What happens when one of the most popular companies in the world begins to hemorrhage money? Uber, a growing technology giant, has seen itself rise from a small startup into an industry giant worth billions of dollars. Yet, this growth hasn’t helped Uber turn a profit. In fact, Uber recently reported terrible financial losses, leading many to wonder if the company is on its way out, or if this is just a bump in the road for the ride-sharing company.
The losses
In early November, Uber announced its third-quarter earnings, which didn’t sit well with investors. While the company did, in fact, beat many analysts’ expectations, it still is far from turning a profit. Uber reported operating losses of $1.11 billion on the quarter, leading to a net loss of $1.16 billion. Yet, the company only lost $0.68 per share compared to a $0.81 per share loss that was expected.
Financial losses have plagued Uber for some time, but are now catching up with the company on a more tangible level. Uber had to lay off 350 workers — about 1% of the company’s workforce — to combat these losses. This wasn’t the first big employment cut by the company, which laid off 435 people last September after failing to hit its growth targets.
In an email to employees, CEO Dara Khosrowshahi admitted some of the issues that have plagued his company since its growth spurt.
“We all have to play a part by establishing a new normal in how we work: identifying and eliminating duplicate work, upholding high standards for performance, giving direct feedback and taking action when expectations aren’t being met, and eliminating the bureaucracy that tends to creep as companies grow.”
The losses are beginning to pile up, causing the company’s stock price to plummet. After what was seemingly a successful IPO, shares of Uber have fallen more than 40%, leaving investors holding the losses. The company’s largest shareholder, Dragoneer Investment Group, lost $338 million in share value this quarter alone. In early November, the lock-up period for early investors ended, allowing them to trade their shares on the open market. Investors didn’t waste any time dumping their shares, with over 100 million shares traded on the day the lock-up period ended. Given the current financial state of Uber, many wonder if institutional investors will continue to sell their shares of the company for fear of further losses.
Drivers are upset
Uber not only has a financial problem, it has an operational one as well. At first, it appeared Uber provided its drivers with flexible work schedules and an easy way to make money. However, over time drivers have become enraged at the company’s policies and inability to support them in their work.
Earlier in 2019, Uber agreed to $20 million settlement as a result of a lawsuit filed by some of its drivers. The drivers claimed that they should be treated as employees because of the nature of their work, while Uber held steadfast in its assessment that drivers were instead, independent contractors. While the drivers did receive a nice payout, it did not change Uber’s stance on its workforce as independent contractors.
The previous lawsuit has caused other drivers to file new suits of their own. A group of 96,000 drivers in New York City is suing Uber claiming the company did not reimburse them for taxes that were deducted from their earnings. In New Jersey, Uber was fined $649 million for making claims that its drivers in the state aren’t employees. The state is seeking to recover money for unpaid employment taxes from the company.
Some drivers have become so enraged at Uber’s policies, they protested outside the home of one of Uber’s biggest investors, venture capitalist Bill Gurley. The drivers are demanding fair pay and benefits given their work with the company. These issues were highlighted by one driver who said, „With plummeting (pay) rates, we work more for increasingly less. There is nothing flexible about working 60-plus hours a week and still not being able to make ends meet.“
Looking at the upside
The recent quarterly report from Uber wasn’t all doom and gloom. While the company has been faltering when it comes to turning profits, its business is actually growing. In the third-quarter Uber reported revenue of $2.94 billion, up almost 30% year-over-year. This revenue increase was driven by a 29% increase in gross bookings from the same time last year, totaling $16.5 billion on the quarter.
According to the company’s CEO Dara Khosrowshahi, there is a reason for optimism:
“Our results this quarter decisively demonstrate the growing profitability of our Rides segment. Rides Adjusted EBITDA is up 52% year-over-year and now more than covers our corporate overhead. Revenue growth and take rates in our Eats business also accelerated nicely”
Some analysts believe the company’s stock price could double in the next few years. Using its expansion into other services (such as Uber Eats) and cutting back on markets which carry significant losses could be the path forward. For instance, in India alone Uber experiences $1.2 billion in annualized losses from its Uber Eats service. Analysts believe that either cutting these losing services or partnering with other businesses to cut costs, will drastically increase profitability.
Driverless vehicles could change the landscape
It’s clear that the future of ride-hailing apps like Uber will be shaped by technology more than people. Driverless vehicles will eventually become the standard in providing these services to customers. However, the question still remains if such technology will create profitability for Uber in the long-term.
Uber’s main rival, Lyft claims that it can bounce back to profitability in the near future via partnerships with Waymo and Aptiv to provide self-driving taxi services to its customers in the coming years. This is the same strategy Uber plans to employ to dig out of its own financial hole. Driverless vehicles will not only completely eliminate questions of employment status for drivers, it will also cut costs.
Don’t forget about drone delivery services, which could come to the United States as early as next year. As new modes of delivery are brought to life, Uber will have more opportunity to decrease its reliance on human drivers and rely more on its own technological innovation instead.
Is it an industry issue?
It isn’t just Uber that is struggling, many of its 21st-century startups are also losing money, and fast. WeWork has seen its stock fall to new lows as the company has been under scrutiny after its co-founder and CEO was caught leasing office space to his own company and profiting as a result. Given its current share price, WeWork is valued at only $8 billion, a far cry from its $47 billion valuation it was touting when attempting to sell its IPO to investors.
Uber’s main competitor, Lyft, is also experiencing a time of financial distress. Lyft has lost more than 35% of its share value in the past six months. Lyft is continuing to spend far too much money in relation to its revenue, and has run a deficit every quarter since its public filing. In 2018, the company generated only $913 million in gross profit, which failed to cover its operating costs of $1.89 billion.
Another tech unicorn, Snap, has only three more years to turn a profit before it runs out of money completely. Snap hit the public market at a $24 billion valuation and has risen to 186 million daily active users. Yet Snap maintains financial losses that see no sign of turning around. The company lost $192 million in the last quarter alone, and lost a total of $1.3 billion in 2018.
The future of Uber
There is reason to believe that Uber will be fine at the end of the day. Its brand recognition is at an all-time high — Uber even has its own branding service — and customers see it as an industry leader in its current form. This means, Uber will have a leg up in whatever next businesses it finds itself exploring.
For example, Uber Eats has just begun to roll-out across the globe, and is already gaining traction in the market. Uber is already iterating on this model, for instance, with its new dine-in option which allows customers to order from a restaurant ahead of time and go to a restaurant to eat without waiting in line. The company also announced its foray into financial services via Uber Money, a new payments application for drivers complete with VISA debit and credit cards.
Those that see Uber as simply a driving company are missing the big picture. The company has the technology and resources to expand its operations on many levels. Yes, Uber continues to lose money and is having trouble turning a profit, but it has so much room for growth that cannot be ignored.
Instead of comparing Uber to Lyft, compare it to Amazon instead. This will give you a better idea of how Uber is set to become one of the biggest technology companies on the planet for decades to come.
*As with any investment, your capital is at risk and the investments are not guaranteed. The yield is up to 6.75%. Before deciding to invest, please review our risk statement or consult with a financial advisor if necessary.
