Uber Q1 19 – Slave to the market.

Uber now has to bow to the stock market.

• Uber’s maiden set of results demonstrated exactly the problem associated with listing immature companies on the public market in that its ability to fight for share is being hurt by its requirement to keep the market happy.
• It’s one consolation will be that Lyft is in exactly the same position, having squandered what I considered to be a great opportunity to win an advantage over Uber by cancelling its IPO (see here).
• This would have given Lyft a free rein to operate without having to worry about the whims of the market smashing its share price giving it a big advantage over Uber.
• Q1 19 revenues / EPS were $3.10bn / LOSS$2.26 which was not surprisingly very close to consensus at $3.08 / LOSS$2.25.
• Gross margin remains a real problem falling by around 1000bp in the last 12 months as Uber has to keep offering incentives to drivers and riders to keep them from using Lyft or other competitors.
• This is where the problem with this company lies as there remain very few barriers to entry and one is only able to hold onto market share by being cheaper than one’s rivals.
• Uber attempted to prop up sentiment with the notion that it sees competition moving from price to brand and product and as a result, it says it will be able to cut incentives and discounts in Q2 19 and beyond.
• This will allow gross margins to improve going forward prompting the shares to rally 4.3% in after-hours trading.
• However, I see very little sign of this in the market and am of the opinion that riders will choose whichever ride-hailing company that offers the lowest fares and/or is able to arrive first.
• On this basis, there is very little to separate Uber from Lyft.
• Hence, I suspect that in Q2 19 and beyond, it will transpire that Uber will be unable to wind back the incentives, due to ongoing competitive pressure from Lyft and others.
• What Uber really needs to do is to get so much volume on its platform that it becomes the go-to place to effect a transaction, get a ride, book freight, order food or rent a bike such that incentives no longer have to be offered.
• This typically occurs when one has 60% market share or is double the size of the nearest competitor, but Uber is struggling to make this work in its favour as it is hovering around the 60% mark in the USA.
• I suspect that Lyft’s maiden set of results will also show similar issues meaning that the whole ride-sharing investment landscape looks pretty bleak for now.
• Both Uber and Lyft remain very well financed and so I see no end to this bloodbath, meaning that there are more disappointments to come when the time to report to the market rolls around again.
• I continue to maintain that both Uber and Lyft are substantially overvalued given their shared outlook and would steer clear of both of them.
• There will be a better time to invest.