Be Wary of Uber-valuations in the New Year

2017 was a trying year for Uber with respect to negative headlines.  It was the subject of high profile accusations of systemic sexism that resulted in the dismissal of over 20 employees. It revealed that it had engaged in a cover-up of a massive hack of confidential customer information.  It is preparing to go to trial with Alphabet Inc. over accusations that it stole trade secrets.

However, the most troubling bit of news for Uber that surfaced in 2017 may be a gray lining in a silver cloud of ostensibly good news concerning Uber this past week.  Uber is widely perceived as, in the words of the Wall St. Journal, “the most valuable U.S. start-ups” and one that is likely to test the public markets in 2018 or 2019.  The gray lining concerns the true value of this ‘most valuable’ of start-ups.

On December 28, 2017, Softbank Group Corp. announced that it had won a bid to acquire approximately 18% – 20% of Uber.  Softbank revealed that the price it had paid values Uber at approximately $48 billion – $51 billion, a good 25% less than Uber’s most recent publicly reported valuation of $68 billion.

Uber is a private company.  However, Uber’s financials were apparently leaked to the Wall St. Journal and certain information regarding the Softbank deal was discussed by both Softbank and Uber.

A $20 billion valuation discount is certainly remarkable and indicates that Uber’s business model, revenue and earnings are hardly proven out to the point where they can be valued with precision.

Additional questions regarding Uber’s profitability came to the fore this past week on December 26 when Uber announced that it was selling its US subprime auto-leasing business, which operated under the name Xchange Leasing.

Uber utilized this business to attract workers (i.e. drivers) in sufficient numbers to give its service the scale to compete against established taxi companies.  Uber decided to close this business because it was losing roughly $9,000 per car.

Uber is selling the car leasing business to a start-up entity called Fair.com, which will offer Uber drivers access to its cars as part of the transaction.

The losses reported by Uber’s leasing unit call into question whether the basic arithmetic of Uber’s business model foots out to profitability.  Apparently, the cars being leased were relatively attractive and required drivers to make monthly lease payments of up to $500, including insurance and other fees.  In order to meet these stiff payments, drivers were forced to drive long hours and many returned the cars markedly worse for wear, hurting resale values.

It remains to be seen how and why outsourcing the car leasing division will result in Uber offering a winning profit formula.  The costs inherent in owning, maintaining and insuring vehicles that are attractive to customers should not materially change just because these costs are now borne by Fair.com. Inevitably, these costs will be reflected in the price of the service offered and the income made by the drivers.

To date, the price of the service offered has been attractive to the customers.  However, income for drivers is much more suspect and may be the problem that Uber ultimately cannot solve.

Uber’s stunning average loss per leased vehicles indicates that many would be Uber drivers simply do not make enough money to stay in business.  Anecdotal information is hardly encouraging. Tales of financially disappointed Uber and Lyft drivers are common enough and this tax season should add some further statistical detail to this common knowledge.

With respect to drivers that have built up a steady clientele, there is little to keep them from offering their services independently from Uber or Lyft.  How will Uber or Lyft maintain barriers to entry? Regulation?  To date, they have trounced the taxi industry on this front in the US on the pretext that they are technology companies.

On December 20, 2017, the European Union decided that Uber was indeed offering taxi services and was not just a technology company.  There is no movement afoot nationally in the US to follow suit, although some municipalities may no doubt do so.

Uber has enjoyed a good valuation run with the Softbanks of the world being a ‘disruptive technology company’.  However, at some point in the very near future it will be a company that has a technology that used to be disruptive.  At that point, Uber will be valued based on its actual earnings, especially measured vis-à-vis competitors.

Investors should insist on some clear direction on that front before taking a ride with Uber.

About Chris Donnelly

Christopher J. Donnelly, is an experienced attorney, bond analyst and fixed income strategist, with years of experience in structured finance, distressed bonds and bond related litigation in a variety of industries and the emerging markets. He is a graduate of Rutgers University (BA), The University of Pennsylvania (JD) and New York University, (LLM in Taxation). Chris is a Managing Director of Straacom, LLC and can be contacted at cdonnelly@straacom.com. Straacom provides strategic research, analysis and communications for publication and on assignment for private clients.

Leave a Reply

Your email address will not be published. Required fields are marked *

*