Last Thursday, April 11, Silicon Valley poster boys-founded start-up Uber Inc filed the most-awaited IPO of the year. The offering, led by Goldman Sachs and Morgan Stanley along with 27 others, that looks to raise around $10 billion is easily one of the biggest ever. Its been widely speculated that Uber will breach the $100 billion valuation mark with the offering.
According to Recode, Uber was valued at $76 billion last year. In a letter to the investors, CEO Dara Khosrowshahi said, Our continued success will come from stellar execution and the strength of the platform we have worked so hard to build.
This message, however, comes along with the warning that the company might never reach profitability.
Uber using its preferred metric, Monthly Active platform consumers (people who used its service at least once a month); the figure has doubled to 91 million from 2016. It stresses on the huge potential of Uber Eats, which it believes is addressing the $795 billion market. With $7.9 billion in revenue, it believes it has penetrated just 1% of the market and feels its stellar execution might help realise that.
Why did Uber go for the IPO?
Ubers need for cash is more than ever right now, especially considering it has made its foray into different segments now. According to the its official website, Uber currently offers a variety of services. Apart from Uber Eats it has:
- Uber Health: Under this, it offers rides to patients and caregivers. Uber has partnered with several healthcare organisations.
- Uber Freight: At a nascent stage, it is an app that matches carriers with shippers.
- Uber Bike: This is their latest offering. It lets a person rent out electric bicycles. At the moment, this service is available only in San Francisco and Washington DC.
And this is not all. Uber is investing heavily in its research and development.
According to its prospectus, in 2018 alone, it invested a mammoth $1.5 billion in its R&D activities; a major chunk of it went to Uber Air and Advanced Technologies Group. With Uber Air, it plans to create flying cars with vertical take-off and landing capabilities. Advanced Technologies Group offers driverless car solutions. Both projects are being eyed as the future of transportation.
According to TechCrunch, Uber has announced that it will give its full focus to the two projects to dominate these sectors. In the process, it has begun competing directly with other giants, namely Google, Amazon, and Tesla.
Taking into account all of the above-mentioned segments, Ubers plan has been to expand and expand fast. If it hadnt gone for the IPO, the company would have crumbled under the weight of the billions invested in R&D and would have to write them off without getting back a dime.
Why then cant Uber be profitable?
Its prospectus states, “We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability.”
There are various reasons that led Uber to make this statement. Firstly, it needs large cash investments in cutthroat segments, and secondly, it incurs a mammoth R&D bill. If we add marketing costs and incentives to both drivers and users among other expenses incurred, it becomes clear that the revenue doesnt match up.
According to a Forbes report, one of the main reasons behind Ubers recurring losses is the low barriers to entry. One can easily set up an app and go for partnerships with drivers. The services on offer would be identical, leading to customers not staying loyal to the platform. This, in fact, has led to rise of regional players across the globe.
In its home turf, Uber has been battling it out with Lyft. According to Recode, Uber has a 69% market share in the US. In Southeast Asia, it had to fight with Anthony Tan-led Grub, which led to Ubers exit. In the Middle East, it had to buy out Dubai-based Careem for a whopping $3.1 billion.
In 2017, it was forced to merge with the home-grown ride hailing company Yandex. In one of the most lucrative markets worldwide, Uber was booted out by Didi Chuxing, resulting in yet another sale of operation to its direct rival. And finally, in India, Ola enjoys a marginal advantage owing to the fact that it had a three-year head start over Uber.
Other problems and perceptions
According to Financial Times and the prospectus, Uber acknowledged the prevalent perception that Uber is a toxic place to work, mainly due to alleged harassment and discrimination rampant under former CEO Travis Kalanick.
It also admitted that it lost a lot of users due to the #DeleteUber campaignthis campaign led to Kalanicks ouster. However, even now, Kalanick remains the single largest shareholder at Uber with a whopping 117.5 million shares; Khosrowshahi owns just 1.96 lakh. Other major shareholders include Canadian businessman Garrett Camp, the Softbank Group, and Saudi Arabias sovereign wealth fund with 82 million, 222 million, and 73 million shares, respectively.
Ubers plan for India
Uber has placed big bets on the Indian market, where it first started the cash acceptance service for its rides. According to Economic Times and Ubers prospectus, cash paid trips now account for 13% of the $50 billion gross bookings worldwide. The feature is available in 50 counties.
India is also an important market for Uber EatsUber has mentioned in its filings Indian start-ups Swiggy and Zomato as its direct competitors.
In its filing, it states that it has been making huge investments in partnerships and promotions to drive growth but lacks local expertise that its Indian counterparts has.
It has also flagged several issues in the high growth market, such as growing dissatisfaction among the drivers due to lack of incentives. It described India as one of the few markets across the world where it can face issues of predatory pricing, price-fixing, and abuse of market power.
The way forward, lit by a silver lining
The Uber IPO is on the complex side of the spectrum. Taking cues from tech unicorn start-ups going for IPOs, like Snap and Lyft, which had warned investors that it might never achieve profitability, Uber has followed suit by stressing on the growth story.
Uber has incurred $8 billion in losses since its inception. However, what works in its favour is the fact that it has become more than just a cab aggregator company. It also holds a dominant position in major markets across the world.
On the flip side, it also has many legal battles to face due to cases of harassment, rapes, etc, courtesy drivers across the world.
Only time will tell whether the IPO has been a success or not. Uber is slated to begin trading from early May on the New York Stock Exchange.
Hemant Agarwal is a Writing Analyst at Qrius