The most anticipated IPO in years is almost here. Ridesharing giant Uber (UBER) filed its preliminary S-1 on Thursday, April 11, and it will reportedly begin trading in May. While the company has not yet provided pricing details, it is rumored to be seeking a valuation of ~$100 billion. At this proposed valuation, UBER currently earns an unattractive rating.In almost every respect, Uber looks even more dangerous than Lyft (LYFT), which is already down 20% from its overvalued IPO price. Uber is growing at a slower rate than Lyft, loses much more money, and has an expected market cap that is ~5x higher. Lyft’s troubled IPO seems to have dampened enthusiasm for Uber, which in turn is driving Lyft’s stock even further down. This feedback loop just shows that the valuations of these two companies only make sense in comparison to one another, and not to fundamentals or the rest of the market. Numbers Don’t Back Up Growth Story I’m not going to talk about Uber’s losses here, even though the amount of money the company loses ($3.0 billion in 2018) is astonishing. Everyone knows Uber loses money. At this point, the amount of money you’re able to lose seems to be a point of pride in Silicon Valley. Instead, let’s talk about the story Uber wants to highlight for investors. According to Uber, they are still in the early stages of capturing what they estimate to be a $12 trillion (yes, that’s trillion with a “T”) total addressable market that includes personal mobility, food delivery, and freight shipping. For context, the World Bank estimates that global GDP was ~$80 trillion in 2017. Uber is saying they think they can capture 15% of global economic activity. If that goal was remotely feasible, and Uber was at less than 1% of its total addressable market, you’d expect the company’s revenue growth to be rapidly accelerating. Instead, Uber’s revenue growth rate declined from 106% in 2017 to 42% in 2018. Even that number overstates Uber’s growth, as it doesn’t account for the extra incentives given to drivers. Uber’s Core Platform Adjusted Net Revenue, which strips out driver incentives, grew by just 39% in 2018, and it actually declined quarter-over-quarter in Q4 ’18. Uber’s Gross Bookings – the total amount of money spent by users on the platform – increased by 11% in Q4, but core net revenue declined by 1%. This disconnect shows the key problem with Uber’s theory of world domination: as Uber tries to protect and expand its market share around the world, it’s giving up a larger share of revenue to drivers and restaurants, a trend I expect to continue unabated. Alarming Decline in “Take Rate” Will Continue Uber’s Take Rate, the percentage of Gross Bookings it captures as Core Platform Adjusted Net Revenue, has been in steady decline throughout 2018. Figure 2 shows that the company’s take rate declined from 22% in Q1 to 18% in Q4. Figure 2: UBER Take Rate: Q1 ’17 – Q4 ‘18 Uber’s declining Take Rate in 2018 stands in stark contrast to 2017, when its Take Rate increased from 19% to 22% over the course of the year. It’s not hard to see what caused this reversal. Uber’s attempt to squeeze drivers in 2017, along with a series of PR disasters that led to the #DeleteUber campaign, drove both riders and drivers to other platforms, like Lyft. According to data firm Second Measure, Uber’s share of the U.S. rideshare market declined from 82% at the beginning of 2017 to 71% at the end of the year. The U.S. rideshare market is not the only market where Uber is losing share. Internationally, the company has been forced to throw in the towel in China, Russia, and Southeast Asia in recent years. Meanwhile, Uber Eats is losing share to DoorDash domestically. Uber’s added incentives for riders and drivers have helped stem the market share losses – its domestic market share declined by a smaller amount, from 71% to 67%, in 2018. Despite its efforts to improve its image, Uber’s brand still has a worse reputation than Lyft with consumers, and its drivers recently went on strike in Los Angeles. It’s no surprise that Uber drivers are upset, as one recent study suggests they only earn ~$9/hour after accounting for all costs involved. In light of these ongoing struggles, one line from Uber’s S-1 stood out. On page 30, Uber writes:
“As we aim to reduce Driver incentives to improve our financial performance, we expect Driver dissatisfaction will generally increase.”Uber can’t achieve profitability without squeezing drivers, but if it tries to squeeze drivers it will lose market share. With wages rising at the fastest pace in a decade – and growing even faster for low earners – it seems likely that Uber’s take rate will decline even further in 2019. Companies like Bolt in Europe have shown that it’s possible to operate a ridesharing app profitably, but you can’t do so while simultaneously trying to achieve a dominant market share worldwide. Uber can be a huge company, or it can be a profitable company, but it can’t be both. Uber Has No Competitive Advantages Uber’s declining market share and take rate highlight the core problem the company faces: it has no real competitive advantage that will allow it to earn a sustainable high return on invested capital (ROIC). Uber bulls would dispute this claim. They’ll argue that the company’s scale gives it a network effect that will lead to a long-term competitive advantage. Uber even makes this claim explicitly, writing on Page 152:
“Our strategy is to create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage.”Uber believes that as it grows its user base, it gains a competitive advantage over its rivals. Riders want to use a platform with lots of drivers, which minimizes wait times, and drivers want to use a platform with lots of riders so they have consistent fares. In theory, by achieving the largest scale, Uber’s network should represent a sustainable competitive advantage over its rivals. In practice, Uber is losing billions of dollars of a year and its market share is declining. The company’s fundamentals certainly don’t back up the idea that it has any real competitive advantage. There are two key reasons why network effects don’t make much of a difference in the ridesharing space:
- Low Switching Costs: It is easy for both drivers and riders to use multiple ridesharing apps. Roughly 70% of drivers work for both Uber and Lyft, and smaller services such as Juno have easily grown by piggybacking off that network. The only switching cost involved for users of these platforms is the time it takes to close one app and open another. Switching cost are inconsequential for drivers too, especially for new rideshare apps that can use driver ratings from Lyft and Uber as a lower-cost way to screen drivers.
- No Scale Effects: The bulk of Lyft and Uber use comes within a single city. In fact, Uber discloses that 24% of its bookings comes from just five cities: New York, San Francisco, LA, London, and Sao Paolo. The localized nature of the ridesharing industry means that competitors can make inroads by focusing on a single city. If a startup can attract enough riders and drivers in a single city, it doesn’t matter if Uber has a superior network worldwide.