Uber business model and IPO

Uber recently became public company, which led to questions on their business model, huge debts etc.

I’ve decided to read report filed with United States Securities and Exchange Commission (Form S-1,Registration Statement). That’s long report with same information repeated over and over again. Here’s key takeaways.

Uber is technological company with on-demand service. Everything started in 2009 with simple idea “tab a button and get a ride”. Eventually to ensure company’s public listing (IPO) in New York Stock Exchange.

Company’s mission: “to ignite opportunity by setting the world in motion”. Company operate in 63 countries by own operation or minority owned affiliates. According to the Report, in 2018: consumers travelled 26 billion miles using uber platform.

Main Uber services:

  1. Uber Rides. Since 2015 drivers earned $77.2 billion. And $1.2 billion earned by tips (since 2017 launch).
  2. Uber Eats. (Food delivery service) Based on Gross Bookings it’s largest in the world food delivery system (excluded China’s food delivery services). In South-East Asia and Russia/CIS meal delivery done by minority owned affiliates Grab and Yandex(taxi).
  3. Uber Freight. Optimized and on-demand cargo transportation for seamless operation. By using Uber Freight service it’s easy to book truck in a few clicks with upfront cost and real time tracking system.In US launched in 2017, contracted over 36000 carriers by 400000 drivers. Revenue $125 million. In 2019 Uber Freight announced expansion into European market.
  4. Advanced Technology Group. Development and perfection of autonomous vehicles driving technology for long-term potential benefit. In ATG employed more than 1000 employees.

For expansion, Uber must achieve profitability and pay off debts. In March 2019, it announced an asset purchase agreement with Careem (Dubai-based ride-sharing company). Careem operates in Middle East, North Africa and Pakistan. Acquisition price $3.1 billion. After acquisition Careem’s CEO will continue to lead the business.

Uber’s team actively working to introduce Uber Green (dockless e-bikes, electric vehicles) to decrease air pollution in Berlin and Munich.

Company’s liquidity created by following ways :

  • More drivers (higher payments, better working conditions, flexible working hours)
  • Lower wait times and fares (on average less than 5 minutes waiting time).
  • More rides (demand prediction, matching and dispatching, upfront price estimation, robust payment infrastructure, machine learning software platform).
  • Higher potential earnings for drivers and Company.

There’s massive market opportunity for Uber:

  1. Total addressable market: 63 countries with 4.1 billion people.
  2. Serviceable addressable market (currently serving market).

According to Uber Report key growth elements include:

  • Year to year increase in ride-sharing services.
  • Expansion in new countries.
  • Fast growth of Uber Eats.
  • Strategic acquisitions and investments.
  • Easy and fast launch of new products on company’s platform.
  • More drivers.
  • Short waiting time.
  • More customers.
  • Expansion of Uber Freight.
  • Investment in machine learning and driverless cars.

Please check screenshot from Uber’s Report with their official financial data.

In 2018 revenue $11,270 million ($11 billion +) which higher from 2017 results of $7,932 million. Total cost and expenses $14,303 million (14 billion+).

$14,303 – $11,270 = $3,033 million (loss from operations). This number means that company not profitable.

As of December 31, 2018 Uber’s total liabilities $17,196 million (more than $17 billion+). On same date Uber’s total assets $23,988 million (almost $24 billion).

On screenshot from Uber Report presented information about monthly platform users, trips, gross booking, adjusted EBIDTA, etc.

Monthly active users as per December 31, 2018 was 91 million, fulfilled more than 5 billion trips with gross booking almost $50 billion.

Uber attracted many investors in last 10 years. Every investor want to get invested money plus handsome return. Most probably it’s main reason for IPO. Also Company’s CEO get huge salary and stock (around $40 million).

In every business risks available. When company apply for IPO then list of most probable risks published. Here’s main risks which Uber might face in near future:

  1. Competition in ride-sharing, food delivery, freight, autonomous vehicles, etc.
  2. Low switching cost between platforms for users.
  3. Uber contractually restricted from competing with minority owned affiliates but in same time minority owned affiliates not prohibited to compete with Uber anywhere in the world.
  4. Possible lowering of prices to stay competitive in the market.
  5. Uber incurred significant losses in past and may not achieve profitability.
  6. Drivers classified as independent contractors. If drivers considered as employees than it will lead to extra expenses for the company.
  7. Unavailability of sufficient drivers, food delivery orders, shippers, etc. Ride-sharing business based on availability of drivers on-demand with only a few minutes to reach pick up place.
  8. Driver qualification and background checks. It’s extra cost for company.
  9. Brand reputation damage.
  10. Need in more local qualified employees. As per December 31, 2018 by company employed 22,263 global employees.
  11. Safety incidents which negatively impact reputation.
  12. Cost of insurance and insurance policy.
  13. Investment in new technology and offerings which may not result in increased profitability of the Company.
  14. Operational risk in foreign countries: law changes, political instability, language, social acceptance of brand, customers preferences, competitors, currency exchange rates, import and export restrictions, data collection and sharing with US, intellectual property protection, etc.
  15. Limited influence over minority owned affiliates.
  16. Ride-sharing demand fluctuation.
  17. Large number of gross booking comes from metropolitan areas and airport pick up & drop off.
  18. Risks related to autonomous vehicles development. Company’s competitors may develop and start using technology faster or with bigger profit.
  19. Change in consumer spending habits may negatively influence business. As more customers save as less probability that they will pay for taxi.
  20. Increase price of fuel and food will negative impact business.
  21. Lack of addition capital (high cost of capital) to support business growth.
  22. Software malfunction, data loss, hacking attacks may negatively influence on business profitability.
  23. In some countries it’s possible to pay COD (cash on delivery) for food and taxi.
  24. Payment gateways issues.
  25. Internet reliability.
  26. Apps development and software updates.
  27. Crucial ability to carry forward net operating losses.
  28. Careem related acquisition risks.
  29. Legal and regularly risks.
  30. Intellectual property protection.

The ride-hailing company went public at $45 per share. After IPO company’s shares fell sharply. Currently priced $43.

Stock experienced high volatility and provide excellent chances to earn in short run. I would not recommend this stock for long term.

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