Overhyped Uber Technologies Should Currently Trade Below $20 Due To Many Reasons Part 1


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Feb. 20, 2020 7:35 AM ET

About: Uber Technologies, Inc. (UBER), Includes: LYFT
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Uber has been reporting massive losses while burning cash with no end in sight, primarily due to fierce competition, low-margin businesses and lack of economies of scale.

Also, Uber's Rides, its core business, is facing serious challenges in its core markets because the gig economy is under attack by regulators worldwide, which has been downplayed so far.

Proforma the Careem deal, net debt has risen significantly, and due to continued cash burn, Uber will announce a debt or an equity offering or both in the next few months.

We believe that Uber should currently trade below $20 per share or about 1 times its revenue due to many reasons.
Uber is an overhyped stock that could end up being another fad with its shares going to zero or almost zero in the next five years, same like Sidecar.
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In era of cheap money, the Fed’s monetary policy has allowed investors to speculate and/or take on more debt. Actually, the low interest environment invites for imprudent decisions. As a result, a bunch of money-losing companies that are cash incinerators have insane valuations. One of them is Uber Technologies (UBER) that has become a poster child for overinflated startups, as explained in the next paragraphs.

The Slowing Revenue Growth And The Scalability Problems
Revenue in 2018 and 2019 were $11.3 billion and $14.1 billion, respectively, so revenue year-over-year growth was 25%. However, all revenues are not created equal and all revenue growth is not created equal either, so we deepened into the company's reports and want to point out the following:

1) Revenue growth in “Rides,” the core business, continues to slow down. As shown here and here, Revenue from "Rides" in 2019 were $10.6 billion vs. $9.3 billion in 2018. Therefore, when it comes to Rides, revenue YoY growth of 95% in 2017 declined to 37% in 2018 and 14% in 2019.

Meanwhile, “Other Than Rides” businesses grew from $2 billion to $3.5 billion in 2019, or about 80% growth YoY, which allowed Uber to present, somewhat overall revenue growth rate of 25% in 2019. But the "Other Than Rides" (Eats and Freight) are low margin businesses.
Given also that all the newer "Other than Rides" businesses have much lower profit potential than “Rides,” the relatively faster growth of these low margin "Other Than Rides" businesses is contributing to the deteriorating overall profit picture.

2) Gross profit margin remained stable at almost 50%, both in 2018 and 2019.

3) Total expenses (excluding costs of revenue and D&A) in 2018 and 2019 were $8.2 billion and $15.1 billion, respectively. Therefore, total expenses were approximately 108% of the total revenue in 2019, significantly up from 73% of the total revenue in 2018. To say it differently, on a YoY basis, total revenue in 2019 grew 25% and total expenses grew by 85%, so total expenses grew YoY much faster than revenue.

Despite the fact that gross profit margin remained decent at almost 50% in 2019, operating profit margin was negative 61% in 2019, so it went significantly up from negative 27% in 2018. The reason is that total expenses went significantly up YoY, as shown above.

These facts indicate that Uber has an inability to control its expenses and has been unable so far to scale up its operations. We believe that the reasons for Uber's scalability problems stem from its corporate structure along with industry-wide difficulties and growing competition, as presented below.

Losses, Negative Adjusted EBITDA And Stock-Based Compensation
In Q4 2019, Uber recorded another operating loss of ($1) billion, slightly down from the operating loss of ($1.1) billion in Q4 2018. But it reported an epic operating loss of ($8.5) billion in 2019, significantly up from the operating loss of ($3) billion in 2018.
Also, the loss of ($8.5) billion includes stock-based compensation expense of $4.6 billion. Therefore, it's noteworthy that even if the stock-based compensation expense had been zero, Uber would have recorded an annual operating loss of ($3.9) billion.

The stock-based compensation expense will remain high and will most likely exceed $1 billion in 2020 given that Uber stated in the latest CC that:
Finally, we expect stock-based compensation of $300 million to $350 million in Q1 2020."
Adj. EBITDA loss in 2019 was ($2.7) billion, up from adj. EBITDA loss of ($1.8) billion in 2018. Also, in Q4 2019, quarterly adj. EBITDA loss went deeper into negative territory reaching ($615) million, about 5% more than ($585) million in Q3 2019 and down from ($817) in Q4 2019. On that front, Uber touted in the CC that:
If you look at our Rides business Q4 to Q4, our Rides business grew ANR about $700 million, a little bit below $700 million in terms of revenue. And over the same period with a $700 million increase in ANR, they delivered a $550 million increase in EBITDA. So that’s an 80% flow through of incremental EBITDA from revenue growth to EBITDA growth."
However, this was not the case with all the other segments that remain a major drag on Uber's business. Specifically, in Q4 2019, the Eats business grew GAAP revenue YoY by $297 million, and over the same period, the Eats business delivered $183 million additional adj. EBITDA losses. This was the case with the other segments such as Freight, Other Bets and ATG where revenue went up hand in hand with the adj. EBITDA losses. And this was the case in Q3 2019 too. Revenue for Eats, Freight, Other Bets and ATG went up on a YoY basis but adj. EBITDA losses went deeper into negative territory for all these segments.

In the latest CC, Uber estimated that it could turn into positive adj. EBITDA in Q4 2020. But it's not wise to downplay these key parameters:
1) The guidance is just guidance and many things can go wrong until then.

2) CEO's forecast for positive adj. EBITDA in Q4 2020 could be another inaccurate forecast. And we say this because in January 2018 the CEO Dara Khosrowshahi told Uber executives that he wanted the company to nearly break even by the end of the year and to be profitable in 2019, as a public company. His forecasts proved to be wrong, which meant a few billion dollars, and Uber recorded massive losses both in 2018 and in 2019.

3) Even if the best-case scenario materializes and Uber reports positive adj. EBITDA in Q4 2020, positive adj. EBITDA isn't GAAP profitability. Adj. EBITDA is a very long way from generating profits because adj. EBITDA excludes billions of expenses other than interest, taxes, depreciation and amortization. For instance, it excludes Uber's $4.6 billion in stock-based employee compensation.

4) Uber has admitted that adj. EBITDA in 2020 will remain deep in negative territory, as quoted below (emphasis added):
For 2020 adjusted EBITDA, we expect a loss of $1.45 billion to $1.25 billion. Further, we expect Q1 EBITDA loss to be similar to Q4 2019 levels with similar investment levels in Eats. Beyond Q1, we are expecting a meaningful improvement in profitability throughout the year including in Uber Eats."
The Mounting Debt Is Expensive And Could Become More Expensive
Downplaying or ignoring a company's mounting debt has never been a wise choice in the stock markets. It's an axiom that the growing debt will bite. And when the company has an unproven business model that generates massive losses and burns cash with no end in sight, we consider that downplaying the company's mounting debt is a recipe for disaster.

That said, S&P recently gave Uber's debt offering CCC+ ratings, while Moody’s rated it one notch higher at B3, both of which are only notches away from being designated imminent default risks, which will definitely weigh on the next debt placements and their interest rates.
Specifically, Uber has $11.3 billion in cash and cash equivalents and $5.7 billion in debt, so its net debt is negative (cash and cash equivalents exceed debt) at $5.6 billion in December 2019.

In early January 2020, Uber closed the Careem deal for $3.1 billion. To finance the deal, Uber offered junk bonds worth $1.2 billion last September. And they were junk bonds because these bonds were given credit ratings in a CCC range after the company’s IPO in May 2019. Additionally, in early January 2020, Uber issued $1.7 billion of convertible notes to help fund the deal and we guess that the remaining amount of $200 million was paid from the company's cash. Therefore, proforma the Careem deal, Uber's net debt declined and ended up being negative about $3.7 billion in early January 2020.

Meanwhile, from a cash flow standpoint, Uber remains a cash incinerator. The cash burned by Uber’s operations and investment activities worsened, going from $2.2 billion in 2018 to $5.1 billion in 2019. Operating cash flow was negative at about ($1.8) billion in Q4 2019. Furthermore, it's noteworthy that "net cash used in operations" (ex. capex) went from ($878 million) in Q3 2019 to ($1.799 billion) in Q4 2019. In other words, strictly on an operating basis, the cash burn doubled in the most recent quarter. And if we include the cash from investing activities, Uber burned about $2.5 billion in Q4 2019 alone.
That said, Careem isn't profitable and also burns cash (more about it in the next paragraphs), so Careem's cash burn will weigh on Uber's quarterly cash burn both in Q1 and in Q2 2020. Therefore, based on a quarterly cash burn rate between $2 billion and $2.5 billion, we project that Uber's net debt will become positive (debt will exceed cash and cash equivalents) by the end of Q2 2020, the latest.

Moreover, we project that Uber's cash burn will continue in the second half of 2020. Based on our conservative projections that include Careem's cash burn, Uber's quarterly cash burn will be at least $2 billion in Q3 and Q4 2020, so Uber's net debt will keep rising in the second half of 2020. Therefore, proforma the Careem deal, we project that Uber's positive net debt (debt exceeds cash and cash equivalents) could reach or exceed $4 billion by the end of 2020.
After all, we forecast that Uber will announce another debt offering in the next weeks or months. And if it doesn't announce a debt offering, it will announce a large equity offering (dilution). Or it could announce both a debt offering and an equity offering in the next weeks or months in order to fund its liquidity needs by the end of 2020.

And we want to point out that our debt and cash burn projections by the end of 2020 don't take into account the Cornershop deal. Specifically, Uber announced the acquisition of a majority stake in Cornershop for an undisclosed amount. Last year, Walmart (WMT) wanted to acquire Cornershop for $225 million, but Mexican regulators blocked the deal. Uber didn’t disclose its purchase price but we guess that Uber hasn't paid less than $250 million. This transaction is expected to close in Q2 2020 subject to regulatory approval, which will increase Uber's net debt further by the end of Q2 2020.

Moreover, Uber's debt is expensive with interest rates ranging from 6.1% to 8.1%, as illustrated below:
As of
December 31, 2018September 30, 2019Effective Interest Rate
2016 Senior Secured Term Loan$1,124$1,1166.1%
2018 Senior Secured Term Loan1,4931,4816.2%
2021 Convertible Notes1,84423.5%
2022 Convertible Notes1,03013.7%
2023 Senior Note5005007.7%
2026 Senior Note1,5001,5008.1%
2027 Senior Note1,2007.7%
Total debt7,4915,797
Less: unamortized discount and issuance costs(595)(59)
Less: current portion of long-term debt(27)(27)
Total long-term debt$6,869$5,711


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As quoted above, Uber admits that "Consumers have a propensity to shift to the lowest-cost provider" and "shippers and carriers have a propensity to shift to the platform with the best price and most convenient service for hauling shipments," which means that there is no customer loyalty and the customers for Rides and Freight could choose another company if Uber raises its prices.

Additionally, when it comes to Eats, there's no customer loyalty either. Specifically, in the first quarter of 2019, 46 percent of people who ordered through Eats in the US also ordered from one or more of its competitors, according to new data from Second Measure, a company that analyzes billions of dollars in anonymized credit and debit card transactions. Also, nearly 25% of Eats’ customers used DoorDash, while 20% of Eats' customers tried Grubhub (NYSE:GRUB) and 12% of Eats customers opted for Postmates.

And we believe that this trend will be worsening as US customers will continue to use multiple food-delivery services. As such, we see considerable execution risks as Uber attempts to improve its position in the challenging food-delivery sector where the margins are undoubtedly very low.
This is why Grubhub’s CEO has cited “promiscuous customers” as hindrance to his company’s growth. This also is why Amazon (AMZN) Restaurants announced last June that it was shutting its doors for good. The fact that Amazon Restaurants closed its food delivery business is another indication about the problematic food-delivery model and sends a strong message that must not be downplayed, in our opinion.

2) Prices for Rides will remain lower for longer: As shown above, there's no customer loyalty in Uber's business, so Uber acknowledges that it will most likely continue to offer lower fares and service fees in the next quarters, as quoted below (emphasis added):
To remain competitive in certain markets, we have in the past lowered, and may continue to lower, fares or service fees, and we have in the past offered, and may continue to offer, significant Driver incentives and consumer discounts and promotions, which may adversely affect our financial performance: To remain competitive in certain markets and generate network scale and liquidity, we have in the past lowered, and expect in the future to continue to lower, fares or service fees, and we have offered and expect to continue to offer significant Driver incentives and consumer discounts and promotions. At times, in certain geographic markets, we have offered, and expect to continue to offer, Driver incentives that cause the total amount of the fare that a Driver retains, combined with the Driver incentives a Driver receives from us, to increase, at times meeting or exceeding the amount of Gross Bookings we generate for a given Trip. In certain geographic markets and regions, we do not have a leading category position, which may result in us choosing to further increase the amount of Driver incentives and consumer discounts and promotions that we offer in those geographic markets and regions. We cannot assure you that offering such Driver incentives and consumer discounts and promotions will be successful. Driver incentives, consumer discounts, promotions, and reductions in fares and our service fee have negatively affected, and will continue to negatively affect, our financial performance. Additionally, we rely on a pricing model to calculate consumer fares and Driver earnings, and we may in the future modify our pricing model and strategies. We cannot assure you that our pricing model or strategies will be successful in attracting consumers and Drivers."
3) Expenses will go up and losses will continue: As noted above, total expenses in 2019 (excluding cost of revenue and D&A) grew YoY much faster than the revenue and were about 108% of the revenue in 2019.
Importantly, Uber expects its operating expenses to increase significantly in the foreseeable future while also continuing to incur losses, as quoted below (emphasis added):
We have incurred significant losses since inception, including in the United States and other major markets. We expect our operating expenses to increase significantly in the foreseeable future, and we may not achieve profitability. We anticipate that we will continue to incur losses in the near term as a result of expected substantial increases in our operating expenses, as we continue to invest in order to: Increase the number of Drivers, consumers, restaurants, shippers, and carriers using our platform through incentives, discounts, and promotions; expand within existing or into new markets; increase our research and development expenses; invest in ATG and Other Technology Programs; expand marketing channels and operations; hire additional employees; and add new products and offerings to our platform."
4) Employment laws in the core markets and "the contagion risk": California and New York lawmakers are aiming to pass employment laws that would redefine the standards by which a worker is considered an employee. California's AB5 already is out while the new employment laws in New York is a matter of months, as shown here.

The thing is that California and New York are two of the five most important markets for Uber's Rides. Therefore, this change could spell costly headaches for Lyft (NASDAQ:LYFT) and Uber down the road. Actually, the costs for Uber and Lyft could be substantial. A Barclays analysis from June said that reclassifying California drivers as employees could cost Uber $500 million per year and Lyft $290 million per year. And this is for California alone. If we add New York to the mix, the additional cost for Uber could reach $1 billion per year.

Actually, Uber admits that if the drivers are classified as employees, its business will be negatively affected, as quoted below (emphasis added):
Our business would be adversely affected if Drivers were classified as employees instead of independent contractors: The independent contractor status of Drivers is currently being challenged in courts and by government agencies in the United States and abroad. We are involved in numerous legal proceedings globally, including putative class and collective class action lawsuits, demands for arbitration, charges and claims before administrative agencies, and investigations or audits by labor, social security, and tax authorities that claim that Drivers should be treated as our employees (or as workers or quasi-employees where those statuses exist), rather than as independent contractors."
Last but not least, there is the “contagion risk” of AB5, which could spread to other states. For instance, in addition to New York, New Jersey also recently weighed its own version of a gig-worker bill while Illinois could soon do the same. These developments could have onerous consequences both for Uber and Lyft.
5) Legal challenges in London, another core market: Uber faces serious challenges in London and its legal battle for its London license will begin on July 6. The thing is that London is not just another market for Rides. London is one of the five core markets for Rides, as quoted below (emphasis added), so a negative outcome will weigh on Uber's top and bottom line (emphasis added):
We generate a significant percentage of our Gross Bookings from trips in large metropolitan areas and trips to and from airports. If our operations in large metropolitan areas or ability to provide trips to and from airports are negatively affected, our financial results and future prospects would be adversely impacted. In 2018, we derived 24% of our Ridesharing Gross Bookings from five metropolitan areas—Los Angeles, New York City, and the San Francisco Bay Area in the United States; London in the United Kingdom; and São Paulo in Brazil. "
6) High CapEx for Advanced Technologies Group (ATG) will continue: Uber projects that it will require additional capital to build the ATG business and capex will be significant given also that Uber is not a tech company, and therefore it does not have experience with robotics and artificial intelligence experience. Actually, from a tech standpoint, it's behind its competitors regarding autonomous vehicle technologies, as quoted below (emphasis added):
For example, we believe that autonomous vehicles will be an important part of our offerings over the long term, and in 2018, we incurred $457 million of research and development expenses for our ATG and Other Technology Programs initiatives. We expect to increase our investments in these new initiatives in the near term. "
and below (emphasis added):
If we fail to develop and successfully commercialize autonomous vehicle technologies or fail to develop such technologies before our competitors, or if such technologies fail to perform as expected, are inferior to those of our competitors, or are perceived as less safe than those of our competitors or non-autonomous vehicles, our financial performance and prospects would be adversely impacted. We have invested, and we expect to continue to invest, substantial amounts in autonomous vehicle technologies. As discussed elsewhere in this Quarterly Report on Form 10-Q, we believe that autonomous vehicle technologies may have the ability to meaningfully impact the industries in which we compete. While we believe that autonomous vehicles present substantial opportunities, the development of such technology is expensive and time consuming and may not be successful. Several other companies, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, are also developing autonomous vehicle technologies, either alone or through collaborations with car manufacturers, and we expect that they will use such technology to further compete with us in the personal mobility, meal delivery, or logistics industries. We expect certain competitors to commercialize autonomous vehicle technologies at scale before we do. In the event that our competitors bring autonomous vehicles to market before we do, or their technology is or is perceived to be superior to ours, they may be able to leverage such technology to compete more effectively with us, which would adversely impact our financial performance and our prospects. For example, use of autonomous vehicles could substantially reduce the cost of providing ridesharing, meal delivery, or logistics services, which could allow competitors to offer such services at a substantially lower price as compared to the price available to consumers on our platform. If a significant number of consumers choose to use our competitors’ offerings over ours, our financial performance and prospects would be adversely impacted."
and below (emphasis added):
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. While we closed the investment in ATG from the ATG Investors for an aggregate of $1.0 billion, we will likely 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 background, we are at Level 2 for commercial purposes. An example of a level 3 autonomous car is the Audi A8 but the system, called Traffic Jam Pilot, has yet to be approved for sale by regulators. Tesla’s Autopilot falls somewhere between Levels 2 and 3 and Cadillac Super Cruise operates at Level 2. No commercially available level 4 vehicles exist in the market. To remove the driver, we will need to be at Level 4 or Level 5, according to these articles here and here.
Therefore, we forecast that Uber's autonomous vehicles will not be ready in the next five years (to say the least) while the high ATG-related capex will put immense pressure on Uber's total capex in the next years.

On top of this, has anybody thought the amount of capital needed annually to maintain a fleet of Autonomous Vehicles in every city in which Uber operates?

7) Strong dollar in 2020: It has passed unnoticed so far but there's no question that the recent strength of the dollar will make a dent in the American multinational companies this year, as always. The strong dollar has been stronger over the last weeks closing at 0.92309 with Euro last week, which will definitely impact negatively the earnings of the US-based multinational firms effective Q1 2020, including Uber. Uber has operations across 63 countries and admits the negative impact, as quoted below:
We are exposed to fluctuations in currency exchange rates. Because we conduct a significant and growing portion of our business in currencies other than the U.S. dollar but report our consolidated financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates."
Actually, we see momentum in the dollar and several reports believe the dollar could rise further, reaching 0.95-0.98 with Euro in the next few months.


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the biggest problems with these companies if they just don't have people that actually care about consistently making the apps better day after day

the sole focus should be constantly improving the apps day in and day out, making them more efficient and fun