Author Topic: Uber filing for IPO  (Read 2317 times)

Jurgis

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Re: Uber filing for IPO
« Reply #10 on: April 12, 2019, 10:14:05 PM »
Anecdotally, Lyft has been offering discounts for quite a while. Possibly in preparation for IPO, possibly to grab market share, possibly to show growth, possibly all of these. I don't have preference, so I've been using Lyft predominantly, except when I see surge pricing on Lyft, but Uber has no surge pricing at the time.

Although I somewhat agree with Broeb22 about duopoly pricing, there seems to be an issue that to pay drivers "normal" wage and to be profitable, Uber/Lyft will have to drive up  8) prices a lot. Which will likely drop the number of rides which may drop the number of drivers, which ... - not a positive cycle. Unless the riders are so hooked up that they'll tolerate way higher prices. Or companies will find a way to profit without driving the prices up. But it's not easy to see how they would do it apart the magic "self-driving cars" spiel.

"Self-driving cars" is not really an answer. First, the development is taking longer than expected. Second, it's not clear that Uber/Lyft will dominate self-driving car ecosystem.

As a customer, I'm afraid of the bearish predictions that either Uber/Lyft will drive up prices to close to old taxi pricing or they'll go out of business and we'll go back to old taxi pricing anyway. I'd like to hope that this won't come true. But Spekulatius was right in his initial post - investors are subsidizing the riders so far.
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wachtwoord

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Re: Uber filing for IPO
« Reply #11 on: April 13, 2019, 05:34:15 AM »
Why are they IPO'ing now? Do they think they reached their ceiling, do they need investments and can't borrow cheaply enough or do insiders simply want to cash out and diversify their risk?
"Beware of he who would deny you access to information, for in his heart he dreams himself your master"

DTEJD1997

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Re: Uber filing for IPO
« Reply #12 on: April 13, 2019, 07:32:55 AM »
Hey all:

I've said it before and I'll say it again.

I'm not sure there is a viable business model here.  The possible exception would be that the business model is simply to go public and cash out on bag holders.

If Uber can double their sales, do they make a profit?  Probably not.  What level of sales do they need to grow to get profitable?  Hard to say...but it is incredibly higher than what it is today.

Another factor is how do they increase profitability?  Pay drivers less?  Call me crazy, but I just don't think that is going to work.  There are all sorts of problems now with drivers & reporters & studies saying that drivers make less than minimum wage.

Do they get more efficient on the back end?  Stop churn of drivers and new driver bonus?  Sell the data?  Maybe?  They are losing so much $$$ as a percent of revenue, it is hard to see how they close the gap to profitability.

As to self driving cars, why would Uber want them?  They would have to buy them, and insure them, and maintain them.  Why would you undercut a minimum wage driver who is providing their own vehicle?

Bottom line is that I don't think there is much profit to be captured here, and thus no business model.


Pelagic

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Re: Uber filing for IPO
« Reply #13 on: April 13, 2019, 08:49:32 AM »
Why are they IPO'ing now? Do they think they reached their ceiling, do they need investments and can't borrow cheaply enough or do insiders simply want to cash out and diversify their risk?

While I'm inclined to go with the investors want to cash out while the market is hot, the S-1 does sort of answer this, they need money to grow and don't have many other options.

Page 41

Quote
We will require additional capital to support the growth of our business, and this capital might not be available on reasonable terms or at all.

To continue to effectively compete, we will require additional funds to support the growth of our business and allow us to invest in new products, offerings, and markets. In particular, our dockless e-bike and e-scooter products and autonomous vehicle development efforts are capital and operations intensive and we may require additional capital to expand these products or continue these development efforts. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders may suffer significant dilution, and any new equity securities we issue may have rights, preferences, and privileges superior to those of existing stockholders. Certain of our existing debt instruments contain, and any debt financing we secure in the future could contain, restrictive covenants relating to our ability to incur additional indebtedness and other financial and operational matters that make it more difficult for us to obtain additional capital with which to pursue business opportunities. For example, our existing debt instruments contain significant restrictions on our ability to incur additional secured indebtedness. We may not be able to obtain additional financing on favorable terms, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when required, our ability to continue to support our business growth and to respond to business challenges and competition may be significantly limited.

I enjoyed reading pages 25-74 where they discuss risk factors as its a good look at the industry and the challenges they face. They were surprisingly forthright including stating that they may not achieve profitability, are highly dependent on high growth rates to scale the business, and will continue to compete for market share using rider/driver incentives to match their competitors in certain markets, even if said incentives lose money for the company.

When we look at businesses benefiting from network effects we try to determine what it's costing them to acquire additional customers relative to the lifetime value of that customer. However in Uber/Lyft's case I think a more telling metric might be what it's costing them to acquire drivers relative to the value of that driver. In my mind their pool of drivers in cities across the world is their most valuable asset. Customers are fickle, I switch between Uber and Lyft for a few pennies and will almost always comparison shop my ride between the two. Having some indication of the costs involved in maintaining sufficient driver supply and how long a driver can be expected to last relative to what they bring in, would be useful.
« Last Edit: April 13, 2019, 08:51:25 AM by Pelagic »

wabuffo

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Re: Uber filing for IPO
« Reply #14 on: April 13, 2019, 09:01:12 AM »
There are no economies of scale in the taxi business.  Each and every current Uber/Lyft trip is uneconomic and has to be "sold" to the rider at below its cost.  Uber/Lyft are the quintessential examples of losing money on every ride but trying to make it up on volume, LOL.

The only way Uber/Lyft can make money is to take more of the gross billing from the driver.  But this is problematic since even at current pricing levels, the average Uber driver makes less per hour (<$10/hr) than working at McDonalds (with no benefits) based on this detailed study of Uber driver earnings.
https://www.ridester.com/2018-survey/

I'm not sure how much more Uber/Lyft can take from drivers without losing them (even though there is some informational asymmetry between these companies and their drivers).  And of course, raising gross fares to allow both the driver and the company to make money will drive away consumers/invite more competition.

I seriously doubt that these are viable businesses.  There's zero innovation here, just a huge subsidy that is unsustainable - though the IPO proceeds will keep it going for a little while longer.  But going public now also exposes the financials to the light, so we'll see if they can continue to defy the laws of economics.

wabuffo
« Last Edit: April 13, 2019, 09:21:59 AM by wabuffo »

vinod1

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Re: Uber filing for IPO
« Reply #15 on: April 13, 2019, 10:46:18 AM »
I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

DTEJD1997

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Re: Uber filing for IPO
« Reply #16 on: April 13, 2019, 06:39:35 PM »
I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

Vinod

Vinod:

If prices for Uber/Lyft are raised 30% or so, then would they only be just a LITTLE cheaper than a regular cab?

Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

Is that enough to achieve profitability?

vinod1

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Re: Uber filing for IPO
« Reply #17 on: April 14, 2019, 04:26:15 AM »
I spent more than $15,000 annually in each of the last 3 years on Uber. It is about 35% to 40% cheaper than taking a taxi. So what would cost $100 is costing me $60-$65.

Given all the conveniences it offers over taxi, a 15% to 20% discount would make Uber/Lyft a no brainer. So I think they can increase prices by about 30% - 35% and still offer a compelling value proposition.

I have not looked at the S-1 yet, but if the business can make money once prices are increased by 30-35% and it reaches scale, I think it is a viable business model.

Right now market share is extremely important and it is local market share that is important. So I can understand why each company would be hell bent on increasing the market penetration as much as possible.

At the local level one of the companies is going to become dominant and in aggregate one dominates 60% of the local market and other dominates the other 40%, they can exist in a fashion similar to Visa and MasterCard.

Vinod

Vinod:

If prices for Uber/Lyft are raised 30% or so, then would they only be just a LITTLE cheaper than a regular cab?

Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

Is that enough to achieve profitability?

It might be easier to look at it this way:

1) Uber/Lyft are a much better experience than Taxi service from a user perspective. They are easier to use in almost every respect for users.

2) Uber/Lyft are also from a business model perspective, structurally more efficient and can be operated at lower cost than Taxi service. No need to operate a bunch of people to operate the phone banks to route and coordinate between users and drivers. You are automating the intermediation between users and drivers. That by definition should be lower cost. The software to develop and run is expensive but it is a fixed cost. You know the drill - scale, operating leverage, etc.

3) We know that Taxi service is profitable at least before Uber/Lyft.

It follows from the above three points that Uber/Lyft would be profitable at some point. We have an existing business that is profitable and if you can find a better way to do that same business and at a lower cost, why is it such a stretch to think it would not be profitable?

Put valuation aside, I did not look at S-1 so have no comments on that.

Uber/Lyft should be reporting losses at this time. In fact, they should be willing to lose as much as they can afford to while the growth opportunity is still available.

Not my style of investment, but I can understand why they are doing what they are doing.

Vinod

The fundamental algorithm of life: repeat what works. –Charlie Munger

SHDL

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Re: Uber filing for IPO
« Reply #18 on: April 14, 2019, 07:59:41 AM »
Perhaps even more importantly than that, IF they raise prices 30%, how much of that 30% do they get to keep?

Do you not think that the drivers will notice prices are going up 30% and want SOME percentage of the increase?  Many drivers are grousing that their share of the fees was reduced.  If rates go up, I would suspect that Uber has to give SOME of increase to the drivers.  So, if rates go up 30%, Uber maybe splits it with drivers, so Uber gets 15% more?

Is that enough to achieve profitability?

Some back-of-the-envelope calculations using numbers from the S-1 (in billion $):

- Revenue = 11.3
- Total costs and expenses = 14.3
- Interest expense = 0.6

So if Uber had a way to magically increase its revenue by ~30% (without incurring additional costs or expenses) they could stop losing money.  That should be enough to keep the company alive, but not much more.

Now if Uber could charge its customers 30% more per ride AND not lose any market share AND keep the entire 30% without sharing any of it with its drivers, it’s a totally different story.  Their gross bookings (i.e., the cash they get from customers before paying drivers) for 2018 was 49.8B, so under this scenario their revenue and pre-tax income should go up by 15B or so.  If you think this is what is going to happen, it should be pretty easy to justify the 100-120B IPO valuation.  This scenario strikes me as way too optimistic, but anyway. 

Broeb22

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Re: Uber filing for IPO
« Reply #19 on: April 14, 2019, 07:35:51 PM »
Lyft and Uber could frankly be priced at parity with taxis and I would still go with them every time. They offer a better service, so even at pricing parity I'm getting a better value.