As Uber Swoons, Dara Chases Growth While Travis Dumps His Stock

Uber faced a chilly reception on Wall Street earlier this month after revealing a third-quarter loss of $1.2 billion. Uber’s stock price sank nearly 10% the day after its disappointing earnings report, and now trades nearly 40% below its IPO listing price.

CEO Dara Khosrowshahi has tried putting lipstick on this pig by noting more than half this year’s losses are attributable to non-cash accounting charges for stock-based compensation. But hey, rather than debating the intricacies of GAAP accounting, let’s not lose sight of Uber’s elephant in the room: Uber’s quest for profitability is still heading in the wrong direction, bolstering the company’s dubious distinction of losing more money faster than any startup in history.

It wasn’t supposed to be this way. After replacing Travis Kalanick as Uber’s CEO over two years ago, Dara pledged to repair Kalanick’s fractious board relations, instill a new cultural norm to “do the right thing, period,” continue growing into the company’s self-declared $12 trillion addressable market, and achieve profitability, now targeted as early as 2021.

In preparing for life after Travis, Uber’s board looked for a completely different type of executive to take the company forward. Dara’s deliberative, principled and downright avuncular management style (not to mention his early commitment to take Uber public) was ideally suited to restoring effective board governance and taming Uber’s cultural wild side.  And yet, Dara and Travis have proved to be remarkably similar in prioritizing growth over profits, propelling Uber’s dismal financial performance to this day.

While both CEO’s aggressively expanded the scale and scope of Uber’s unprofitable core ridesharing and meal delivery businesses, Dara has gone a step further, diversifying into a number of speculative new businesses to reposition the company as “the operating system for everyday life.” But extending an enterprise built on a shaky financial foundation is highly inadvisable.

Uber’s core ridesharing business, representing 82% of company revenues, cannot possibly justify the company’s market value, even at its current depressed level. As has been reported extensively elsewhere, ridesharing is an intrinsically low value business, capable at best of low growth and marginal profitability. The reason is simple: every assumption Uber made about its supposed productivity improvements, network effects, scale economies, winner-take-all monoply pricing power, regulatory freedom and near-term conversion to driverless vehicles has proven wrong. Uber is not alone in this rude awakening. None of the other global ridesharing leaders — Lyft, Didi, Ola and Grab — has made money either.

Uber Eats, accounting for 11% of revenues, was supposed to be Uber’s financial savior. Shortly after coming on board in 2017, Dara was reportedly “pleasantly surprised” by Uber Eats’ performance and committed to expanding its global operations. But on Uber’s Q3 earnings call, Dara acknowledged that Uber Eats’ quarterly loss of $316 million ballooned by 67% over the past year, on disappointing bookings growth.

No wonder. Restaurant delivery has always been a financially fraught category. Bankruptcies abound, and the remaining well-capitalized competitors are engaged in fierce competition, including DoorDash, Postmates, and Uber Eats, none of whom are profitable. Industry veteran Grubhub has barely eked out a 0.4% sales margin this year, while seeing its stock price decline 75% from last year’s high.

With 93% of Uber’s revenues thus mired in businesses with weak fundamentals, it is perhaps not surprising that Dara has embarked on a Quixotean quest for greener pastures elsewhere. On his watch, Dara has initiated or amped up investments in Uber Freight, Jump (scooters and bike sharing services), Uber Elevate (urban air services), Uber Works (gig economy hiring services), and Uber Money (financial services), none of which are expected be profitable for years to come.

In the meantime, Uber’s deepening losses – not to mention slowing topline growth – has run afoul of Wall Street’s growing demand for companies to demonstrate a clear path to profitability. On his Q3 earnings call, Dara provided his first-ever profit guidance, indicating Uber might break even on an adjusted EBITDA basis by as early as 2021. In a sign that the company may be willing to trade off some growth for profits, Uber’s CEO also noted he would consider selectively retreating from metro markets where Uber Eats can't be a market share leader.

But this tentative guidance raised more questions that it answered.

• Neither Dara nor CFO Nelson Chai provided specifics on how Uber would go from losing more than $4 billion over the past year to near-term breakeven. As Chai equivocated: “We don't want to get too stuck on 2021. As Dara said, we're still in the process of working through it.” 
• There were no details on what adjustments would be included in Uber’s definition of “adjusted EBITDA.” In years past, Uber has taken some dubiously generous exceptions to GAAP accounting protocols, so investors would be wise to read the footnotes when details emerge.
• Perhaps most importantly, there was no mention of just how much growth Uber might be willing to forego to achieve near-term profitability.

Investors have already expressed considerable skepticism about Uber’s strategy and business outlook, as reflected by the steady stock price decline since Uber’s IPO. And there is strong reason to believe that Uber may still be over-valued, given the company’s dismal profitability, slowing growth and questionable guidance.

A company that perennially burns $3 billon-$4 billon of cash every year is worth no more than its liquidation value. So the only way to justify Uber’s current $50 billion market value is to assume the company can and will achieve significant profitable growth in the meaningful future.

To evaluate Uber’s business outlook, I applied a discounted cash flow valuation model developed by investment research firm New Constructs* to answer two basic questions:

1. How long would it take for Uber’s operating cash flows to justify its current stock price of $29 per share, based on relatively optimistic forecasts of Uber’s revenue growth and profit margins?
2. Alternatively, what would have to be true about Uber’s growth and profits to justify its current stock price within the next five years?

To answer the first question, I assumed that Uber would achieve breakeven (on a pre-tax profit basis) by 2022 by ceding some growth over the next five years (viz. 20% annual growth, down from Uber’s current, but steadily declining 30% rate). Further downstream, I assumed Uber’s annual growth rates would kick back up to 30% as new businesses gained traction, and that pre-tax profit margins would grow to 8%. These margin assumptions are generous, given the recent performance of comps in the ridesharing, food delivery and gig employment sectors, not to mention Uber’s role model, Amazon, whose current pre-tax profit margin is only 5%. Even with these generous assumptions, Uber’s projected cash flows couldn’t justify the company’s current $29 share price until the year 2031.

To justify Uber’s current $50 billion market cap in a shorter time frame, say within 5 years, one such scenario would require Uber to break even by 2021, and then achieve accelerating annual growth rates (up to 50%) and profit margins (up to15%) over the ensuing decade (by which time, its revenues would exceed $600 billion). Suffice it to say, such a remarkable turnaround is as incredulous as Dara’s presumption of Uber’s $12 trillion addressable market.

The exhibit below exhibits Uber’s historical and projected profitability between 2014 and 2024 for the two scenarios described above. As shown, even the more conservative (base case) estimates of Uber’s path to profitability imply a $7 billion profit swing between 2019 (-$4.3 billion) and 2024 (+$2.7 billion). There have been epic “hockey-stick” recoveries of this scale before, from companies like Apple, IBM, GM and Lego. But in each of these cases, the companies implemented a massive strategic reset, fired tens (or even hundreds) of thousands of employees, shuttered multiple non-performing businesses and brands, and brought in a new CEO to lead the turnaround effort.

In contrast, Dara’s timid first steps at restructuring Uber’s poorly performing core businesses simply don’t approach the breadth and urgency of past successful turnarounds. To be fair, Dara inherited a broken business over two years ago, at a time when Wall Street appeared to value growth, uber alles. But Dara continued to embrace his predecessor’s fixation on growth-at-all-costs long after he should have been balancing his efforts between strategic growth initiatves and core business profitability.

The clock is now ticking for Dara to demonstrate that he is the right leader to “do the right thing, period” in delivering an improbable hockey-stick recovery. One large investor has cast a no-confidence vote. Travis Kalanick dumped $1.5 billion of his Uber stock this month.