Uber Q2 18 – Time to print pt. II

Lyft may be causing more problems than it should.

• Uber produced a quarter where revenue growth slowed and there was little sign of the profitability that would indicate that Lyft is no longer a problem giving a clear path to a successful IPO.
• Q2 18 revenues / net income were $2.8bn / LOSS$891m with revenue growth of 63% and losses declining by 19% YoY.
• Revenue growth is slowing, but it is growing plenty fast enough for Uber to begin thinking about making some money.
• Uber still has $7.3bn in cash but the real question is why Uber remains incapable of turning a profit despite being forced out of international markets where it was haemorrhaging money as a result of cut-throat competition.
• Margins should have improved meaningfully following these exits.
• Uber is a marketplace and as a result, is bound by the same laws of economics.
• The rule of thumb that I have long used is that to hit critical mass, a network-based business has to have at least 60% share of the market in which it operates or be at least twice the size of its nearest competitor.
• By the last count (see here), Uber still has around 65% of the all-important US market, meaning that at home, it is dominant.
• Hence, it should be able to make money and still force Lyft out of business.
• Uber is still investing heavily in other services such as food delivery, self-driving cars, and logistics which will drag the numbers down somewhat, but even with these, I am not seeing the kind of improvements that should be occurring if all was well.
• This leads me to believe that Uber is struggling to make the most of the scale it has in its home market calling into its question its ability to make money and therefore its valuation.
• Following its ignominious exit from most of its largest international operations, its addressable market has effectively become North America and the parts of Western Europe where it is not banned.
• Consequently, I think that Q3 needs to see a material improvement in profitability if Uber is to have a chance of justifying its circa-$70bn valuation.

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