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Uber/Lyft

Ten Questions Uber’s IPO Investors Should Ask

Uber, which is expected to follow its smaller U.S. rival Lyft to the public market in the next month or so, could get a valuation of $110 billion based on where Lyft is now trading. But valuing Uber will be tougher than figuring out Lyft. Uber is a bigger, more global company with a fast-growing hot-food delivery business and a costly self-driving car development effort.

Even Uber’s ride-hailing operations will be more complicated to understand. Uber operates in more than 750 cities around the world, from San Francisco to Sydney. The health of Uber’s businesses varies widely between those markets, although we have some insight into the differences, detailed below. Meanwhile, Uber Eats, the hot-food delivery business that is Uber’s next great hope to double the company’s overall value, appears to have been surpassed in the U.S. by rival DoorDash. The economics around Uber’s nascent scooter business are questionable.

The Takeaway
• Uber’s purchase of Careem could reduce losses by $80 million annually
• Uber autonomous vehicle unit still losing $1 million-$2 million a day
• Uber Freight recently was on pace to generate $2 billion in gross bookings.

Uber’s basic financial picture is known: it lost $1.8 billion before interest, taxes, depreciation, amortization and other charges in 2018, down 15% from a loss calculated the same way in 2017. Revenue surpassed expectations, hitting $11.3 billion, up 43% from a year earlier.

A year ago, Uber told prospective lenders that its management team expected the company to be profitable by 2020—specifically, that it would generate $1.5 billion in earnings before interest, taxes, depreciation and amortization that year, excluding stock compensation. Investors should ask CEO Dara Khosrowshahi if he would still commit to that.

There’s still plenty else we don’t know about Uber—and plenty of overlap with Lyft in terms of looming challenges. (See related article here).

Here are 10 of the most important questions facing the company:

Which cities show Uber’s long-term profit potential in ride-hailing?

That’s a tough one. Uber operates in hundreds of established markets and hundreds of nascent or emerging markets. Some markets have been competitive blood baths that require Uber to continue spending money to keep market share (in the U.S., San Francisco is likely one such candidate). Others like Melbourne, Australia, are less so and might reflect what things could look like if and when companies aren’t trying to gain share versus Uber. A list of the top markets by number of rides, as of a year ago, can be found here. 

Outside the U.S., Brazil’s Sao Paulo and Rio de Janeiro were expected to be big money makers for Uber before Didi Chuxing of China last year acquired a local ride-hailing company there and started pouring in money, which crimped Uber’s margins, people familiar with the business say. If Didi doesn’t lay down its arms, a merger might be one of the only short-term paths to profits there.

As things stand now, the U.K. (London in particular), South Africa and Australia (namely, Melbourne and Sydney) are among Uber’s best markets globally, with “contribution margins” of around 20%, said people familiar with the business. Contribution margin shows Uber’s profit margin after the impact of most costs, including insurance, credit card fees, local operations and customer support staff, sales and marketing, and allocated non-technical staff costs. There’s a correlation between market share and profit margin potential, Uber’s confidential disclosures have implied. Uber’s global market share estimates from six months ago can be found here

Still, it is unclear how many, if any, of Uber’s markets are nearly or completely efficient—in other words, where the company doesn’t have to juice either the supply side (with bonuses for drivers) or demand side (with discount coupons for riders). Investors ought to ask Mr. Khosrowshahi how many such markets will be at that level anytime soon and how much of Uber’s revenue comes from more efficient markets versus less efficient ones, however Uber categorizes them. Expect him to use a heavy dose of the words “rational” or “irrational” to refer to spending levels of competitors who are trying to eat into Uber’s market share.

For instance, one person who has worked for Uber put it this way: “We lose [money] in the top...markets. If everyone behaved rationally, [those markets] make money. Not much, but they [would] make money.”

What does the recent deal to buy Careem mean for Uber’s path to profitability?

The deal will help reduce Uber’s losses—a little. On several occasions in the past, such as in China and Russia, Uber resolved competitive threats and discarded loss-making businesses by selling to stronger local rivals. For a change, Uber recently agreed to acquire Middle Eastern rival Careem for about $3 billion in cash and stock. In the short run, the merger could help Uber save about $80 million a year in annual cash burn because it would be able to reduce certain forms of spending such as driver bonuses and rider discounts right away, this person said. That would represent about 4% of last year’s cash burn, so it will not be a major factor in Uber’s ability to reach break-even status in the near future.

The real impact is on Uber’s global revenue growth prospects. Between them this year Uber and Careem were expected to generate $3 billion in gross revenue from the region, which spans from Egypt to Pakistan. That would have translated to at least $250 million in net revenue each, said a person familiar with the deal. Over the next five years, though, the region could potentially generate $30 billion in gross revenue for Uber, said a person familiar with the estimate.

Take Saudi Arabia, which has the highest average fares in the region, and where business is booming. The Saudi government authorized a program over three years to subsidize rides for female passengers who travel to work. Uber has estimated this program could infuse more than $250 million per year into ride-hailing services.


How can Uber cut driver costs?

Employees at Uber (and Lyft) say there are plenty of ways for the companies to potentially pare down losses, mostly as a result of the data they have accumulated about riders, drivers and traffic patterns. For instance, Uber could do a better job of making sure the number of available drivers in a particular area is sufficient to meet the demand from customers requesting rides. To date, Uber has handed out financial bonuses to drivers based primarily on the number of trips they handle in a week. But many drivers end up working during periods of low rider demand, and that can lead them to use both Uber and Lyft simultaneously to see which one will give them riders, and to make it more costly for Uber to meet rider demand during peak times.

“Their work pattern doesn’t match up to what demand load is,” said one person familiar with the issue. In Uber’s bond offering documents from last fall, Uber said it has reduced its losses over the past year by doing a better job of targeting subsidies to specific drivers and not to others, reflecting the notion that some people will drive for Uber even without a bonus.

Now, Uber is trying harder to understand rider demand in different areas within a city and figure out ways to issue financial incentives to drivers to show up at the right place at the right time.

Investors should ask Mr. Khosrowshahi how these types of initiatives are going, and what stands in the way. It is also worth asking executives what Uber is doing to reduce the churn level of drivers in different markets—and what that the churn level is today versus a couple of years ago. Churn directly impacts Uber’s costs because it requires the company to shell out for ads and bonuses to entice new drivers.

Can Uber slow the growth of insurance costs?

Uber offers drivers insurance for liability in the case of accidents, and reducing insurance payouts is a high priority (as it is for Lyft, which just poached Uber’s head of insurance risk, Curtis Scott, for this purpose). Uber may have incurred costs of more than $2 billion related to insurance last year, if Lyft’s disclosures on its insurance costs are any guide. It’s been a longtime problem: between the fourth quarters of 2016 and 2017, for instance, Uber’s U.S. insurance costs rose so much that the company’s “cost of revenue” line item increased by 2.3 percentage points as a percentage of revenue at the time, or about $250 million, the company told potential financial lenders a year ago.

Uber, like Lyft, has other ways to reduce insurance costs. Both have a lot of data on dangerous intersections and likely can do more to steer drivers through safer routes. They also are able to track the average speeds of drivers, including seeing which ones take corners too quickly or speed dangerously in residential zones to understand which ones ought to get rewarded with the most valuable rides.

However, one person who is familiar with Uber’s practices says it must be careful not to run afoul of labor laws governing how contractors are treated, even if they are deemed to be risky drivers. Investors should ask Uber CFO Nelson Chai how much more room there is for Uber to cut insurance costs as a percentage of revenue.

Can Uber accelerate rider demand in the developed world?

It seems increasingly likely that Uber will reach a limit on how low it can price rides in markets like the U.S. That means there will be a cap on customer demand. In the past, lower cost ride options such as UberX and then Uber Pool (in which multiple passengers may be transported simultaneously) created tremendous demand boosts that kept more drivers busy.

Uber a year ago positioned Express Pool, its lowest cost ride option introduced last year, as the next potential catalyst. The company hasn’t disclosed much lately about Express Pool, which requires passengers to sometimes walk a short distance to reach an Uber vehicle, or to walk a little after the car ride ends. Investors should ask whether Express Pool will be able to make money and in how many markets it could work.

Will Uber be able to stop SoftBank from helping Uber’s rivals?

The short answer is no, for now, but Uber should try to figure out a way. SoftBank is Uber’s biggest shareholder, with a 16% stake. But through its $100 billion “Vision Fund,” SoftBank a year ago also led a $535 million investment in food delivery startup DoorDash, which competes with Uber Eats. Uber executives unsuccessfully tried to convince SoftBank not to do the deal, said a person briefed about the situation.

Much to Uber executives’ chagrin, DoorDash used that money to help grab market share that UberEats might otherwise have gotten, and to get further funding from other investors, according to third-party market share data and Uber shareholders who have tracked the situation.

SoftBank also has been investing in self-driving vehicle developers, such as Nuro and General Motors’ Cruise, that could compete with Uber and Uber Eats in the long term. Luckily for Uber, that’s far off. And right now it seems more likely the would-be rivals will have to find a way to work with Uber—by offering the tech to Uber customers through Uber apps—rather than try to compete directly.

What’s eating Uber Eats?

The silver lining in Softbank's investment in DoorDash is that it highlights the growth potential of the food delivery market. Regardless of how well DoorDash is doing, Uber Eats—already in more than 300 cities—can get a lot bigger. The question for Mr. Khosrowshahi is how much bigger can it get and how much value does he currently place on the business?

On a gross revenue basis, Eats likely generated $7.7 billion, or 15% of Uber’s $50 billion total for 2018, though net revenue might have been closer to $1 billion, or 9% of Uber’s total. (The net revenue share is lower in Eats than ride-hailing because restaurants take a cut as well as the drivers.) Eight months ago, Uber executives viewed Eats as a business worth at least $10 billion. Has that changed?

If Uber’s public offering document does not fully reveal Eats losses—which totaled less than $160 million during the first half of last year, and at least $300 million for the year, before interest, taxes, depreciation and amortization—investors should ask for details.

At the very least investors should demand some data on specific major markets that are profitable on a contribution margin basis—Florida and Seattle have been particularly strong in the past—and a projection on when the entire effort could be deemed profitable by some measure. Uber might hesitate to reveal details that might help its competition. Eats shares drivers with Uber’s ride-hailing service and it utilizes the same technical infrastructure, so Uber ought to explain how it is attempting to calculate Uber Eats’ profit margin.

How will Uber ease concerns about its autonomous vehicle unit?

One area where Mr. Khosrowshahi appears to have hesitated on making changes is autonomous vehicle research. A year ago, the unit got a black eye from a deadly collision in Arizona, which halted road testing for the better part of a year as managers re-examined poor practices. Yet the unit appears to have a similar budget this year as it did last year, burning $1 million and $2 million in cash per day, according to two people briefed about the spending. Investors may have a hard time accepting such an investment, with no clear path to showing a return. If the autonomous vehicle unit had been stripped out of Uber last year, the company would have burned 25% to 30% less cash for the full year.

In a move that underscores the technical challenge, Dan Tascione, a senior engineer at the unit, is leading a rewrite of some of the unit’s outdated software in a program dubbed “RNA,” or repository for new architecture, said a person briefed about it. After getting approval to restart road tests of its vehicles in Pittsburgh, Uber is trying to get the same approval for testing in California, this person said.

Mr. Khosrowshahi reportedly is looking to allow existing Uber investors including SoftBank and Toyota to take a stake in the autonomous vehicle unit at a different valuation from core Uber. That could erase worries about its cash burn for now. Whether Uber can persuade anyone else to buy stock in such a unit, given its uncertain prospects, is another question.

What is the potential profit margin and size of Uber’s truck freight marketplace?

The U.S. freight brokerage industry generates about $80 billion in gross revenue annually, estimated Timothy-James Henry, an early Uber Freight employee who is now a consultant to commercial logistics and transport companies. It looks like Uber will be able to capture 1% or 2% of that market by the end of this year, three years after starting the business: Uber’s business—connecting truckers or truck fleets with companies that need to ship their freight in the U.S.—could cross $2 billion in terms of bookings, or gross revenue, this year, said a person briefed on a recent internal projection. That figure would be a roughly 200% increase from 2018, this person said.

If Uber Freight obtained traditional freight brokerage gross margins, its net revenue could be around $300 million annually if it indeed generated $2 billion in bookings. However, the unit is likely to operate at a loss for the foreseeable future and needs to be at a much bigger scale to make money. (The freight unit has more than 540 employees.) A lot of Uber’s freight brokerage deals are still negotiated over the phone rather than on Uber’s marketplace app.

Historically, no matter the macroeconomic outlook, freight brokers can average a margin of between 6% and 8% before interest and taxes, said a person who has recently been involved in Uber Freight. That makes it one of the better transportation-related businesses to be in, this person argued.

One potential advantage for Uber Freight versus other brokerages is the well-known Uber brand behind it, which “can open doors” with potential big customers, Mr. Henry said. And Uber has the capital to be able to pay drivers and fleets right away for carrying big loads for major customers. Those customers may not be able to pay Uber for 90 days or longer. Speaking of potential big customers, Uber recently was hired by Niagara Bottling, the Canada-based bottled water purveyor, to move bottles through at least one major corridor in the U.S., according to a person briefed about the deal.

Like with Uber’s ride-hailing business, the company’s freight business hopes to obtain enough volume of goods to be able to attract more drivers or fleets to move the freight. “You buy a lot of volume and optimize later,” Mr. Henry said. “It’s a strategy.”

Still, the company must compete with a bevy of established brokers like UPS’s Coyote Logistics—from which Uber Freight drew inspiration—and C.H. Robinson; fleet owners like J.B. Hunt that have brokerage arms; and startups like Convoy and Transfix. It’s worth asking what Uber is planning to do differently from the other newcomers, and how much of the traditional gross margin it is willing to forego in order to gain market share.

Does Mr. Khosrowshahi have any other ideas to increase Uber’s valuation?

Mr. Khosrowshahi, who took the reins of Uber in mid-2017, has a big incentive to get Uber’s valuation up—and to keep it up for a while. He has only a negligible equity stake—just under 200,000 shares compared with nearly 100 million shares held by his predecessor and Uber co-founder Travis Kalanick, according to a person with knowledge of the figures. But he will get a sizable equity award if Uber reaches a $120 billion valuation after it goes public and remains at that valuation for 90 consecutive days, according to people briefed about the original deal. The stock award will vest in phases.

Investors should therefore ask Mr. Khosrowshahi what he’s thinking about in terms of future products that might help Uber double, triple, or quadruple its valuation after the IPO. One area he has talked about only internally as a potential new business is Uber’s recently launched digital wallet in its app. “Uber Cash,” as it’s called, allows customers to store value in the app from which they could pay fares at a discounted rate, depending on how much money they transferred to Uber Cash.

Other ride-hailing companies like Grab have turned such wallets into new businesses, by helping customers use them make purchases of other products, sometimes by letting merchants send them targeted offers, for instance. In other words, an advertising business for the ride-hailing company. Some commentators have suggested Uber could even use its wallet capabilities to launch a cryptocurrency.


Amir Efrati is executive editor at The Information, which he helped to launch in 2013. Previously he spent nine years as a reporter at the Wall Street Journal, reporting on white-collar crime and later about technology. He can be reached at [email protected] and is on Twitter @amir