Hubert Horan: Can Uber Ever Deliver? Part Twenty-Three: Uber’s Already Hopelessly Unprofitable Economics Take A Major Coronavirus Hit

Yves here. I supposed I should not be surprised that Uber is bleeding cash at an astonishing pace, yet the press natters on about no-plausible-path-to-profits food delivery services.

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Last Thursday, Uber announced a first half 2020 GAAP loss of $4.7 billion with a GAAP net margin of (-81%). Uber’s “official” full year 2019 result was a GAAP loss of $8.5 billion with a (-60%) margin, but these were based on problematic accounting that makes it impossible to evaluate Uber’s financial performance properly over time. After necessary adjustments that were documented in Part 22 [1], the more meaningful full year 2019 result was a GAAP loss of $5.9 billion with a (-42%) margin. Uber has now lost $23.2 billion in the past four and a half years.

Uber burned $4 billion in cash in the first half of 2020. As of June 30th, it had $7.8 billion in unrestricted cash and short-term investments on hand. Uber’s full year 2019 cash burn was $5.1 billion.

For readers who have followed this series’ depiction of Uber’s awful economics and financial results over the past four years, these headlines may seem no more surprising than “Francisco Franco is still dead.” [2] Nothing has happened to change the fact that after ten years, riders have always been fundamentally unwilling to pay prices that would cover Uber’s actual costs, that Uber was always less efficient than the traditional taxis it drove out of business, that its only “efficiency improvement” was to push driver compensation to minimum wage levels, and that its growth depended entirely on unsustainable predatory subsidies.

But if anyone still thought that Uber could somehow magically reverse its multi-billion dollar losses, the coronavirus should have put their fantasies totally to rest. The coronavirus has crushed the major drivers of urban car services demand, including business travel and discretionary urban entertainment (clubs, restaurants, etc.). Their customers remain highly concerned about the health risks of all forms of public transportation.

While many industries have been devastated by the coronavirus it is critical to distinguish between those that clearly had a strongly profitable business model prior to the pandemic (United Airlines, Disneyland, Major League Baseball) and a company like Uber that had been incapable of generating positive cash flow under ideal economic conditions. There needs to be discussion about how to best restructure airlines, tourist and entertainment industries because they have contributed to overall economic welfare in the past, and clearly can in the future. Uber has only served to reduce overall economic welfare. Society has nothing to gain from “saving” Uber.

2ndquarter Uber revenue in its core “rides/mobility” business fell 74% ($3,056m to $790m) from the 4thquarter of 2019, the last quarter with no coronavirus impacts. Echoing issues discussed in part three of my airline series [3] there is no prospect of any type of robust “V-shaped” urban car service revenue recovery. Demand may remain seriously depressed for years.

2ndquarter Uber revenue in its “Eats/delivery” business doubled but the economics of these services were always substantially worse than Uber’s hopeless car service business. Uber only reports segment financial performance on an “adjusted EBITDA” basis that (in the 2ndquarter) excluded 38% of actual Uber expense from its “profitability” calculation. But 2ndquarter “Eats/delivery” had an “adjusted EBITDA” 25 margin points worse than car services, even after the big coronavirus driven boost in food delivery demand. And since Eats’ year-over year “adjusted EBITDA” improved by only $54 million (from negative $286 million to negative $232 million) even though revenue doubled, this business is clearly not “growing into profitability.”

Food delivery is hypercompetitive (DoorDash, GrubHub, JustEat, Deliveroo), neither customers nor restaurants can afford the true cost of the service, and none of these companies have ever been sustainably profitable. Uber has never presented a plausible argument it will suddenly become the first company to realize returns from investments in this business.

Coverage of these results in the business and tech industry press was a bit less fawning than the coverage Uber received a few years ago. The fact that Uber has always been unprofitable and is still facing major legal challenges to its labor practices is now at least mentioned in all stories. But none of the dozen or so stories published on Friday [4] even raised the issues of whether (or how) Uber revenue might suddenly recover, or how Uber could quickly achieve cash breakeven. The question of whether the coronavirus shock had significantly increased the risks to Uber’s viability and survival was totally ignored.

Most stories emphasized top-line volume numbers instead of GAAP profits or cash flow. None made any mention of the impact of the revenue collapse on Uber’s drivers, who comprise roughly 80% of Uber’s business model but are not included in its financial reports.

A couple of stories noted that the ridesharing collapse had been ugly, but most tried to obscure this issue by emphasizing the “pivot to delivery” as a “bright spot” and highlighting Dara Khosrowshahi’s claims that with Eats, the company “had built a second Uber in under three years” and “ha[s] secured the path forward.” None addressed the question of whether Uber could ever earn sustainable profits from food delivery. [5] None of the stories mentioned that recent Uber narrative claims such as the profit potential of driverless cars, or that it would soon become the “Amazon of Transportation” were totally absent from its presentation about 2ndquarter earnings.

Several reporters cited Khosrowshahi’s new claim that Uber would achieve “EBITDA profitability” by the end of 2021. None of these reporters appeared to understand that this measure was neither “profitability” or “EBITDA” [6]. None made any effort to document how Khosrowshahi hoped to achieve these multi-billion dollar improvements, or mentioned Uber’s failure to achieve any of its past profitability promises or to otherwise evaluate the credibility of its newest promise. A couple of articles noted a previous Uber’s promise to remove $1 billion in “fixed costs,” but failed to note that Uber has never publicly explained where these cost cuts would come from, or that nothing in its 2ndquarter financial release provided any evidence of progress against that target. None considered how long it might take to exhaust Uber’s remaining cash given highly depressed demand, or whether a company reporting these results would be able to attract new financing.

_______

[1] In order to boost reported profitability prior to its IPO, Uber improperly reported its internal estimate of non-marketable securities it received in exchange for shutting down failed overseas operations as profits from ongoing, continuing operations. After its IPO it recorded the full value of employee stock based compensation in its 2ndquarter 2019. While this was in accordance with GAAP, this was compensating employees for work performed over multiple years. These adjustments and Uber’s historical P&L data are shown in Can Uber Ever Deliver? Part Twenty-Two: Profits and Cash Flow Keep Deteriorating as Uber’s GAAP Losses Hit $8.5 Billion, Naked Capitalism February 7, 2020.

[2] https://gfycat.com/flattautcoral

[3] Hubert Horan: The Airline Industry Collapse Part 3 – Recovery Expectations Were Always Dreadfully Wrong, Naked Capitalism, August 4, 2020. One should also note that the exact magnitude of the coronavirus demand shock will vary between companies depending on their cost structure. This will be larger for companies (including United Airlines, Disneyland, Major League Baseball) who have a large base of semi-fixed costs that cannot be quickly reduced when revenue unexpectedly collapses. Uber’s business model also allowed it to shift most of the coronavirus financial pain to its drivers, who immediately lost almost all their income.

[4] Examples (all published August 6th) include Danielle Abril, Everything to know about Uber’s second-quarter earnings, Fortune, Preetika Rana, Uber Ridership Fails to Recover as Pandemic Drives Another Big Loss, Wall Street Journal, Sara Ashley O’Brien, Uber’s delivery service is now bigger than its rides business, CNN, Amir Efrati, At Uber, Food Delivery Surpasses Rides, The Information, Kirsten Korosec, Alex Wilhelm, Uber’s delivery business is now larger than ride-hailing, Techcrunch, Aarian Marshall, Uber’s Now a Food Delivery Company—and It’s Still Losing Money, Wired, Lizette Chapman, Uber’s Quarterly Sales Tumble, Ending a Decade of Growth, Bloomberg Lora Kolodny, Uber ride-sharing revenue plummets, food delivery more than doubles, CNBC, Kate Conger, Uber’s Revenue Craters, as Deliveries Surge in Pandemic, New York Times.

[5] None of the news coverage of Uber’s earnings release mentioned any of the economic problems with the food delivery but I found one commentator that did. Jamie Powell, Food delivery: if not now, then when? Financial Times Alphaville, August 7, 2020

[6] Uber’s “EBITDA” measure excludes significant costs other than interest, taxes, depreciation and amortization. See Uber Part 22. Prior to the pandemic Khosrowshahi had promised that Uber would achieve “EBITDA profitability” by the end of this year, and (as with the revised claim) none of the stories reporting that promise explained what his plan for achieving that consisted of, or whether those promises were credible.

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30 comments

  1. vlade

    Uber, the undead unicorn.

    Unfortunately, no-one knows what it is
    – zombie, to blow its brains out (doesn’t seem to have any)
    – vampire? It’s definitely sucking it’s victimes (drivers) dry, mostly at night, but has no heart to put a stake through (garlic worn by the victims might help though)

    Hmm.

    Reply
      1. vlade

        Mr. Praline: Now that’s what I call a dead unicorn.

        Owner: No, no…..No, ‘e’s stunned!

        Mr. Praline: STUNNED?!?

        Owner: Yeah! You stunned him, just as he was startin’ to get profitable! Uber Blacks stun easily, major.

        Mr. Praline: Um…now look…now look, mate, I’ve definitely ‘ad enough of this. That unicorn is definitely deceased, and when I purchased the shares not ‘alf an hour ago, you assured me that its total lack of profits was due to it bein’ tired of fast growth and shagged out following a prolonged pandemic.

        Owner: Well, he’s…he’s, ah…probably pining for the riders.

        Mr. Praline: PININ’ for the RIDERS?!?!?!? What kind of talk is that?, look, why did he fall flat on his back the moment I got ‘im home?

        Owner: The Uber Black prefers keepin’ on it’s back (or at least it’s CEOs)! Remarkable animal, id’nit, squire? Lovely horn!

        Mr. Praline: Look, I took the liberty of examining that uynicorn when I got it home, and I discovered the only reason that it had cash in the first place was that it had been fooled the investors.

        With apologies to surviving MP, who may use Uber.

        Reply
    1. DJG

      Ignacio: Have you never seen it? It was a staple with Saturday Night Live, as here in the U S of A, back when Americans had some sense of history, we were eagerly waiting for the dear leader of the Falange to go to his Well-Deserved Reward.

      Reply
      1. Ignacio

        I hadn’t seen it. I thought if they were joking with eagerness to broadcast bad news.

        Now let me indulge with a Covid joke:

        – Darling, do you think I am clever?

        – Yes you are, but asymptomatic.

        Reply
  2. cnchal

    Another few months amd another Nimitz unit down the drain.

    > Uber has now lost $23.2 billion in the past four and a half years.

    With an accumulated operating loss of that magnitude, it is going to be never that Uber pays a penny of income tax. Carry forward losses as far as the eye can see. This type of insane money losing tech wasteland business would not be possible with a time limit on carry forward losses, which used to be twenty years and now is in essence, forever

    The year is 2055 and Uber just posted it’s first profit, a measly thousand bucks on turnover of $10 billion. Experts predict Uber is projected to have worked through it’s carry forward losses by the year 4021 and can finally start paying inwestors for their patience and a couple of bucks of income tax.

    Reply
    1. timbers

      “This type of insane money losing tech wasteland business would not be possible with a time limit on carry forward losses, which used to be twenty years and now is in essence, forever”

      Another way to kill many of these Zombie companies, it for the Fed to raise interest to normal levels – best guess 3% and to do so IMMEDIATELY in 1 day, and to terminate QE forever. I’m sure a lot of the Fed’s QE and ZIRP is funding those hedge funds that are carving up and taking private hospital services (as just one example) – like emergency rooms – so their prices can be jacked up to the moon. There is so much QE looking for someplace to go, and the Fed has essentially made all this liquidity practically free to these vulture hedge fund and capitalists. So we have this massive QE floating out there, looking not for technological improvements that benefit people, but ways to do things easier or just differently, for the sole purpose of higher profit margins even when this causes the service to decline and the outcomes are hugely worse. And why not? The Fed and made it almost free to do so.

      Reply
      1. Code Name D

        Hmm. I always assumed that what was Libertarian Fantasies of realigning the labor force to a true free market model was what was keeping it alive. But you make a great point worthy of further exploration here, that the Feds effort to keep the economy “alive” is likely feeding Uber. Could we have a plague of other such zombie corporation?

        Reply
  3. Tom

    Why should we care it’s profitable? Shouldn’t we only care if it’s labour practices are upto standards and workers compensated well?

    Reply
    1. edmondo

      I couldn’t care less if they are profitable. I do care that I – as a taxpayer – get to provide $600 a week to every Uber “non-employee because Uber doesn’t want to pay unemployment compensation costs for their drivers. It kind of sucks to be supplementing WalMart’s employees through Medicaid and SNAP benefits and Uber people through unemployment insurance even though they paid nothing into the funds. The only socialism in this country is for multi-national corporations.

      Reply
      1. James

        Actually, we are supplementing the economy from a total collapse with the $600 a week, which you’ll never really see hit your bottom line because taxes aren’t going to go up on average joes like you. Also, Uber drivers still pay taxes just like the rest of us.

        Reply
      2. Patrick

        Unlike the corporations, those Walmart employees and Uber drivers pay income tax. You shouldn’t speak of them in the same breath that you use to disparage the corporations that don’t. They were struggling before the pandemic and deserve better.

        Reply
    2. tegnost

      Compare Ubers labor standards to the average bus driver. The silly con valley idea of labor standards is be exploitable or we’ll exploit someone else. Also, in this case particularly, the reason to be unprofitable is to get those bus drivers fired then raise rates to a profitable level when there is no alternative. So yeah, anyone not invested in Uber should care.

      Reply
    3. Grumpy Engineer

      @Tom: It doesn’t have to be a profitable business, but it should at least be a business that breaks even (i.e., covers its own expenses). The ability to operate with massive losses indefinitely has enabled Uber to drive a great many of their smaller competitors (e.g., traditional taxi companies) out of business. This has not been without consequence:

      https://www.nbcnews.com/news/us-news/shadow-uber-s-rise-taxi-driver-suicides-leave-cabbies-shaken-n879281

      In today’s world, the “winners” aren’t the people who can put together a viable business. Instead, they are the people who can catch the eye of investors armed with billions of newly-printed dollars from the Fed. Uber is given billions by investors, while competitors without Wall Street backing have to earn revenues from their customers. It’s not even remotely a fair contest.

      Because of these dynamics, Uber has achieved a near monopoly on taxi-like services, which means they can treat their employees as shabbily as they like. After all, where else would they go?

      My thinking is largely in line with the comments by “timbers” above… Today’s ultra-liquid financial markets driven by QE and ZIRP are doing more harm than good.

      Reply
  4. sluggo

    I signed up for an UberEats platinum service or something during the pandemic and for $10 a month, you get a 15% discount on fees and no delivery charges – it’s a ridiculously good deal for heavy food delivery users like myself. Some restaurants charge $5 for delivery, so I save quite a bit each month. I have no idea how this is anything other than a money pit program.

    Reply
  5. DJG

    Yves Smith and Hubert Horan: Thanks for this series, which has been highly educational for me on the “sharing economy” and its built-in depravity.

    On the other hand, as I read that this is Part 23, I began to think that HH is pretty much writing a new novel by Dickens, with all of the usual scoundrels. Now we have to come up with a title. I’ll propose The Uberscam Papers.

    Thanks for the mention of food-delivery services and how they will ruin things. I was talking once with the owner of a wonderful informal Greek place in my neighborhood, and she pointed out how bad the percentages are. Yet she went with UberEats, I believe, with its 30 percent commission, because the extra couple of hundred dollars a night that came back to her would put her place in the black for the day.

    [And she’s too small a place to hire her own driver.]

    Reply
    1. Arizona Slim

      I had the privilege of meeting Hubert last October. ISTR asking him when the book will be coming out.

      Please, Hubert. Write that book.

      Reply
    2. drumlin woodchuckles

      One wonders if, or whether, enough too-small places could get together and collectively hire a shared driver to do all their deliveries at a Decent Living Wage.

      One doesn’t know, one merely wonders . . . .

      Reply
      1. Norma Geer

        I suggested as much via twitter because of my experience with delivery while living in South Korea in 1996-1998. Customers paid for delivery – no middleman. One merely phoned in orders to a restaurant which dispatched moped or cycle drivers. Food arrived hot. Attached metal cases kept the food warm and multiple orders could be handled by drivers who kept in contact with restaurants. Who needs an unprofitable scummy middleman sucking profits from restaurants, all of whom already operate with thin margins. Getting my boots expertly resoled in minutes at a sidewalk kiosk was another efficiency I enjoyed while residing there.

        Reply
    1. drumlin woodchuckles

      Given the amount of Big Organized Crime money in the world, why would Intelligence agencies need to be involved? Or even invoked?

      Reply
  6. Phil in KC

    Who in the Dickens (See Bleak House, Jarndyce v. Jarndyce for the consummate dreary non-happening event) is funding Uber these days? Who or what in their right mind would toss money into this bottomless, meaningless pit of a company? I mean, really!

    Reply
    1. drumlin woodchuckles

      There could be some multi-billionaires with money to burn and a deep Libertarian-based hatred for bus service and subway/light-rail service. They could be willing to burn it in the Uber furnace in hopes of exterminating bus and rail service from every city in the world before their ” political hobby-horse” money runs out.

      Reply
    2. HotFlash

      The function of Uber is to break laws — municipal and local, state, federal — with impunity until the rule of law is totally broken. The oligarchs of this world are happy to pay for this service.

      Reply
    3. Richard Hershberger

      The mere fact of owning, or at least controlling, vast sums of money does not imply wisdom or insight or plain common sense. If the financial press is your main source of information, you not being interested in doing your own homework, then Uber could well seem like a good idea. See also: We Work.

      Reply
  7. Konstantin

    It’s interesting that in Russia Uber ended up forming a joint venture with its local rival Yandex.Taxi and this company is actually profitable now. They also have other local competitors of them same style, but far less convenient and technologically advanced.

    However we had a different taxi business before that, we never had independent licensed taxi drivers, we had grey market of drivers which sometimes were organized as taxi companies, but the whole business was very shady, especially when it came to tourist. E.g. different people could end up paying fares of different magnitudes.

    Reply

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