Richard Windsor
30 November 2017

Uber – Annus horriblis

Even at $54bn, no shortage of sellers

While attention is focused on SoftBank’s moves to take a 13-15% stake in Uber, the deterioration of Uber’s fundamentals is a warning that its dominant position may already be slipping. Q3 17A revenues were $2.01bn up 21% compared to $1.66bn in Q2 17. However, net losses grew faster with Q3 17A net losses at $1.46bn, up 38% from the $1.06bn it lost in Q2 17A. This represents a deterioration in net margins to a loss of 73% from a loss of 64% in Q2 17A.

Given the year that Uber is having it is possible that the losses have been increased by non-operational items such as compensation payments and restructuring.  However, these headline figures come from an investor communication which typically will exclude costs and benefits that come from non-operational sources. Hence, we suspect that the 870bp decline in margins is operational in nature and represents a deterioration in the company’s underlying performance. This should be of huge concern because if its home market is going to descend into a bloodbath of cutthroat competition, then Uber is going to be raising a lot more money and most likely at much lower valuations.

We are quite surprised to see such a deterioration as despite Lyft’s recent increases in share, Uber is still hugely dominant in its home market, USA.  So far in 2017 Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year. This leaves Uber on 66% which based on my rule of thumb for network based businesses, is still enough to eventually win the market, but its margin for error has been substantially reduced. This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit.

Coming into 2017, Uber had a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 6%. Uber’s figures are implying that Lyft is beginning to impact Uber’s ability to make money which is a real problem. Google is now Lyft’s biggest backer as it represents the best way for it to get its self-driving technology (Waymo) to market.  As of Q3 17, Google has $100bn of cash on its balance sheet giving Lyft potentially much deeper pockets than Uber. This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat.

This is a much more important issue because if Lyft is able to impact Uber’s financials, it means that its hallowed status of market dominance has already been lost despite my rule of thumb. This is critical because Uber’s $70bn valuation compared to Lyft on $11bn is based on its dominance of the market and the unassailability of its network effect.  Consequently, the real valuation of Uber may be far lower than even the $54bn that SoftBank is offering existing shareholders to purchase some of their stock. These investors include Benchmark and Menlo Ventures who may have already have arrived at this view and concluded that $54bn is a great exit price. Hence, we still expect there to be no shortage of sellers at this lower valuation.

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