Uber promises profit for the first time ever
An unsustainable business model
According to Columbia Business School professor Len Sherman, “No venture has ever raised more capital, grown as fast, operated more globally, reached as lofty a valuation - or lost as much money as Uber”. While Uber may be famous for its rapid growth and soaring revenues, many people remain oblivious to the fact that Uber loses money, and a lot of it.
At first glance, it may be difficult reconcile the asset-light business model that Uber operates with the discrediting concept of unprofitability. If Uber’s contracting drivers drive their own cars and pay for their own petrol and insurance, how can the company still be losing hundreds of millions of dollars each quarter? It is precisely this naivety that led to venture capitalists finding Uber’s ambitious and disruptive business model so enthralling over the last decade. But in April 2017, Uber (still not public and not required to report its earnings) disclosed its finances for the first time and reported a loss of $3.8 billion for the previous financial year.
Why is it so? The issue goes to the root of the taxi and ride-hailing industry, and reflects their deep structural deficiencies. The taxi industry that Uber is looking to disrupt is simply not profitable without regulation which serves to control the competition, as it is flooded with competitors thanks to very low barriers of entry. There is also a lack of ‘switching costs’ between the various ride-service providers; consumers tend to just go with whoever is least busy or wherever they can get the lowest pricing at that time. In essence, it follows that whenever Uber tries to raise prices their profitability takes a hit.
Profitability - coming soon?
Uber is the world’s largest ride-hailing app - and it has never even turned a profit. But things may start to change; “we recognise that the era of growth at all costs is over” said Dara Khosrowshahi, the CEO of Uber. This statement was accompanied by the disclosure of the company’s fourth-quarter financials, as well as the moving-forward of the company’s targets to achieve profitability by a year to the fourth quarter of 2020. Essentially, Mr. Khosrowshahi pledges to cut costs, with the aim to generate more repeat-customer business.
However, some analysts remain skeptical. Eric Ross (an analyst at Cascend Securities) goes as far as saying that he prefers the stock of Lyft over Uber - a smaller ride-hailing competitor. This is because whilst Uber has greatly diversified its business through expanding into food delivery and even the development of self-driving cars, Lyft has not invested in costly side-projects.
Against the backdrop of Uber’s shares rising 5% on reassurances about their financial targets, Dan Ives (an analyst with Wedbush) expounds that “Rome was not built in a day and neither will the Uber growth story”. The company has made steps in the right direction and has has vowed to exit markets where becoming the dominant market force is unlikely. For instance, Uber sold its money-losing Indian-based food business last month to a competitor. Ultimately, Uber has delivered a promising quarter which should strengthen investor confidence in the company, but will still have to do more to turn around its business in an attempt to break the barrier that is profitability.
