitability: In 2018 Uber showed what looks like good progress in EBIT margins.
  • Uber splits its business into revenue derived from the core platform and other bets.
  • The core platform includes ride sharing as well all of the other services that Uber offers such as Uber Eats and Uber Freight and saw EBIT margins improve to 9% from 0% in 2017.
  • However, this is misleading as quarterly data provides a clearer picture of what is going on.
  • The EBIT margin of the core platform peaked in Q1 18 and has been rapidly declining ever since, reaching their lowest point in two years at -3% in Q4 2018.
  • Lyft’s EBIT margins are not exactly a pretty picture either at -40% in Q4 18 but at least they are improving as the company grows in contrast to Uber.
  • Second, growth: Lyft is smaller than Uber, but it is growing at a much higher rate posting 94% YoY in Q4 2018 as it continues to capitalise on Uber’s mistakes.
  • Uber grew at just 22% YoY in Q4 2018 but investors are being asked to pay nearly 9x 2018 revenues compared to Lyft which currently trading at 6x revenue.
  • Uber is asking for this premium based on the size of the platform that it has created but as I have stated above: a platform that makes no money is not worth anything.
  • Furthermore, investing 101 and the stock market teaches us that, in general, a company growing at a higher rate and rising earnings should have a higher multiple, the exact reverse of what is happening here.
• Investors are being asked to pay a 50% premium for a company that is growing at one-fifth of the rate and where margins are going in the wrong direction.
• I also have issues with Lyft’s inability to make money, but given its growth and its smaller size, it has a greater opportunity to generate operating leverage from its increasing scale.
• Uber is already 5x larger than Lyft but has failed to use its dominance to generate profitability and the bigger it gets, the more it appears to lose.
• I continue to believe that both of these companies have no business being public (see here and here) as the kind of battle they are waging is best fought outside of the harsh scrutiny of the public market.
• Brutal competition is likely to mean that both miss their profitability estimates which will cause big moves in their share prices.
• This can lead to substantial reputational damage as Lyft is already feeling.
• If I am forced to pick one it will be Lyft, but only under the condition that I can offset the risk with a short position in Uber.