Uber’s IPO is finally scheduled to roll out this week amidst much fanfare, and is said to be the most anticipated IPO since Facebook in 2012. In terms of concern, it might be #1 of all time.
Uber has been in the taxi business for 10 years now, even though they are careful to try to disassociate themselves with taxis. This is mostly because they have used their position as an online service to step in and take away a lot of revenue from taxi companies while mostly avoiding all the local regulation that their old-fashioned competitors are subject to.
The idea behind Uber is a good one in principle, as there are some real advantages to bringing taxi service into the 20th century, especially with an industry that is stuck in the earlier part of the 20th century for the most part. Taxis rely on technologies such as answering telephones, pen and paper, and two-way radios to do their business. These tools have served the industry well enough in the old days when that’s all we had, but they cannot compare to what we can do now with computers, satellites, and cell phones.
Uber brought technology to the taxi business in a big way, even though this really hasn’t impacted the experience of taking a taxi all that much. Instead of calling a phone number, you order a cab with them on an app on your phone, which is really not that big of a deal unless you really hate talking to real people.
This technology does offer the opportunity to manage the order flow better than a guy answering phones and jotting things down, which can make a little difference at least. It’s nowhere near as much as would be needed to have a lot of people sell their cars and travel by taxi instead, even though Uber continues to dream of this day coming soon. This is a niche market and has a very long way to go in order to have a lot of people switching to taxis full time, instead of just drives to the airport, transportation when they are impaired, and as a means for those who don’t have a car now to get around and can’t use public transit for certain trips.
This is an important issue when it comes to evaluating the attractiveness of this new stock, as the company is throwing market projections around in the trillions of dollars, but this also has to be realistic. We’ve had taxis for as long as we’ve had cars and the taxis haven’t been able to put much of a dent into the car market. We would need a very good reason to think that Uber could change this game, and so far, they really haven’t given us much of one, other than someday being able to order a cab without a driver, which will also be appealing to those who don’t like people.
The Vision of So Many People Traveling By Taxi is Not Realistic
Whether you have a driver or not might mean a few more cars on the road, since cars don’t have to take lunch or bathroom breaks, but that won’t matter much to the experience, other than the additional apprehension for passengers this would create. There are some people who don’t own a car because they may travel such a short distance that car ownership would be more expensive, and have to put up with the inconvenience of waiting for rides to come, but this is not a big percentage of people.
The biggest challenge to this vision is that the assumption that a lot of people will find Uber cheaper than their own car is how far people drive. The average American drives over 13,000 miles a year, and hiring an Uber to take you that far around is going to be expensive indeed. A lot of these miles are driven during trips out of town, and this is not a situation where taxis can compete or probably ever will be able to.
Dodging local regulation is Uber’s biggest accomplishment thus far, but as time goes on, we may expect that they will be faced with more and more of this. It would be reasonable to conclude that their competitive advantages will be reduced over time, not increased, at least as long as they use human drivers, if not beyond.
Uber is by no means a company just cutting its teeth, and it actually has been very successful in growing their business over the years, with a big market share and an ever-expanding global reach. There is only one problem with their business model in fact and it’s that they haven’t figured out how to do this and not just lose more and more money.
Uber Is Bleeding Money and the Wound is Getting Bigger, Not Smaller
Uber has lost $10 billion over their history, including a billion dollars just last quarter. Things don’t look any better on the horizon, as the losses are expected to just keep piling up. The bigger they get it seems, the more money they lose, and this makes sense when you have a negative profit margin.
We might wonder, and perhaps rightfully, why anyone would want to buy a piece of this company. New IPOs often don’t make money right away, but at least have some green on the horizon, where it is both realistic and probable that the company that you are buying a stake in will make money fairly soon.
It is not clear at all if Uber will even ever get to this point, and they really won’t with the current business model using real people as drivers. Uber is working on autonomous taxis though, and while that is years away for them, it at least gives investors some hope.
That day will come, although building a car that drives itself and doing this at scale with paying passengers are two different things. We really don’t have the infrastructure to support this, nor the technology to teach cars how to actually drive like people do, and driving safely sometimes requires judgements that a machine would have great difficulty making, even though these things would be second nature to us.
The more of these autonomous cars there are on the road, the bigger the potential risks, especially in the heavily populated areas that Uber thrives in. These risks will need to be managed, and this is not unlike introducing a new drug which starts out with limited testing, but takes many years to prove itself to be minimally safe to roll it out to the general population.
In any case, the arrival of autonomous taxis may not be the savior that Uber and Lyft hope it will be, because before they arrive at this destination, another competitor will already be doing it and doing it better. Competing with local taxi companies wasn’t really a challenge, as long as we don’t count the fact that the taxi companies make money doing it and they don’t, but when your new competitor is Google, that should put a lot more fear into you.
Google has decided to get into the autonomous taxi business as well, and they are well ahead of Uber in this regard. Google already has some technologies developed such as three- dimensional maps that will at least make this mission doable at some point soon on a limited scale, and this is all expected to be rolled out as early as 2025. Whether or not they can make this work by then to satisfy the minimum requirements of public safety or whether this really is a futuristic vision on this scale remains to be seen, but they will do it well before Uber does.
Google, or officially Alphabet these days, has created a whole new division called Waymo, and their pockets are far deeper than Uber’s is. Google already has a big head start in geo-mapping and other technologies necessary to make an autonomous car viable. Google already has them on the road today, where this is still just a dream for Uber.
Uber needs this dream to come true if they ever want to make a go of things because human drivers cost so much. Wages eat up almost all of Uber’s revenue, and there simply isn’t enough left to cover their expenses and not be in the red. When they finally get there, if they are competing against Google, things might even get worse.
It is difficult to price an IPO that is losing money, so what we do instead is base it upon their revenue. That’s not a good formula to use when you have no margins and there aren’t any in the foreseeable future either, and maybe not even in the future period.
Uber was a great idea but this needs to be translated into something that has business value as well. That may happen one day, but that day isn’t even near. There will be many who will jump on this IPO the same way that people buy lottery tickets, hoping that their number comes in one day and they may make a lot of money. We should not be approaching investing in such a whimsical way though, and when you are just left wishing and hoping, it’s best to leave that to others and steer well clear of such things.
It is likely that Uber’s IPO will end up a lot like Lyft’s, because these are both very ugly companies that are set to stay ugly for quite a while. Lyft did not lift off the ground and crashed at the end of the runway, and Uber looks like they will be right behind them.
Uber has already well penetrated their niche market and they may increase this, especially with getting into deliveries and other ways to generate more revenue, but all of this is for naught, and worse actually, if they can’t make money doing any of this.
The best bet is to wait on these companies until it actually makes sense to stake a claim to their profits, but we need profits first to claim, and we should never get excited about owning a percentage of a company’s deteriorating capital with no real end in sight, as is the case here.