Uber’s IPO Troubles – Will it be Profitable for Investors?
I’m an economist. Thus, if you ask me about a company’s prospects, I will pose three questions.
1. Do the company’s products offer value that customers will pay for?
2. Can the company profit that value at a profit?
3. How easy or difficult is it for a competitor to do the same thing?
These questions are vital for investors to ask — especially when it comes to the technology companies on the verge of an initial public offering (IPO).
The Buzziest IPO of All
“Cars are to us what books were to Amazon.”
This statement came from Uber’s CEO, Dara Khosrowshahi, last July. He — like his fellow spinmeisters at Uber — wants you to associate his company with Amazon so you will buy it at its IPO. In fact, Uber says that it’s following the Amazon model, focusing on growing revenue and market share so that one day it can become profitable.
He continued: “Just like Amazon was able to build this extraordinary infrastructure on the back of books and go into additional categories, you are going to see the same from Uber.”
Don’t believe this for a second.
Uber: Not the Amazon of Transportation
Unlike Amazon, Uber has never turned a profit — and it never will. There are several reasons for this…
First, Uber’s costs aren’t fixed. It must pay individual drivers to provide rides, so its costs go up as it expands. And Uber has no scope to reduce costs.
Second, Uber’s market is a patchwork of local markets. People want rides within those markets. They don’t care who provides them or whether that company operates in other places.
Third, it’s all too easy to develop and launch a local ride-sharing app. Thus, Uber faces intense competition from taxis, Lyft and city-based ride-sharing startups like Juno, Gett and Arro.
Lastly, Uber’s drivers can easily switch to one of its competitors.
Let’s return to the questions I posed earlier:
1. Do Uber’s products offer value that customers will pay for? Yes.
2. Can the company provide that value at a profit? No.
3. How easy or difficult is it for a competitor to do the same? Extremely easy.
Uber shares may provide some short-term gains … But whatever you do, don’t buy and hold.
Editor, The Bauman Letter
An economist by training, I grew up in the U.S. but emigrated to South Africa in the mid-1980s where I became deeply involved in the development and implementation of post-apartheid economic and urbanization policy. During the 90s and 2000s, I was a consultant to a variety of entities, including African and European governments and the United Nations.