Wednesday, July 26, 2017

Is Uber the world's biggest Ponzi scheme?

The Economist digs out this from the financials of Uber, which was valued at $68 bn in its last funding round in 2016,
Underlying pre-tax losses were $3bn-3.5bn last year and about $800m in the most recent quarter. Some $1bn-2bn of last year’s red ink was because of subsidies that Uber paid to drivers and passengers to draw them to its platform. At least another $1bn went on overheads and on developing driverless cars; money is also being splashed on a new food-delivery venture and a plan to build flying cars. To put its 2016 loss in perspective, that number was larger than the cumulative loss made by Silicon Valley’s least profit-conscious big company—Amazon—in 1995-2002. Measured by sales, Uber is the world’s 1,158th-biggest firm. Judged by cash losses, it ranks in the top 20. It is now eight years old, but still probably years away from being stable enough to make an initial public offering of shares. In contrast, Amazon went public at the age of three, Alphabet at six and Facebook at eight... 

A discounted cashflow model gives a sense of the leap of faith that Uber’s valuation requires. After adjusting for its net cash of $5bn and for its stake in Didi, worth $6bn, you have to believe that its sales will increase tenfold by 2026. Operating margins would have to rise to 25%, from about -80% today. That is a huge stretch. Admittedly, Amazon and Alphabet, two of history’s most successful firms, both grew their sales at least that quickly in the decade after they reached Uber’s level, and Facebook is likely to as well. But over the same periods these firms’ operating margins show an total average rise of only one percentage point. Put simply, Uber finds it desperately hard to make money. It is not clear that it breaks even reliably across the group of cities where it has been active for longest.
Put simply, with these numbers, it is no stretch to argue that Uber may well turn out to be the world's biggest Ponzi scheme - you keep acquiring customers by bleeding money till you can take it no longer and the last ones wearing the hat takes the hit! 

As I have blogged earlier, the challenge is even greater in developing countries like India where the market is so price sensitive that any significant increase in price is most likely to see largescale customer exits, thereby snuffing out the only end-game of ride-sharing firms. Further, unlike Ponzi schemes where just the remaining investors take the hit, there is also the massive social damage likely to be caused by the immiseration of poor drivers who would have taken loans to buy cars to work for Uber. 

The potential social negative externality that results from Uber's business model cries out loud for regulation. Ride-sharing and room-sharing are probably the only two large economic activities that take place in unregulated environments, where the negative externalities, and they are very significant, are completely externalised.

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