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Hubert Horan: Can Uber Ever Deliver? Part Twenty-Three: Uber’s Already Hopelessly Unprofitable Economics Take A Major Coronavirus Hit

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Hubert Horan: Can Uber Ever Deliver? Part Twenty-Three: Uber’s Already Hopelessly Unprofitable Economics Take A Major Coronavirus Hit

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Yves here. I supposed I should not be surprised that Uber is bleeding cash at an astonishing pace, yet the press natters on about no-plausible-path-to-profits food delivery services.

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Last Thursday, Uber announced a first half 2020 GAAP loss of $4.7 billion with a GAAP net margin of (-81%). Uber’s “official” full year 2019 result was a GAAP loss of $8.5 billion with a (-60%) margin, but these were based on problematic accounting that makes it impossible to evaluate Uber’s financial performance properly over time. After necessary adjustments that were documented in Part 22 [1], the more meaningful full year 2019 result was a GAAP loss of $5.9 billion with a (-42%) margin. Uber has now lost $23.2 billion in the past four and a half years.

Uber burned $4 billion in cash in the first half of 2020. As of June 30th, it had $7.8 billion in unrestricted cash and short-term investments on hand. Uber’s full year 2019 cash burn was $5.1 billion.

For readers who have followed this series’ depiction of Uber’s awful economics and financial results over the past four years, these headlines may seem no more surprising than “Francisco Franco is still dead.” [2] Nothing has happened to change the fact that after ten years, riders have always been fundamentally unwilling to pay prices that would cover Uber’s actual costs, that Uber was always less efficient than the traditional taxis it drove out of business, that its only “efficiency improvement” was to push driver compensation to minimum wage levels, and that its growth depended entirely on unsustainable predatory subsidies.

But if anyone still thought that Uber could somehow magically reverse its multi-billion dollar losses, the coronavirus should have put their fantasies totally to rest. The coronavirus has crushed the major drivers of urban car services demand, including business travel and discretionary urban entertainment (clubs, restaurants, etc.). Their customers remain highly concerned about the health risks of all forms of public transportation.

While many industries have been devastated by the coronavirus it is critical to distinguish between those that clearly had a strongly profitable business model prior to the pandemic (United Airlines, Disneyland, Major League Baseball) and a company like Uber that had been incapable of generating positive cash flow under ideal economic conditions. There needs to be discussion about how to best restructure airlines, tourist and entertainment industries because they have contributed to overall economic welfare in the past, and clearly can in the future. Uber has only served to reduce overall economic welfare. Society has nothing to gain from “saving” Uber.

2ndquarter Uber revenue in its core “rides/mobility” business fell 74% ($3,056m to $790m) from the 4thquarter of 2019, the last quarter with no coronavirus impacts. Echoing issues discussed in part three of my airline series [3] there is no prospect of any type of robust “V-shaped” urban car service revenue recovery. Demand may remain seriously depressed for years.

2ndquarter Uber revenue in its “Eats/delivery” business doubled but the economics of these services were always substantially worse than Uber’s hopeless car service business. Uber only reports segment financial performance on an “adjusted EBITDA” basis that (in the 2ndquarter) excluded 38% of actual Uber expense from its “profitability” calculation. But 2ndquarter “Eats/delivery” had an “adjusted EBITDA” 25 margin points worse than car services, even after the big coronavirus driven boost in food delivery demand. And since Eats’ year-over year “adjusted EBITDA” improved by only $54 million (from negative $286 million to negative $232 million) even though revenue doubled, this business is clearly not “growing into profitability.”

Food delivery is hypercompetitive (DoorDash, GrubHub, JustEat, Deliveroo), neither customers nor restaurants can afford the true cost of the service, and none of these companies have ever been sustainably profitable. Uber has never presented a plausible argument it will suddenly become the first company to realize returns from investments in this business.

Coverage of these results in the business and tech industry press was a bit less fawning than the coverage Uber received a few years ago. The fact that Uber has always been unprofitable and is still facing major legal challenges to its labor practices is now at least mentioned in all stories. But none of the dozen or so stories published on Friday [4] even raised the issues of whether (or how) Uber revenue might suddenly recover, or how Uber could quickly achieve cash breakeven. The question of whether the coronavirus shock had significantly increased the risks to Uber’s viability and survival was totally ignored.

Most stories emphasized top-line volume numbers instead of GAAP profits or cash flow. None made any mention of the impact of the revenue collapse on Uber’s drivers, who comprise roughly 80% of Uber’s business model but are not included in its financial reports.

A couple of stories noted that the ridesharing collapse had been ugly, but most tried to obscure this issue by emphasizing the “pivot to delivery” as a “bright spot” and highlighting Dara Khosrowshahi’s claims that with Eats, the company “had built a second Uber in under three years” and “ha[s] secured the path forward.” None addressed the question of whether Uber could ever earn sustainable profits from food delivery. [5] None of the stories mentioned that recent Uber narrative claims such as the profit potential of driverless cars, or that it would soon become the “Amazon of Transportation” were totally absent from its presentation about 2ndquarter earnings.

Several reporters cited Khosrowshahi’s new claim that Uber would achieve “EBITDA profitability” by the end of 2021. None of these reporters appeared to understand that this measure was neither “profitability” or “EBITDA” [6]. None made any effort to document how Khosrowshahi hoped to achieve these multi-billion dollar improvements, or mentioned Uber’s failure to achieve any of its past profitability promises or to otherwise evaluate the credibility of its newest promise. A couple of articles noted a previous Uber’s promise to remove $1 billion in “fixed costs,” but failed to note that Uber has never publicly explained where these cost cuts would come from, or that nothing in its 2ndquarter financial release provided any evidence of progress against that target. None considered how long it might take to exhaust Uber’s remaining cash given highly depressed demand, or whether a company reporting these results would be able to attract new financing.

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[1] In order to boost reported profitability prior to its IPO, Uber improperly reported its internal estimate of non-marketable securities it received in exchange for shutting down failed overseas operations as profits from ongoing, continuing operations. After its IPO it recorded the full value of employee stock based compensation in its 2ndquarter 2019. While this was in accordance with GAAP, this was compensating employees for work performed over multiple years. These adjustments and Uber’s historical P&L data are shown in Can Uber Ever Deliver? Part Twenty-Two: Profits and Cash Flow Keep Deteriorating as Uber’s GAAP Losses Hit $8.5 Billion, Naked Capitalism February 7, 2020.

[2] https://gfycat.com/flattautcoral

[3] Hubert Horan: The Airline Industry Collapse Part 3 – Recovery Expectations Were Always Dreadfully Wrong, Naked Capitalism, August 4, 2020. One should also note that the exact magnitude of the coronavirus demand shock will vary between companies depending on their cost structure. This will be larger for companies (including United Airlines, Disneyland, Major League Baseball) who have a large base of semi-fixed costs that cannot be quickly reduced when revenue unexpectedly collapses. Uber’s business model also allowed it to shift most of the coronavirus financial pain to its drivers, who immediately lost almost all their income.

[4] Examples (all published August 6th) include Danielle Abril, Everything to know about Uber’s second-quarter earnings, Fortune, Preetika Rana, Uber Ridership Fails to Recover as Pandemic Drives Another Big Loss, Wall Street Journal, Sara Ashley O’Brien, Uber’s delivery service is now bigger than its rides business, CNN, Amir Efrati, At Uber, Food Delivery Surpasses Rides, The Information, Kirsten Korosec, Alex Wilhelm, Uber’s delivery business is now larger than ride-hailing, Techcrunch, Aarian Marshall, Uber’s Now a Food Delivery Company—and It’s Still Losing Money, Wired, Lizette Chapman, Uber’s Quarterly Sales Tumble, Ending a Decade of Growth, Bloomberg Lora Kolodny, Uber ride-sharing revenue plummets, food delivery more than doubles, CNBC, Kate Conger, Uber’s Revenue Craters, as Deliveries Surge in Pandemic, New York Times.

[5] None of the news coverage of Uber’s earnings release mentioned any of the economic problems with the food delivery but I found one commentator that did. Jamie Powell, Food delivery: if not now, then when? Financial Times Alphaville, August 7, 2020

[6] Uber’s “EBITDA” measure excludes significant costs other than interest, taxes, depreciation and amortization. See Uber Part 22. Prior to the pandemic Khosrowshahi had promised that Uber would achieve “EBITDA profitability” by the end of this year, and (as with the revised claim) none of the stories reporting that promise explained what his plan for achieving that consisted of, or whether those promises were credible.

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