One of three unprofitable companies worth more than $ 50 billion

When Uber starts to trade publicly in the next few weeks, he will join a very exclusive but undesirable club, companies worth at least $ 50 billion and losing money.

Of the 110 US companies with a market capitalization of at least $ 50 billion, only three were unprofitable last year: CVS, General Electric and Qualcomm. And Qualcomm does not really count because its loss resulted from the one-time imputation of a tax code change.

Uber recorded a $ 3 billion operating loss in 2018 after losing more than $ 4 billion the year before. (The company recorded net income last year thanks to non-recurring gains of $ 5 billion, mainly from the sale of its operations in Russia and Southeast Asia.)

That's the main challenge for Uber, which runs from the confines of the Bay Area, where venture capital and private equity firms finance futuristic, Wall Street-rigged projects crowded with mutual funds and wealth managers more inclined to take risks. The latter group has never seen anything like Uber – a company that already has a reputation for being a resounding success, even though the business model remains largely a work in progress.

Friday, Uber set the price range of its next IPO from $ 44 to $ 50, giving it a market capitalization of $ 83.8 billion. This would make it the 65th most valuable company in the United States, just behind DowDuPont and ahead of US Bancorp, which generated net earnings of $ 3.8 billion and $ 7.1 billion respectively.

"If you're wrong and you're paying an exorbitant amount, look really below," said Brian Yacktman, chief investment officer of YCG Investments, which manages about $ 700 million and counts Alphabet and Facebook among the top holdings. in its mutual fund. "When you can buy a company with a similar market capitalization that is currently producing cash flow with much more certainty on the bottom line, why not take that instead?"

Yacktman sees the value of Uber as a service. He knows that it saves time, makes payments easier and offers a much more comfortable ride than your usual taxi. Food delivery is also perfectly logical, given the huge number of cars on the streets.

But Yacktman just does not have the investment needed.

Runners are cost conscious and have the choice, that it is Lyft (whose stock is well below the price of its IPO compared to last month), a taxi or public transport. On the other hand, drivers must earn enough money to stay on the platform while paying for gasoline and maintenance. After doing everything in his power to make runners and drivers happy and spent the money needed to run the platform, Uber does not have much money for himself anymore. .

Uber has a metric called the contribution margin of the main platform, which is the percentage of income remaining after "direct expenses". This figure represented 9% of revenue in 2018, before all investments in emerging products were accounted for. In the first quarter of 2019, the number is heading south, with Uber forecasting a negative margin of 4% to 7% due to competition and spending on Uber Eats, the food delivery sector.

"I would prefer to buy one of the many profitable companies showing me money now and take a wait and see approach with Uber to determine if it's a profitable business model and it's sustainable, "said Yacktman.

Large cap companies that are losing money today are punished by the market. CVS shares plunged 22% last year, while GE lost 31%.

Uber has a very different story to tell about these two companies, stuck in traditional markets and struggling to find growth opportunities. Uber, who is only 10 years old, is pioneering a new industry and working in the future of autonomous cars, while earning 42% of revenue last year to reach more than $ 11 billion.

Uber's vision is to build a global platform that includes carpooling in its current form, a continued expansion of Uber Eats and much more.

There is Uber Freight, which connects trucking companies with companies that ship large quantities of goods, autonomous vehicles, drone deliveries and Uber Elevate, which aims to deal with "air transport in cities". Uber has also acquired Jump Bikes, which currently has a network of electric bikes in 20 cities, and offers electric scooters in eight cities.

For Uber, all this adds up to an addressable market that, according to the company, amounts to thousands of billions of dollars. CEO, Dara Khosrowshahi, said at the beginning of the video of the online tour that "the company's mission is to create opportunities by setting the world in motion" and that it "changes the way people and things move from one point to another ".

Nelson Chai, Uber's chief financial officer, then explained to investors that the company "was laying the foundation for attractive long-term margins."

But this is an ambitious plan that requires decades, not years, of investment and much more capital than the $ 9 billion that the company seeks to lift during its initial public offering. saving. The challenge for a public investor is that, in the long term, Uber's experimental projects become real enterprises and that the company will have enough advance over any potential competition to have pricing power.

"With Uber, you have the potential to create a premium on the ecosystem," said Eric Barden, president of Barden Capital in Austin, Texas. "If that's the case, you can be more constructive about future profitability."

Barden does not intend to invest in Uber because he sees too many variables and risks for this type of evaluation. But he also recognizes that the landscape of public market investment has changed in recent years to greatly favor growing investors and that a money-spreeing machine like Uber can not be discounted.

Amazon and Netflix are profitable but barely. Amazon's net profit margin of 4.3% last year ranked 98th of the 110 most profitable companies, and the Netflix margin of 7.7% was 86th.

Still, Amazon is up 542% over the last five years and Netflix has gained 717%. The S & P 500, meanwhile, has climbed only 58% on this stretch.

"The old measurement measures are no longer always applicable," said Barden, an investor in Amazon and Netflix. "It's hard to make money playing under-rated arbitrage."

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