S-1 reports are expected to have outrageous claims, such as having a $12 trillion addressable market. Big stories yield higher valuations, and in Uber's UBER case, that valuation is $80-90 billion. Aside from becoming one of the most valuable money-losing companies, it will also be one of the largest IPO's of all time.
The analyst estimates show a lot of bullishness, but we at Countach Research could not feel any more indifferent towards that. In all fairness, there are a few good arguments: losses are depreciating as a percentage of sales, there is core unit profitability and fixed cost scalability, the food delivery market is growing, the approach to their autonomous driving department shows a smart balance and increased liquidity in key markets leads to a margin advantage.
We are not concerned about the statement that they might never reach profitability either. We interpreted it as a simple way for lawyers to communicate that risks are involved with any investment.
Risks are involved indeed, risks that are not fully understood by most analysts.
Uber will continue to be in a pricing war with LYFT Inc LYFT. After raising close to $10 billion with the IPO, Uber will hold enough cash to sustain their current burn rate for nine years. In comparison, Lyft will only be able to sustain their current burn rate for three years. However, Uber will not be heading towards profitability in the near future. The pricing competition will continue, and as a result Uber will protect their market share at all costs, regardless of the billions that will be lost annually.
But there's more to this. The last few years were marked by questionable management practices, and poor managerial decisions will continue to take the charge. On page 31 of its S-1, Uber stated that reduced driver incentives will lead to increased driver dissatisfaction. However, drivers are the principal assets of the company. With an increasing cost for driver acquisition, the focus should be on driver usage rather than pushing drivers to seek alternative offers that pay more.
And that leads me to my next point. Nearly a quarter of Uber's revenue is being generated in five cities: Los Angeles, San Francisco, New York, London and Sao Paulo. Any local competitor is able to enter that market and capture a significant market share for that one specific city. In this case, the value of Uber's superior global network has less use. On top of that, Uber will see an increasing competition from alternative transportation methods. Nearly half of all drives in the U.S. are less than three miles, a short distance that can be travelled using e-scooters and dockless e-bikes as well.
There is further competition ahead. At first, we will have a group of major OEM's that will all start their own ride-sharing projects, presenting an incredibly tough competition for Uber to compete against. Autonomous taxis are perceived as a future savior for Uber, but Alphabet Inc's GOOGGOOGL Waymo is well ahead in this industry segment.
One of the solutions could be further diversification, but into what? Freight delivery, helicopter transport, pallet delivery, bikes? These are all highly competitive industries that will make it incredible tough for Uber to become a profitable entrant.
But one of the biggest red flags is the S-1 itself. We are interested to see what the acquisition cost and retention rate is for drivers, riders and restaurants. All of this information is extremely important, but not available. How about revenue and profit by geography, the effect of driver incentives on their top line, their cost allocations, separation of ride-sharing and uber-eats? Once again, unknown. Whenever there is such a lack of information, we get a bit suspicious. On top of that, the fact that Jeff Jones, who has proven to be an incredible executive, left after four months with potentially hundreds of millions in stock options thrown out the window. Red flags are all the way up.
The only two questions that an investor should ask are whether the $80-90 billion valuation is justified and whether there is a favorable risk-reward ratio. In our opinion, it is not and there is not.
As a crowd favorite, it is dangerous to go short on an overhyped company with a lot of public support. We will closely examine the first three trading days after the IPO, and if there is a clear directional trend, it will allow a safer entry for a position.
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