More reasons to avoid Uber’s IPO
Uber says it is only in the early stages of capturing a $12 trillion total addressable market that includes personal mobility, food delivery, and freight shipping. So, if you believe its prospectus, the potential upside should be huge. But how realistic are its aspirations?
When investing in Private Equity I have always zipped up my wallet when a presentation contains a hope to capture a small percentage of a huge market. Typically it goes something like this: “the market is worth X billion dollars, so even if we only capture one per cent of that market, we’ll make a fortune.”
Uber’s prospectus plays that exact same card.
Uber implies a very long runway for growth through increased penetration, within existing markets, by noting that just two per cent of people in the 63 countries where Uber does business have used the ride-hailing service.
That’s a problem when you consider the company has been operating for more than 10 years, since March 2009, and according to Crunchbase, has raised a total of $24.7 billion in funding over 23 rounds.
If 10 years and US$25 billion gets you two per cent penetration, how much more money and time will it take to grab the fruit that isn’t as low-hanging?
Instead of answering that question, Uber notes that it’s only in the early stages of capturing a $12 trillion total addressable market (TAM) that includes personal mobility, food delivery, and freight shipping.
But it’s relatively easy to see that Uber is playing the same unrealistic TAM card. Global GDP was about US$82.4 trillion in 2018, and according to World Bank, it wasUS$80 trillion in 2017. Of that number China, where Uber has been run out of town, was $12.24 trillion. If Uber’s addressable market is US$12 trillion, they’re claiming their addressable market is about 18 per cent of global economic activity excluding China.
We also know growth is actually slowing. If the market was as large as Uber claims, and momentum was behind its service, growth would be accelerating from the current one or two percent penetration. According to company data, however, quarterly Core Platform Adjusted Net Revenue has been flat for the last year.
The reason might be that in the US, 22.5 per cent of new car registrations in 2014 were to millennials, those aged 25-34. In 2018, that number was 28 per cent. To put that level of ownership in perspective, baby boomers were responsible for 33.8 per cent of new car registrations. In other words, millennials have become car buyers as holidays, convenience and practicality catch up with the younger generation.
Moreover, between 2012 and 2017 US household vehicle ownership grew at a faster rate than the population in all of the United States eight largest cities.
Keep a simple fact in mind: Uber is a taxi service and taxis have been around for more than half a century…and we still own cars.
And despite news stories suggesting younger generations such as millennials love high density city living and will therefore be more likely to use ride-hailing and car-sharing, there was a two million person increase in the number of millennials in the US between 2010 and 2018 but most of them – 78.9 per cent – chose to live in the suburbs and beyond.
Finally, it appears ride hailing might actually be maturing. For example, in the US in 2017, using a ride hailing service more than once per week commanded 23 per cent of all ride hailing. In 2019 that figure fell to 12 per cent. The same decline has been observed in Japan and Germany and the decline was even more pronounced in Korea, China and India.
Ride hailing will not, it seems for some time, transform behaviour or car ownership.
Other interesting data points
We noticed that Uber’s Gross Bookings, which represents the total amount of money spent by users on Uber’s platform, jumped 11 per cent in the fourth quarter of 2018. At the same time, however, core net revenue was reported to have fallen one per cent.
The reason is likely to be that its ‘Take Rate’, which is the percentage of Gross Bookings it keeps as Core Platform Adjusted Net Revenue declined 18 per cent through 2018, from 22 per cent in the first quarter to 18 per cent in the last quarter.
Thanks to PR disasters including a driver strike in L.A., as well as allegations of sexual harassment, passenger murders and the #deleteUber campaigns, Uber has been losing market share to rivals such as Lyft in the US. In Asia, Russia and China it has been run out of town.
According to data firm Second Measure, Uber’s share of the U.S. ride-share market declined from 82 per cent at the beginning of 2017 to 71 per cent at the end of the year.
Clearly, in order to maintain market share (forget about growing), the company is paying more of its revenue away to drivers and restaurants in the form of bonuses and incentives.
Keep another simple fact in mind; Uber doesn’t make money because either it isn’t charging enough for its product or its costs are too high. Its popularity to date is therefore a function of the fact that consumers have benefited from their Uber rides being subsidised by the company’s Private Equity backers and their clients.
No wonder they want to sell out through an IPO.
Private Equity generally makes a profit for its investors through selling the businesses it owns rather than from dividends generated by the business. Given stock market investors have nobody else to sell to, I suspect they’ll be far less patient and willing to reinvest, than those that have funded the Uber experiment for the last ten years.
And so, you can probably kiss that total addressable market goodbye.