Uber’s S1 and slowing growth

Uber released their S1, their prospectus for their IPO today.

The biggest concern for potential investors is probably their falling growth rates, which makes it hard to model a future where the company can produce significant earnings to justify its valuation.

The table below shows how the growth rates have punched.

YearRevenue Trip NumbersActive Users
2016-2017100%105%51%
2017-201840%40%33%

Uber, like most US companies, uses calendar years for their financial years.

The quarterly revenue data is more worrying – December Quarter 2018 was up only 22% over the previous year. (Page 121)

On Page 126 we see that even that revenue increase was subsidised by excess driver incentives, and netting that out the growth was only 17% year on year.

They have tightened things and their adjusted yearly EBITDA loss fell by $800m to $1.65 billion, but has this come at the expense of growth? Or has the growth simply become too expensive to chase? Or are electric mobility devices taking away the shorter distance rides?

And Uber had a loss of $890 million in the last quarter, and it’s hard to see tangible evidence of margin improvement. (P128)

A valuation today of, say, $100 million needs to have net income of, say, $10 billion to be a very real probability relatively soon, or of one much larger later.

At, say, a 20% net margin and 40% growth $10 billion income would take 5 years. But that is a courageous assumption about the growth rate, given the above, and it also assumes significant margin improvement, which will be hard if the marketing spend continues, which itself is required for growth. And increasing pricing is hard because customers and drivers will simply choose other platforms. This is not a winner take all market.

For the model to work the higher growth (100% y/y) of Uber Eats needs to be maintained for quite a while, and while that’s possibility, I suspect their margins will be sharply squeezed as big brand chains respond. Mobi2Go is making very good progress in part because Uber’s take rate from restaurants is absurdly high, and Mobi2Go puts the brand in the centre rather than Uber. So either that take rate will need to decrease, and with it the net revenue, or this market will become a multi-player game and revenue will fall regardless.

Overall if Uber raises a high amount of money then they will simply get a longer runway, but it also seems clear that there is a real chance of judgement day arriving, and with it a plunge in the share price.

Published by Lance Wiggs

@lancewiggs

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