Investors have long been concerned about the profitability of Uber Technologies Inc. (UBER), and those concerns have only heightened as the company’s revenue growth slows. But Uber, whose stock has fallen nearly 33% since the company first went public back in early May, is still growing and its management remains positive about future opportunities. While profitability remains a question, Bank of America recently highlighted some reasons to stay optimistic about the ride-hailing company that has disrupted traditional taxi services around the world.
- Uber shares down 33% from IPO price of $45.
- Bank of America sees potential for Uber to become profitable.
- Growth opportunities in Uber Comfort, Business, and Eats segments.
- But revenue growth is slowing amid a high rate of cash burn.
What It Means for Investors
The big opportunities driving rides growth are in some of Uber’s new segmentation products. Uber Comfort, which allows users to request special comfort services when they order their ride, is starting to pick up and is performing well, while Uber Business has further room for expansion in the underpenetrated market for airport trips. Uber Eats, the food delivery segment, faces many competitive challenges but larger basket sizes have been one positive sign.
Further, despite California’s recent passage of Assembly Bill 5, or AB5, which makes it harder for companies like Uber to classify drivers as contract employees, Uber is optimistic that its business will be largely unaffected. Either the new bill will have little effect on how the company classifies its drivers, a possibility that has precedent in states with similar regulations, or AB5 will act like a tax that Uber will mostly be able to pass on to customers with little effect on demand.
Bank of America also noted Uber’s optimism over its negotiations with Transport for London, London’s transportation regulator, and that the company expected to receive a license to operate. However, a ruling came through on Tuesday last week, and while Uber did receive a license, it was for a timespan of just two months, one of the shortest time frames ever granted by the agency, according to Barron’s.
That setback comes amid wider concerns of the company’s slowing quarterly revenue growth. In its second-quarter earnings report issued in August, Uber announced revenue growth of 14%, its slowest quarterly gain ever, and the fourth consecutive quarter in which revenue has slowed. Gross bookings fell to 31% from 49% from the year-earlier quarter, and the company continues to burn through cash at an alarming rate, as net cash used in operating activities for the quarter jumped by a factor of six over the year to $922 million.
The slower growth and cash burn rate are perhaps much more worrisome than the overall loss of $5.2 billion, which was inflated by a one-time, non-cash charge of $3.9 billion related to Uber’s initial public offering (IPO). Losses are generally expected for companies that are still in an investing-for-growth mindset. However, when that growth starts to slow, investors are going to want to start seeing signs that the company’s management has a straightforward plan for not just growth, but profitable growth. At this point it’s not clear that Uber’s management does.
“You can get away with these large losses when the growth rates are quite high, because many of your expenses, of course, are investments in the future,” said Wharton adjunct professor of finance David Wessels. “But in this particular case, it’s just bad news when the numbers are so low.” Wessels noted that Uber is still sitting on about $15 billion of cash, but if it continues to burn cash at a rate of $1 billion a quarter, that gives it about 15 quarters to turn things around.
While Uber has become somewhat of an Amazon.com of the transportation industry, offering not just ride-hailing services but food-delivery and even bicycle-sharing and scooter-sharing services, the company may have to start focusing its energy on which of its businesses have the most promising future and let go of those that look less likely to succeed.