Whitney Tilson’s email to investors on a discussion on Uber; How Uber Got Lost; Silicon Valley Is Trying Out a New Mantra: Make a Profit; Bill Ackman charity lunch.
1) In Monday’s e-mail, I shared my colleague Enrique Abeyta’s analysis of why he thinks ride-sharing service Uber (UBER) could be a zero within 18 months. In response, one of my readers, Kerry C., wrote:
I was disappointed in the level of analysis in your note today concerning Uber. The fact that they burned $3.4 billion in 12 months and operate in a low margin business are very legitimate concerns.
However they have:
- $11 billion in unrestricted cash
- Minority investments in Didi, Grab, etc. valued at $10 billion
- An autonomous driving unit valued at about $7 billion
I don’t see how that leads to bankruptcy within 18 months. There were times earlier in Amazon’s (AMZN) history (also operating in a low margin business) when it had a shorter cash runway and fewer assets that might be sold if needed.
I have mixed feelings about Uber and would love to see a more nuanced analysis of it. However, the comments you shared seem so one-sided it is hard to put much weight on them.
Interesting points to discuss include:
- Amazon also had low margins and high losses. What is the chance of Uber navigating a similar path to success?
- Lyft (LYFT) has better financials even though Uber has greater scale in a business where scale should be rewarded. How should we interpret this? Is it because Uber is investing in Eats and Freight and Autonomous Driving? Can Uber be expected to steadily converge on something like Lyft’s financials? If Lyft can generate positive operating cash flow, should we expect the same from Uber’s core ridesharing business?
- What do we think of positive “Core Platform Contribution Margin” metric? Is that a reasonable way to measure core platform health?
Would be great if you could share any comments relative to those questions.
Here’s Enrique’s reply:
Your points are well thought out and fair, Kerry.
In fact, the one thing that I debated most strongly was the time frame for my prediction. I was considering saying two or three years, but went with a shorter time frame, which I think is possible (though not probable).
Remember also that this format is not necessarily focused on a “deep dive” into the ideas but rather a quick overview.
A few quick comments on what you said…
You made fair points on current liquidity around the cash. The value of the stakes in other (similar) companies and autonomous driving unit is very much up in the air at this point. It would be great if Uber moved aggressively to monetize them.
The big problem for all of these companies is now going to be the crisis of confidence they’re now experiencing. If Uber has enough liquidity on hand to reach cash flow breakeven, then it’s good to go. Perhaps if it sold those minority stakes and aggressively pared back some of the new ventures, it might pull this off. But I suspect this isn’t the plan… and it couldn’t make it work even if it was. Given that, it’s going to depend heavily on the capital markets, which will be difficult.
In addition, the regulatory environment could be a big problem. There certainly seems to a be a lot of momentum globally on the regulatory side against Uber. If some of these changes materialize (and I suspect they will), then the liquidity story could quickly become a huge issue.
Everyone likes to make the Amazon analogy to make their bull case, but how many companies have pulled of what Amazon did? I can’t think of another example.
I thought all of your comments were fair. I am working on a “deep dive” report that will incorporate many of them.
2) For more on Uber, New York Times reporter Mike Isaac – author of the excellent new book on the company, Super Pumped: The Battle for Uber – wrote this in-depth article: How Uber Got Lost. Excerpt:
As a private start-up, Uber represented pure possibility – at its peak, a $69 billion wrecking ball threatening entities as vast as the taxi industry, mass transit networks and automotive giants, all at the same time. Mr. [Travis] Kalanick built the company in his brutal and triumphant image, knocking through concrete at company headquarters to install luminous glass-and-black stone staircases – an aesthetic he described as “Blade Runner meets Paris.” It was a start-up that not only booked Beyoncé to play a staff party – it paid her with $6 million in restricted stock that quickly surged in value.
The public Uber displays little of this braggadocio, and competitors and critics are moving in. Labor activists are pushing back against the lack of worker protections for drivers, and legislation could push up the driver minimum wage in cities like New York. The hype around Uber’s autonomous cars has died down, and until they arrive – if they ever do – the company will have a hard time reducing the costs it incurs paying drivers.
In August, Uber posted its largest-ever quarterly loss, about $5.2 billion, as its revenue growth hit a record low. In cities around the world, Uber faces well-financed competitors offering a substantially similar product. And its food delivery business – a bright spot that executives point to for growth prospects – is in danger of becoming another cash-suck. Uber and most of its basically indistinguishable competitors (it names 10 of them in a recent filing) are subsidizing customers’ meals in a bid for market share, with profitability a secondary concern.
Investors are internalizing these challenges. Interest in shorting Uber stock has only grown since the IPO, according to share borrowing data from IHS Markit, with pessimists betting some $2 billion that the price of shares will continue to fall.
3) This article provides important context: Silicon Valley Is Trying Out a New Mantra: Make a Profit. Excerpt:
At some start-ups, entrepreneurs began behaving more cautiously. Travis VanderZanden, chief executive of the scooter start-up Bird, declared at a tech conference in San Francisco last week that his company was now focused on profit and not growth. “The challenge is to try to stay disciplined,” he said.
Best regards,
Whitney
