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May 14, 2019
The poor beginnings of Uber and Lyft's IPOs have heightened concerns about the economy's potential for transformation to demand.
Uber, considered one of the largest IPOs in US history, was released on Friday at the low end of expectations and closed down 8% on its first day of trading. The stock lost an additional 11% on Monday, as the market had fallen in the face of fears of a trade war. Lyft has fallen 40% since it went public in March.
Just like Amazon.com and other digital disrupters, Uber and Lyft are bleeding money to build their customer base and should not be profitable for years. Subsidized by extensive venture capital funding over the years, both charge less per trip than fare costs to keep passengers on low fares. Ordinary investors may not be as patient in rewarding growth over profits.
"If Uber fails to generate profits over time, it will create real problems for the retail economy," said Aswath Damodaran, a professor at the Stern School of Business at New York University. The Washington Post.
At least until the abundance of autonomous cars, the control of labor costs and the reduction of the high turnover rate will be determining factors for profitability.
But the fact that Uber and Lyft drivers were able to hold a global strike Wednesday in the big cities with only social media was perceived by some as a new risk for investors. Presidential candidates also demand a minimum wage and other protections for seat drivers. In filings with the SEC, Uber and Lyft cautioned that any regulatory threat to their independent contractor model would hinder their ability to grow.
Dara Khosrowshahi, CEO of Uber, reminded employees Monday that Facebook and Amazon had a difficult start after the IPO. By positioning itself as "Amazon for Transportation," Uber could still deliver on its promise of tapping into the data of its 91 million average monthly users to dominate a wide range of logistics services, including meal delivery and freight transport.
But the prospects for a number of on-demand delivery services, including Instacart, Postmates and Doordash, all of which should be made public and which would also be unprofitable, would be mitigated if Uber and Lyft did not recover.
DISCUSSION QUESTIONS: Are the challenges facing Uber and Lyft representative of the larger barriers the on-demand economy faces? Should retailers rethink their partnerships and investments in on-demand services?
"Some of these companies have a lot of hype and irrationality, so it's not surprising that the reality does not meet the rather exaggerated expectations."
"To maintain the economy of the show, it takes humans."
"As to whether retailers should rethink their relationship with on-demand services … DUH."
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