6 key insights for Uber's mega-IPO

April 15, 2019 10:37 AM

Uber is a lot more than a ride-sharing app — it is also one of the most disruptive forces in payments.

Its achievements include creating a seamless payments experience that allows riders to travel without needing a card or cash; and a cobranded credit card account that allows people to apply for and manage the card without ever leaving the Uber app. Its Asian rival, Grab, has already gone much farther in operating its own financial services arm.

Uber's influence is set to pick up even more speed in what is expected to be the world’s largest IPO, valued at $100 billion —which four times the previous record setter, Alibaba ($25 billion in 2014), and more than five times the amount raised by another record setter, Visa ($17.9 billion in 2008).

However: In its S-1 Registration, Uber reports that it may never achieve profitability. Reuters reported that investment bankers had been initially discussing a $120 billion valuation but have become more conservative as of late. Perhaps Lyft’s poor performance after its IPO has cast a shadow over Uber upcoming IPO.

The company breaks down its business in three main product lines: 1) Personal mobility (ride share, scooters and bikes); 2) Meal delivery (Uber Eats); and 3) Logistics (Uber Freight).

Heavy competition from Lyft in its ride share business and from Grub Hub and Square in its Uber Eats delivery business have left Uber's net adjusted revenue has been flat for the last three quarters.

One cause for slower growth has been the increased regulations the company faces in its personal mobility segment. Austin, Texas and Santa Monica, Calif., limit the aggregate number of dockless bikes and scooters Uber can provide. Other cities, such as San Francisco, have put similar limits in place. In Fort Lauderdale, Florida Uber failed to obtain the necessary permits for its bikes and scooters so it was not able to expand in that market, according to its S-1 Registration (pages 56-57).

While Uber Eats may have expanded its deal with Starbucks from a limited rollout in Miami last September to more than 2,000 stores in December, its sales peaked in the second quarter of 2018 at $218 million, and have rapidly fallen to $165 million in the fourth quarter of 2018. Competitive pressure in the meal delivery space is rapidly growing and is a direct threat to Uber Eats.

Uber’s rideshare business is particularly vulnerable to laser-focused competitive pressures on specific cities, despite its service being available in over 700 cities across 63 countries.

According to its S-1 filing (page 38), roughly one-quarter (24%) of its ride share gross bookings came from just five cities or metro areas: Los Angeles, the San Francisco Bay Area, New York, London, and Sao Paolo, Brazil. If Lyft were to step up driver and consumer incentives in those three U.S. cities — or BlaBlaCar, which operates in the U.K. and Brazil were to do the same — it would have a material impact on Uber. Similarly, 15% of Uber’s ride share are trips to and from an airport. Any regulatory (airport or municipal) or competitive pressure could damage Uber’s business.

In fact, the there is a substantial risk to Uber’s business in London. In its S-1 Registration (page 54), Uber explains that Transport for London announced in September 2017 that it would not renew Uber’s license to operate in London because “it determined that we were not fit and proper to hold an operator’s license.” Uber did appeal and was given a 15-month license to operate in London instead of the usual five-year term. If Uber is not successful in complying with the terms of the 15-month license it could lose one of its biggest markets.

Additionally, regulatory actions in New York City impacted how much Uber pays its drivers, forcing it to meet minimum hourly wages; and San Francisco has proposed a surcharge on Uber rides. Uber also reports that in key markets such as Argentina, Germany, Italy, Japan, South Korea, and Spain it has been blocked, capped or suspended; or it has been forced to change its business model.

Since Lyft awarded its drivers with one-time cash awards when it did its IPO, it should come as no surprise that Uber would do the same thing, lest it risk a revolt among its drivers. However, Uber’s award program has a few differences that make it a little better.

While the top two awards being given to drivers are identical in money and qualification to Lyft’s program, Uber has actually put up awards for drivers who have given less than 10,000 lifetime rides – something Lyft did not do.

Both Lyft and Uber require that drivers be in good standing, yet Uber is also requiring that the driver is currently working for Uber by having given one Uber ride in 2019. While the company does not define what “good standing” means, it could potentially be interpreted that the 60,000 drivers seeking arbitration claims and all of the California and Massachusetts drivers who sued Uber and won a settlement will not be getting a cash award.

In its S-1 Registration Uber states that the amount of the reward paid to qualifying drivers outside of the U.S. may be adjusted to account for differences in average hourly earnings by region.

Uber is so well known for having a seamless payment experience that it has set the gold standard for others to match.

This gives the impression that all of its payments are digital – but that’s not true. In fact, Uber allows users to pay with cash for rides and meal delivery in Brazil, where one of its top five markets resides (Sao Paolo). It also accepts cash in Mexico, India and certain other countries in Europe, Asia, the Middle East, Africa and Latin America. In 2018, Uber drivers handled 13% of its total Gross Bookings ($49.8 billion) in cash or about $6.5 billion.

Having such a high percentage of sales tied to credit and debit cards allows Uber to keep much of personal mobility (ride share, bikes and scooters), meal delivery and freight payment experiences digital, however it does create a major vulnerability. If one of the payment networks experiences a major outage, as Visa and Mastercard did in Europe in June and July of 2018, Uber would largely be unable to earn any money. In fact, in markets such as the U.S. where its customers can't pay with cash, all its businesses would cease to function. Similarly, if Stripe were to experience an outage, Uber could potentially be unable to pay its drivers.

Lyft’s S-1 Registration (page 79) shows that its active riders grew more than fivefold between the first quarter of 2016 and the end of 2018, while Uber’s S-1 Registration (page 101) shows active platform user growth was at almost the same level. While Lyft ridership is almost entirely in the U.S. and Canada, Uber serves 63 different countries. Lyft’s numbers are pure ride share, scooter and bike users. However, Uber calls their users “monthly active platform consumers” or MAPCs — which includes rideshare, scooter and bike renters, as well as Uber Eats customers.

While Uber suffered heavily during the #DeleteUber media campaign, according to its S-1 Registration, its active platform growth demonstrates that was perhaps just a speed bump. The movement occurred largely in the first two quarters of 2017, when Uber added 12 million new MAPCs.

When it comes to profitability, both Lyft and Uber reported operating losses in their S-1 Registration filings — but the reality is that they have very different contribution margin stories. Losses from operations for Lyft in 2018 were $977.7 million, and for Uber in 2018 were $3.03 billion.

Contribution margin is defined as selling price minus variable cost to deliver goods or services, and is seen as a measure of the ability of a company to cover variable costs with revenue.

The amount left over, the contribution, is used to cover other fixed costs such as admin and R&D, or is taken as profit. Having a strong, positive contribution margin is critical for a company to cover its other costs and pay its shareholders a profit dividend.

Over the last two years, Lyft has been generating a 30% contribution margin or better from its rides, according to its S-1 Registration (page 84) — while Uber has not even come close. In the last two years, Uber’s contribution margin from its core platform has only reached the double digits in two out of eight quarters, based on its S-1 Registration (page 104).