Would Uber’s IPO Be a Revival or a Reckoning?

Xconomy Boston — 

In its early years, Uber was a headstrong force knocking down preconceived ideas about transportation and, along with Lyft, sparking the imaginations of countless entrepreneurs who are now building a new industry called “mobility.”

As it closes in on its first decade, Uber is a conundrum: A Silicon Valley unicorn with $7.3 billion in cash, investors who recently agreed on a $62 billion valuation, short-term IPO plans, and a financial track record that on Wednesday led a Bloomberg reporter to wonder, “Is Uber viable?”

As a private company, Uber doesn’t have to disclose its full financial picture, but it has lately been sharing selected figures about its quarterly earnings and the near-continuous losses that amount to $11 billion since its founding in 2009.

This week, reporters and analysts have been picking over Uber’s partial second quarter numbers, which are like clues in a long-running mystery story centered on the question: Can Uber ever turn a profit from its core ride-hailing business?

Uber has been relying on billions in investor money to expand its on-demand ride network globally, without needing to support it solely from revenues, Bloomberg’s Shira Ovide wrote. What happens if investors lose faith, and the company has to live within its means? Ovide asked.

Uber doesn’t break out numbers for its ride-hailing unit’s operating costs or the losses attributable to that operation alone, separate from the other business lines Uber has added or explored. Those include food delivery unit Uber Eats, truck-hauling marketplace Uber Freight, bike and scooter rental enterprises, and the company’s efforts to develop self-driving cars and trucks.

Uber’s second quarter report, released late Wednesday, shows revenue of $2.8 billion, a 63 percent increase compared with the second quarter of 2017, Bloomberg reported. But the rate of growth dropped off from the 70 percent rate Uber had disclosed for the first quarter this year.

Gross bookings in the second quarter were $12 billion, when the company lost $891 million—less than the loss of about $1.1 billion in the second quarter of 2017, as The Verge reported, noting that Uber lost a total of $4.5 billion in 2017. At a similar rate, even a cash reserve of more than $7 billion would leave a limited runway.

Uber CEO Dara Khosrowshahi, hired in August last year to replace founder Travis Kalanick and shape up an embattled business accused of having a gender-biased and incompetent “bro culture,” has said he hoped the company could go public as early as 2019.

That means Uber’s full financial picture could soon be more widely revealed in an IPO road show, including details about the ride-hailing operation. Potential investors would want to see the revenue growth rate from fares, the cost of acquiring drivers, their turnover rates, and whether any subtantial revenue or loss comes from other sources, such as financing car purchases for drivers.

Uber might not be able to justify its lofty valuation of $62 billion to new investors, given signs of slowing growth and the company’s continuing losses, CNBC’s Paayal Zaveri observed.

A significant percentage of Uber’s loss may be coming from its efforts to field self-driving cars, Zaveri said, citing a report from The Information based on an unidentified source. According to the report, Uber has spent $125 million to $200 million on the program over the last 18 months, and investors are advising the company to cut its losses and end the initiative.

Dropping the driverless car program would avoid further losses, but it would also abandon Uber’s dream of escape from its often fraught relationship with its drivers. That doesn’t mean Uber would be shut out of the self-driving vehicle economy, because many other companies are poised to commercialize their own autonomous cars. Uber could trade on its value as a strong ride-hailing brand, and partner with automakers that would supply or operate fleets. What share of profit such a partnership would assign to the app remains to be seen, however.

Automakers and other fleet operators can now easily bypass Uber and create their own apps, in part because of the rise of mobility-related businesses. For example, Ford Smart Mobility subsidiary Autonomic creates software foundations for such applications and makes them available to its customers through an application programming interface.

Uber, which once had an open field to conquer along with Lyft, is now competing in a complex and rapidly growing mobility marketplace.

Connected cars bristling with sensors are feeding reams of data for analyis with artificial intelligence software that can map transportation service gaps for new companies to fill. Trip planner apps such as Moovit and Transit are working with technology companies to help consumers plot multi-modal travel plans that include cars, bikes, and public transportation options.

Public transit agencies are becoming customers of fleet operators, which can provide “microtransit” services such as shuttles that cover many of the heavily traveled routes where consumers might previously have relied on taxis or ride-hailing companies.

Uber has become a participant in some of these new models, and Khosrowshahi, the former CEO of online travel conglomerate Expedia, has also taken steps to make the Uber app serve as a one-stop trip planning source that displays multiple options, rather than simply remaining a conduit to Uber’s own ride-hailing service. He is also diversifying Uber’s business lines. Uber Eats now delivers 10 percent of the company’s gross bookings, the company has said—but the fact that a new unit could attain such a significant percentage share of total sales “may be masking a slowdown in Uber’s main business,” Bloomberg’s Eric Newcomer conjectured.

All the competitors in the mobility field are facing headwinds from an increasingly active regulatory environment. For example, New York City, a target market for ride-hailing companies, this week became the first U.S. city to rein in the proliferation of cars from Uber and its competitors that are allegedly worsening traffic congestion on crowded streets. The city placed a temporary cap on the number of new licenses for such cars in a bill that also opened the door to a minimum wage for city drivers summoned by apps.

To meet these challenges, Uber benefitted from a boom period in venture funding to build its multibillion-dollar war chest, as Bloomberg’s Ovide points out. But as for an IPO, will it get the timing right?

If the company had gone public earlier, it might have profited from Silicon Valley’s characteristic form of magical thinking—that a company growing users really fast will somehow become proportionally valuable. Now Uber may need to face the metrics of stodgy fundamental business analysis that Ovide raises—will it grow a proportional profit?

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