Uber's horrendous losses make it's high equity valuation a fantasy

Passengers love the fares by Uber. Why would not they? Uber money on almost every ride. When you're sitting in the back of an uber car, you can take pleasure in knowing that the company's business concept is being taken over by the rich – the private investors who subsidize the amazing growth of the ride-hailing service – to the unrich , which would be more expensive.

Uber Technologies Inc. to make a profit and to stop attracting investors. But judging from the company's initial public offering (IPO) flyer, published last week, that day is not coming any time soon – and may never come. Even Uber admits its operating expenses will "significantly increase in the foreseeable future, and we may not achieve profitability."

When you consider Uber 's deep losses – it' s about you – the company 's expected value is wildly exaggerated. While the prospectus is now under review, the company is expected to raise US $ 10-billion, valuing it at about US $ 100-billion. At that valuation, Uft would be worth more than five times that it would have been more important than that, but that it would have started trading on Nasdaq on March 29 (and has drifted south since then, but that's another story).

Still, Uber's IPO will draw scads of tech lovers who are spellbound by its growth story. In their view, Uber is the next Amazon, of the transportation variety. They will be patient as they go to market. Once again, it can be raised and the profits will roll in.

It's a nice fantasy that will forever remain a fantasy. There is no way Uber's new breed of competitors is going to allow it to take full control of big cities. Nor are municipal governments. Some cities are banning or restricting Uber. (In Rome, where I live, only the most expensive Uber services are available – Uber Black, Lux and Van – that 's not competing with regular taxis.

And if any of these cities develop ride-hailing apps of their own, Uber would be in trouble.

Uber's proficiency for dumping in the marketplace is one of the most important tools in the marketplace, and one that is commonly used under the licensed "medallion" system. it could from public transportation. In 2018, Uber's operating losses were US $ 3-billion, taking its total operating losses over three years to US $ 10-billion. Its 2018 net income of US $ 997-million was largely driven by the result of its investment in China's biggest ride-hailing company, Didi Chuxing.

Uber's new public investors are unlikely to be put off by the horrendous loss figures. Instead, they are dazzled by the growth, and Uber is indeed a phenomenal growth story. Since 2016, revenues have climbed from US $ 3.8-billion to US $ 11.3-billion.

But it does not matter what you think about the Uber's growth, while still strong, might be slowing. "Core platform, net revenue adjustment," a key metric defined as driver incentives, driver referrals and a few other miscellaneous expenses related to the main business. Between 2016 and 2017, that revenue figure more than doubled. But in 2018, the rise over the previous year was only 39 percent. In the fourth quarter of 2018, the figure actually fell slightly, to US $ 2.54-billion, over the third quarter.

Uber has a dilemma. If it is fares to try to reduce losses, it will be marketed just as the competition is heating up. But to gain market share, it will be necessary to take over heavy losses, or dropping them further, and give drivers a bigger cut of the worst to reduce their horrendous attrition rate (most Uber drivers do not last a year). How long can it afford to sustain these losses? Another way of asking this question is: How many more trillions are investors willing to pump into the company?

Competition is one serious threat. The other is governments, many of which love for Uber.

Governments dislike the company because its business model is based on the monopoly taxi medallion system that allows them to regulate the market. The tension of thousands of drivers in big cities increase traffic congestion. Uber drivers, who are technically freelancers, not employees, are underpaid and lacking essential benefits such as pensions and medical insurance. In some countries, Uber faces short challenges over the status of its drivers. If the courts determine that they are proper employees, Uber would face an existential threat. The company is admitted in its prospectus.

Uber can only be profitable if it succeeds in re-creating the very monopolies – the licensed taxi services – it is trying to destroy. But the bigger Uber gets, the more incentive governments will have to hit it with costly regulations. Offering low fares to the masses was a great idea, until it worked out that Uber lost billions. Now that governments and competitors such as these are going to be in their gunsights, it's hard to make the case that the company's equity value is US $ 100-billion. Or anywhere close to it.