Uber: King of the Unicorns

So what’s a “Unicorn”? In finance, a unicorn is a start-up company valued at over US$1 billion and like its mythical namesake supposedly rare and “seldom seen”. Well not anymore, since now there are over 197 private companies valued in excess of US$1 billion. At the top of the heap is ride sharing pioneer Uber, valued at a remarkable US$70 billion.

How did Uber achieve this? By becoming one of the most successfully disruptive (and controversial) companies of the 21st century, Uber has mastered the formula for disruption: find an industry that is monopolistic,  large (and preferably regulated), provides poor customer satisfaction, employs outdated technology, and is expensive and inefficient to use. That is the taxi industry writ large.

What is Uber? Uber is an on-demand transportation and mobility service which connects consumers and passengers with car drivers via its smartphone app. Car (or taxi) drivers use their own cars when providing taxi service and Uber gets 20% of the fare. Uber is not in the taxi business, it owns no cabs. Essentially it operates as a marketplace, matching a driver/car with a consumer looking for a ride

Uber was founded in 2009 by current CEO Travis Kalanick and now Chairman Garret Camp. Originally called UberCab, it allowed San Franciscans to hail a hire car with a smartphone. Since then, the company, now known as Uber, has quickly expanded world- wide. In July 2016 Uber announced that it had completed its two billionth trip, just six months after reaching one billion rides. Uber currently operates in over 500 cities and 75 countries..

Uber’s entrepreneurial streak has continued to evolve beyond its core car transportation business. In 2012 it launched UberX, a low cost alternative to Uber. In 2014 it started UberRUSH, a cycle delivery service in NYC, and UberPOOL, a service that allows multiple passengers to share routes and costs. In 2015, Uber launched UberCARGO, a moving and logistics service, and then in 2016 launched UberEATS, an on- demand food delivery service. Via the app consumers can summon a ride,  get food delivered, or deliver a package – no matter what they want, when they want it, or where they want it.

In 2015, CEO Kalanick flagged his intention to move into self- driving cars and hired researchers from the robotics department of Carnegie Mellon University and established Uber’s Advanced Technologies Center.  Since then Uber has operated experimental fleets of autonomous vehicles in Pittsburgh and Arizona. Uber is playing the long game here, envisioning an autonomous fleet that some believe is the future of transportation and mobility.

General Motors backed Lyft is Uber’s closest competitor followed by Ola (in India) and Grab (in South-east Asia). Currently Uber has a dominant leadership position in ride-sharing. Recent surveys indicate 76% of ride sharing app users use Uber most frequently and 78% of Uber users were “extremely” or “very” satisfied with Uber’s offerings.

Uber arguably has one of the best products in the mobile consumer technology space. Uber has created a simple, easy to use,  compelling product which is able to satisfy a large number of consumers and drivers. A consumer survey of 1,500+ Uber users indicates consumers take 2.3x trips per month and spend $15.10 per trip; convenience & price as the top two reasons to choose Uber. Drivers like the flexible work schedules, seamless cash free payments, and the ability to earn incremental income.

Private companies are not obliged to publish financials, but in a reaction to a number of recent controversies (sexual harassment claims, an exodus of senior executives, a lawsuit from Google over self- driving cars and deceiving regulators), the company recently released its 2016 accounts. What they do show is Uber is truly a growth machine with 2016 bookings increasing 126% to US$20 billion. Net revenue was US$6.5 billion. In 4Q 2016, gross bookings increased 28% from the previous quarter to $6.9 billion and the company generated $2.9 billion in revenue, a 74% increase from 3Q 2016. That said, Uber is still loss making. Adjusted net losses were US$2.8 billion. Losses are not unusual in start- ups in expansion phase and revenue growth is far exceeding losses. On May 31 2017, Uber declared that firm’s first-quarter revenue is already 18% higher than Q4 2016’s at $3.4 billion. Uber still lost US$708 million but that’s 28% less than the US$991 million it lost in the last quarter of 2016.

Unfortunately, Australian retail investors can’t directly invest in Uber at this point as it is still a private company. However, Uber may eventually do an IPO even though they are currently able to fund the business. They may want a currency to make acquisitions or its early investors may want an “exit”. If Uber does IPO, I won’t be a buyer, in spite of its impressive growth prospects. Why? Buying much hyped IPOs is a mugs game. Shares are priced according to demand not the value of the enterprise. Potential investors should wait until Uber is seasoned as a public company and has reported a few quarters. It’s very likely Uber shares will eventually trade well below the issue price. Hot IPOs such as Facebook, Twitter, Tesla, Linkedin, and Alibaba all retraced the over hyped post issue share price and provided huge opportunities for savvy and patient investors.

Uber Quarterly Net Revenue Growth

Uber Growth

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances. Past performance is not a reliable indicator of future performance.