Uber has big plans. The ride-hailing service wants to ferry the world around in self-driving cars and on electric scooters, deliver our takeouts and groceries by drone, and ship freight via robot trucks. But first Uber needs to answer a big question: will it ever make any money?
This week, Wall Street will have the chance to ask that question.
Uber went public in May in one of the most anticipated initial public offerings in years. To say it stalled would be an understatement. Shares were sold at a cut price of $45 each, and fell on their first day of trading, costing early investors $618m – the biggest first-day IPO loss since 1975.
On Wednesday Uber releases its second set of earnings as a public company. The update comes after the firm announced it was cutting 400 jobs as it tries to get a grip on its runaway spending.
After a bruising price war with competitors, Uber’s once-robust revenue growth has flattened and losses have ballooned. Despite 91 million US subscribers and net revenues of $11.3bn in 2018, Uber’s losses were more than $3.7bn in the year to March – the largest loss ever for a startup heading into an IPO.
“The reality is it’s an $80bn company that’s unproven,” said Matt Kennedy, a market strategist at Renaissance Capital, which manages exchange-traded funds that focus on IPOs. Investors, he says, are holding their breath, and even its decision to cut a third of its marketing department isn’t appeasing Kennedy.
He said: “It’s unusual to have a big shake-up right after an IPO. They still need to improve the model because it’s losing $2bn annually. There’s still a lot of uncertainty about the ride-sharing industry that’s reflected in the stock price.”
After announcing the layoffs this week, the chief executive, Dara Khosrowshahi, told employees there was a general sense that the company’s expansion is slowing.
He said: “It is something we need to address, and quickly. Many of our teams are too big, which creates overlapping work, makes for unclear decision owners, and can lead to mediocre results. I’m here to win a race that really, really matters.”
The layoffs come a week after two board members, Arianna Huffington and Matt Cohler, a general partner at Benchmark, once Uber’s largest outside investor, announced they would be following Uber’s first employee, Ryan Graves, in stepping down.
In June, Khosrowshahi let go two members of his executive team: Barney Harford, the chief operating officer, and Rebecca Messina, the chief marketing officer.
But the question of whether Uber is a company with a bad business model, or a company with bad management and a good model, or bad in both areas, has yet to be answered.
Uber’s staff reductions came as rival Lyft, with 29% of the ride-share market to Uber’s 69%, and coming off an equally challenging IPO, announced it was dropping its chief operating officer, Jon McNeill, after less than two years on the job.
The question for investors is whether turmoil at Uber has been resolved. This week’s figures could go some way to establish the viability of the ride-share model but it will do little to answer questions about its newer businesses, such as food delivery and freight delivery or larger questions about the company from the regulatory and management standpoints.
“We’re not going to have predictable profitability,” Khosrowshahi said last November. If shareholders want a predictably profitable company, he added: “Go buy a bank.”
Not all analysts are pessimistic. In a note to investors this week, Wedbush Securities’ Dan Ives said: “a core tenet of our bull thesis is around Uber’s ability to morph its ride-sharing platform into a broader consumer engine with Uber Eats and autonomous initiatives.”
Uber, Ives wrote, is effective in leveraging Eats and ride-share users through loyalty offerings and these components of the business model “were already off to a strong start”.
“We ultimately believe that the biggest differentiator for Uber is that it is the only one among its competitors that is a leader in both massive opportunities on a global basis. We maintain our OUTPERFORM rating.”
Kennedy’s optimism is strictly limited.
“They’re spending heavily on driver incentives and new customer acquisition so over time those should go down and profitability should improve,” he says, but warns that a company coming out of an IPO should be “firing on all cylinders”.
“Investors may flee if the financials start to deteriorate at this stage and it’s possible that extremely poor results in the coming quarter could cause the stock price to plummet,” Kennedy added.
“If they can prove they can get to profitability in their mature markets and then expand globally, the sky is the limit.”
But there’s still a question mark over Uber’s management and ongoing regulatory issues. Under Khosrowshahi’s predecessor, Uber co-founder Travis Kalanick, a series of scandals tore into the company, from allegations of sexual harassment and discrimination to claims it used software to evade local authorities and that it stole Google/Alphabet’s self-driving secrets.
Uber has been at the centre of at least five US department of justice investigations, including violations of the Foreign Corrupt Practices Act, and it has clashed with drivers accusing it of driving down their wages to grow its business.
In California and Massachusetts, Uber agreed to pay $20m to settle a long-running fight with drivers campaigning to be considered employees. In Germany, Uber was briefly forced to stop operating after regulators found it was operating an illegal taxi service.
Problems with Uber’s business model are potentially solvable, says Carl Tobias, a corporate governance expert at University of Richmond, but regulatory and corporate culture could prove intractable.
“There’s are a litany of issues still troubling them, most of them are legal, whether regulatory or through litigation,” says Tobias.
“They thought they’d make a big splash with the IPO but that wasn’t enough. They don’t seem to have solved or ameliorated the issues. I’m not sure the culture has been cured.”
