With post-IPO Uber hitting its lowest valuation since July 2015 and shares dropping almost $8 to $37.10, from the IPO price of $45, it is clear that investors believe Uber was overvalued at its float. Considering that Uber priced shares at the lower end of the scale expected by analysts pre-float, this comes as an added blow.
It’s widely thought that Uber priced its shares on the low end to avoid a similar fate to Lyft, whose shares dropped below their initial offering on the second day of trading. However, another credible reason for the lower price could be that, despite Uber’s global growth and success, the company’s future remains in doubt. Additionally, the market has been burdened by the uncertainty over trade talks with China.
While Uber has an easy to use app, a fleet of drivers and vast quantities of data, its rise until now has been fueled by its investor’s willingness to subsidize the rides that make up the bulk of the business. Last year 5.2 billion people rode in an Uber car. In each of those trips, the company lost an average of 58 cents. Uber continues to grow, and it’s fair to say it dominates the ride-share market, but the company’s success is built on sand. The reality is that it still hasn’t made a profit.
But that’s not the only problem. Uber’s big plan to eventually make a return for its investors is based on the promise of driverless cars, but these are reliant on 5G, which despite all the buzz won’t be available at scale for at least five years, likely 10. This means Uber will continue to have relatively high operating costs in the short to medium term as it remains reliant on its drivers.
A further problem for Uber is that the cost base for drivers is also likely to increase in the coming years as a mix of legislation in some markets and strike activity by drivers push up its costs and responsibilities. And although Uber has turned a corner from where it was only a few years ago reputationally, the damage done to the brand under previous CEO Travis Kalanick hasn’t entirely been expunged. It has had a big impact on recruiting drivers, with the company experiencing churn from drivers who haven’t made as much money as they hoped. As Uber works on a fairly simple supply and demand model, a scarcity of drivers is likely to drive costs up. So to keep growing its user base of riders it’s probable that Uber will have to continue to subsidize the cost of those rides.
And the problems for Uber aren’t limited to its ride-hailing business. Currently, its UberEats meal-delivery service is a small but fast-growing part of the business, with growth coming largely from existing Uber customers. But the food-delivery market already has established competitors with loyal customers. In the US, competitors include GrubHub, Postmates and DoorDash, while in the UK Deliveroo and JustEat provide stern competition. Similar competitors exist in most other markets, too. And even if UberEats does win the battle for food delivery, the service won’t be a massive earner for Uber — it has far smaller margins than its classic ride-hailing model.
This issue is replicated in the other areas Uber is looking to break into. Take Uber Freight: Despite its growth in the market, it is still relatively small compared to big players such as Agility Logistics, FedEx, and UPS. Uber Freight is making millions, but these companies are making trillions.
The problem for Uber is that although, arguably, it is well set up for growth and, potentially, domination in the long term (10 – 20 years’ time), in the short term it looks like investors will be shorting up Uber rather than earning immediate returns from their investment. Sadly for Uber, a stock market driven by quarterly results and the need for quick growth isn’t the best environment for a business focused on building out a large future market rather than on genuine gains.