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Uber Technologies Inc., like its rival Lyft Inc., does not have a profitable strategy unless it does one of two things: getting rid of drivers or raising prices .
Expect the giants to try both, now that Uber
UBER, + 0.00%
and Lyft
LYFT, + 4.29%
are public companies that will face the pressure of Wall Street every three months. But given the time that can elapse before autonomous robotaxia reigns on our streets, price increases are much more likely and can be largely concealed by businesses.
Uber, which has quoted its shares on Thursday night and begins trading Friday morning, is the most anticipated IPO of Silicon Valley since Facebook. And while many investors have been impressed by the scale of its business relative to the size of its rival, Mr. Lyft – who is primarily in the US and not yet so diverse – Uber's losses are all as spectacular. In 2018, Uber recorded an operating loss of $ 3 billion on revenues of $ 11.3 billion and its accumulated deficit reached nearly $ 8 billion at the end of last year. Uber said in his "roadshow" presentation that he foresaw that Ebitda's losses in 2019 would increase, along with its ongoing investments.
Uber and Lyft have been subsidized over the past ten and seven years by venture capitalists and other private investors willing to bet on rising power, whose funding has allowed the experiments to grow at a low rate. price. But as a public company, this stage of their lives is coming to an end now.
Read also: Uber IPO: 5 things to know about potentially the biggest IPO in recent years
"Right now, they're both about to" gain market share, "and the end result is less important than generating revenue and growing market share, but once you're become a publicly traded company and you have to publish your earnings every quarter, people will monitor your income very closely, "said Reena Aggarwal, a professor of finance and director of the McDonough School of Business's Center for Financial Markets and Policy. Georgetown. "We will focus a lot on that. They will have to raise prices because of the pressures. "
We can see an example of how this has happened in technology by looking at streaming media companies such as Netflix Inc.
NFLX, -0.44%
NFLX, -0.44%
While Netflix was in the DVD rental business, it offered its customers the opportunity to stream video for free, along with their DVD subscriptions, on an experimental basis. As streaming began to take hold, Netflix began to charge for it, first with Qwikster's unfortunate effort, then separating the streaming activity from the DVD rental.
The relationship between Uber and its drivers, which triggered a worldwide strike on Wednesday to protest the company's economic model prior to its IPO, is one of the biggest pressures. The drivers argue that Uber's business model enriches company executives to the detriment of its low-paying drivers, who are subcontractors and not full-time employees (this issue is at the heart of many prosecution seeking to classify drivers as employees). ). Uber offers drivers incentives to join, which further undermines their bottom line, as well as discounts for bikers. In the company's S1, the group said it had increased driver incentives and promotions in the first quarter in order to maintain its competitive position in the market, and said it was expecting a downgrade of his relations with the drivers.
"While we aim to reduce drivers' incentives to improve our financial performance, we expect a general increase in driver dissatisfaction," the company said. He also noted that while continuing to invest in autonomous cars, "this could aggravate driver dissatisfaction over time as this could reduce the need for drivers."
"Profitability by cutting costs will create even more problems, with the high turnover rate of drivers and challenging new drivers so that they can grow," said Larry Mishel, a distinguished member of the company. Washington Economic Policy Institute. "There are huge contradictions at the heart of their business model." Last year, Mishel conducted a study on Uber drivers and concluded that their hourly wage equivalent to W-2 was lower than that earned by 90% of American workers. "Our results indicate that Uber drivers are earning low wages and compensations. The total number of hours and compensation in the gig's economy is a very small part of the total number of hours and offsets in the economy as a whole, "says Mishel's study.
Uber has not anticipated any potential profitability, but some investors rely on the profitability of autonomous fleets, which would eliminate some driver compensation costs. But autonomous cars are still in their infancy and even when they are completely autonomous, Uber will still have expenses for technology and possibly for the cars themselves.
"The idea that they can expect autonomous vehicles [before they become profitable] is stupid, we are far from that. It's not clear that Wall Street and investors will wait many years before becoming profitable, "Mishel said.
EquityZen, a platform allowing employees to sell their private shares, has set a goal to enable Uber to achieve profitability in 2023. The total amount of gross bookings rises to 145. , $ 6 billion, the business figure to $ 26.4 billion and costs and expenses at a lower rate than its business, of about $ 26.2 billion. The cost of Uber's products is the largest expense item that EquityZen's analysts do not expect to drop significantly as it continues to invest in growing services like Uber Freight and new mobility products.
"We expect Uber to be at a loss for at least the next few years, but we believe investors should be more patient with Uber's investments, as its leadership position will help improve the long-term competitive positioning of Uber. term, "said Ygal Arounian, an analyst at Wedbush Securities. and Dan Ives, in a note from last week at the origin of Uber's cover.
This week, Lyft's first quarterly results removed the booking revenues from its financial statements, a move that investors in the company's presentation tour were alerted to. Nevertheless, the move removes the necessary data and could make it more difficult to raise prices. In his tour video, Uber did not say he would continue to provide this data, but Ives think the company will do it.
"Bookings and interest rates are critical for investors, and we continue to believe that Uber will be transparent in terms of metrics and growth figures," Ives said in an email on Thursday. "Lyft dropped the ball by not giving these measurements and Uber should learn from those mistakes."
Both companies put themselves in a difficult situation. Their business models are far from profitable and there is only one sure way to achieve it. However, higher prices for consumers could have a real impact on the volume of journeys and make them less competitive compared to taxis in urban markets. In any case, Uber's IPO is a difficult sell for investors, with a long and uncertain path to profitability.
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