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Confession: I Don’t Think Uber Is Actually a Great Business (Yet)

36 points by julianozen 10y ago

nhorob67 10y ago
How could Uber have negative gross margin? I have a hard time believing that. I guess it depends on what they include in COGS.
- aarongolliver 10y ago
  They pay drivers more than they charge users. It's pretty simple. Over 75% of my Uber rides are heavily subsidized in some way: - pools where no one else is picked up. - 25% off coupon for 10 rides (I almost always have one of these) - 50% off coupon for 5 rides (I get like once a month, and have one currently)
beambot 10y ago
Reminds me of Facebook six years back: "There's no way they're worth $33B" [1]. Now they're worth 10X, publicly traded, and printing money. Respectfully, even professional prognosticators (ie. VCs) get this shit wrong 9 times out of 10... so lamenting all the ways it could "fail to be a great business" isn't really that insightful (in the probabilistic priors sense). TL;DR: You could be right (and frequently will be), and you could be spectacularly wrong. But we're just Monday-quarterbacking while they're trying to make the future bad-ass with magical "autonomous" cars (whether human drivers or computerized). That's cool in my book; I wish them the best of luck! [1] https://signalvnoise.com/posts/2585-facebook-is-not-worth-33000000000 https://signalvnoise.com/posts/2585-facebook-is-not-worth-33...
- drieddust 10y ago
  This is I don't get. How much money Facebook have made so far vs how much they have burned on operations and various acquisitions? Yes Facebook is earning money but will it be a great business to justify 300B+ valuation in long term?
  - user5994461 10y ago
    They're probably fine as far as they keep having the detailed life and all information of billions of people.
  - edblarney 10y ago
    FB has a P/E ratio of 42, which is high. The market assumption is that they can probably grow their /user revenues quite a lot because they're not getting that many new users. I suggest that FB is probably a very viable, very profitable company long term, but that their stock is probably over-valued. From an investors perspective, it may have nothing to do with the reality of underlying fundamentals - but how other investors will perceive them. Ergo - FB may still make a great investment if you think they will come out with some new shiny products to keep other investors hopped up on the juice. Purely by the books, they are about 4x overvalued right now. 10x price/earnings is the normal place for a healthy, strong, reasonably growing company.
    - justapassenger 10y ago
      ~10 P/E is ratio for a well established, stable business - ones that maybe deliver 10% growth. FB revenue growth is still insane - https://www.wolframalpha.com/input/?i=facebook+revenue https://www.wolframalpha.com/input/?i=facebook+revenue - once that stops, honeymoon will be over. But FB is stabilizing - https://www.wolframalpha.com/input/?i=facebook+p%2Fe+ratio+compared+to+stock+price https://www.wolframalpha.com/input/?i=facebook+p%2Fe+ratio+c... - P/E is dropping even as stock is going up. Market is betting that in a couple of years revenue growth should stabilize.
      - edblarney 10y ago
        "FB revenue growth is still insane" Agreed, but in order to justify the massive P/E they would have to be growing quite a lot for the next 10 years. I don't seem them delivering this kind of growth over that time. Maybe. Google was able to do it for a long while.
        10y ago
- edblarney 10y ago
  That 'someone said something about another company' is basically irrelevant. The underlying issues are the facts that need to be addressed. X years ago, what was FB's user base, how much was it growing, could it be disrupted, and how much were they spending on ops/acquisitions ... and of course, how many $ could they squeeze out of each user are the fundamental questions. The article is not unfair. Uber is a great business that is probably wildly over-priced at this point.
  - beambot 10y ago
    It's not irrelevant -- it's the same story every time, just with a different company. The "underlying issues" are things Uber management (1) understands better than outsiders looking in; (2) they're actively working to address; and (3) they have vastly-superior metrics to understand their own internal growth rate. They want to stay private precisely for this reason: They don't want to answer whiny questions from people who think they know better. "Wildly overpriced" is speculative on your part (at best). This isn't a publicly traded stock. It's preferred stock, and valuation is ~1 line item in a contract that probably spans dozens of pages. Those other T&C's matter a lot: liquidation preference, participating preferred, etc. Those newest investors are certainly getting superior liquidation preference, and likely getting guaranteed ROI.
    - edblarney 10y ago
      " it's the same story every time, just with a different company." No - it's definitely not the 'same story' :) The same was said about Google and FB, and Amazon - and they are doing very well. It was said about Twitter and they are failing. These companies are all quite different.
- TylerE 10y ago
  How long is it going to last though? I expect FB to face some very hard questions about it's ad business (click farming, bots, etc) in the next 12-24 months.
  - ec109685 10y ago
    Google has weathered those same issues just fine.
  - a13n 10y ago
    Really? I don't. Companies aren't blindly paying FB billions of dollars for ads without verifying they actually deliver a return... Clearly it's working, that's the reason so many companies pay for them. Sure, they could probably get better at managing "click farming, bots, etc", but despite these things, advertising on FB has proven incredibly valuable and there's no clear indicator that'll change soon. If anything it'll just grow more valuable across a larger user base, hence their lofty P/E ratio (implying growth).
- ithinkinstereo 10y ago
  There are significant differences between Uber and FB. Two very important ones: 1) Moat - barriers for entry in the ride-"sharing" space are low. See Austin for example. 2) Economies of scale - the costs for FB to add each incremental user got increasingly cheaper due to cost savings at scale. Not so much for Uber.
  - beambot 10y ago
    1) People said the same about FB wrt Myspace. 2) Even if Uber's CAC doesn't decrease, it could have a vastly-higher CLV to justify the crazy spending to capture market share now. It's a calculated strategic decision -- and it's impossible to say if it's "wrong"; only time will tell.
    - ithinkinstereo 10y ago
      2) CLV depends on customer loyalty. In the case of the ride-sharing market, this ultimately comes down to the cost of service. Plus remember that Uber has to satisfy both sides of the coin here: drivers + riders. AND they have to be profitable. Tall order here.
- xkcd-sucks 10y ago
  The difference is that Uber's network effects aren't as important. As long as a service has a minimum number of users (and there isn't any cost to maintaining accounts on multiple services) they're essentially equivalent. Anecdotally, people in my region refer to these services as "Ubers" like "Kleenex" or "Xerox", or refer them as "cars."
edblarney 10y ago
Uber definitely has some advantages vis-a-vis competitors, because there is a brand and networking effect at play. Everyone knows about Uber, nobody knows anything about that 'local startup'. The real competitor is obviously regular cabs. There is always a cab when I need one in Montreal, I don't care about Uber really. The bit about 'regional profitiability' is valid. I'm suspicious that Uber is running profitably in the US. That said, I'll bet the absolutely could if they wanted to ... but they spend a lot on aggressive tactics/marketing. If they had to 'stop growth' and 'just be a US' company right now - they'd have to lay off, downround etc.. Sure - they'd have screwed over later investors, but that's the point no? The loser in all of this is the later stage dumb money. Mostly everyone else wins.
Animats 10y ago
The real question is whether Uber can ever make money without subsidizing rides with investor capital. At some point, they have to raise prices. This make them vulnerable to competition. The good news is that if Uber goes under, it's easy to replace them. Uber and Lyft pulled out of Austin TX last May over required fingerprinting of drivers. Ten competitors sprang up to replace Uber and Lyft. They're doing fine.[1] [1] http://www.curbed.com/2016/12/7/13828514/uber-lyft-ride-austin-rideshare-get-me http://www.curbed.com/2016/12/7/13828514/uber-lyft-ride-aust...
- HillRat 10y ago
  Curbed is ... not the best experience I've had in ride-hailing. To be honest, it's easier and more convenient for me to have the office call a cab for those relatively few times when I'm in Austin. They may have ironed out some of the quirks of their platform since then (scheduled cabs being called out immediately, an attempt to get a ride to the airport being denied because the app decided I was trying to be dropped off on the tarmac itself), but there's no killer reason yet for me to try it out again. Having said that, it's definitely true that there are basically no meaningful barriers to entry beyond mindshare (after all, every Uber driver is also running Lyft, and likewise for the drivers -- and Lyft's better driver rates are also why I have to use Lyft when I leave for the airport at 3 AM). Things like UberEATS may provide some stickiness, but I'm far from sold that their basic economics are going to work in the long run, let alone keep them in the market pole position.
  - sulam 10y ago
    I'm pretty sure UberEATS must be a horrible customer experience based on the random shit I see happening at registers in places that I get food from. Stuff like the driver having no idea what the customer has ordered and just taking any old order the people behind the cash register are willing to give them. Since both ends of this transaction don't qualify as the sharpest tools in the shed, it's basically the blind leading the blind. I get that it makes sense from Uber's point of view -- increasing driver utilization and smoothing out the supply side of the relationship is probably great for their unit economics. But they actually have to execute it well if they expect people like me to use it.
y_u_no_rust 10y ago
It's funny Uber has been out of Austin for a while and things function pretty well and there are decent alternatives (considering their size) Unless they somehow magically get the jump on driverless cars and even then once that technology develops won't easier to compete with them? they seem pretty worthless long term.
koenigdavidmj 10y ago
Uber's value is this: 1. Same interface in any city. I don't need to figure out what the taxi phone number is (or what they are in case of multiple companies). 2. I can get a car somewhere other than downtown. 3. I can pay with credit, without fear that a driver will (best case) lie that the credit card machine is not working, until I say I don't have cash, or (worst case) kidnap me and take me to an ATM. 4. No silly medallion limits, so I never need to wait for long, even at closing time. They really don't need to do the Ponzi scheme thing, hemorrhaging money and leaving the VC with the bill. Plenty of people will gladly pay more than a cab for the above benefits. In that sense, taxis are not really a competitor.
- a13n 10y ago
  These are consumer benefits, what does this have to do with Uber being a great business?
  - koenigdavidmj 10y ago
    Right now, Uber's business model is throw so much VC money at everything that everybody else goes out of business, and hope the taxis die before you run out of VC money.
    - emilsedgh 10y ago
      So Uber's short/mid term plan is to put all taxis out of business by lowering prices using VC money and their long term plan is to use autopilot cars to leave all drivers jobless. And the other day there was an engineer from Uber commenting how ethical the company was. I'm sure their engineering team is very ethical and responsible. But their business model and plan is actually very questionable. It's like they are hiding the highly questionable business ethics behind the good engineering ethics. Or is there a point I'm missing?
      - ithinkinstereo 10y ago
        Don't forget the whole dodging regulations thing. This aspect of the "sharing" economy I find the most disgusting. Ethics goes out of the window in the pursuit of profit.
jasonlingx 10y ago
Uber is overvalued. It's not rocket science, easily copied, little customer loyalty and consumers will switch quickly to whoever offers the better and cheaper service. The end game here is autonomous vehicles and I'm not sure they are even in the game.
- ndirish1842 10y ago
  Uber is already running autonomous car tests with customers[1]. They have an entire division devoted to self driving technology[2]. [1] https://techcrunch.com/2016/09/14/1386711/ https://techcrunch.com/2016/09/14/1386711/ [2] https://www.uber.com/info/atc/ https://www.uber.com/info/atc/
makomk 10y ago
The BBC ran an interesting article the other day asking if Uber were getting too big to fail, pointing to the way state-subsidised Uber is replacing public transport in some areas and worrying about what their lack of profitability means for this: http://www.bbc.co.uk/news/technology-38252405 http://www.bbc.co.uk/news/technology-38252405

36 points by julianozen 10y ago

How could Uber have negative gross margin? I have a hard time believing that. I guess it depends on what they include in COGS.

aarongolliver 10y ago
They pay drivers more than they charge users. It's pretty simple. Over 75% of my Uber rides are heavily subsidized in some way: - pools where no one else is picked up. - 25% off coupon for 10 rides (I almost always have one of these) - 50% off coupon for 5 rides (I get like once a month, and have one currently)

beambot 10y ago

Reminds me of Facebook six years back: "There's no way they're worth $33B" [1]. Now they're worth 10X, publicly traded, and printing money. Respectfully, even professional prognosticators (ie. VCs) get this shit wrong 9 times out of 10... so lamenting all the ways it could "fail to be a great business" isn't really that insightful (in the probabilistic priors sense). TL;DR: You could be right (and frequently will be), and you could be spectacularly wrong. But we're just Monday-quarterbacking while they're trying to make the future bad-ass with magical "autonomous" cars (whether human drivers or computerized). That's cool in my book; I wish them the best of luck! [1] https://signalvnoise.com/posts/2585-facebook-is-not-worth-33000000000 https://signalvnoise.com/posts/2585-facebook-is-not-worth-33...

drieddust 10y ago
This is I don't get. How much money Facebook have made so far vs how much they have burned on operations and various acquisitions? Yes Facebook is earning money but will it be a great business to justify 300B+ valuation in long term?
- user5994461 10y ago
  They're probably fine as far as they keep having the detailed life and all information of billions of people.
- edblarney 10y ago
  FB has a P/E ratio of 42, which is high. The market assumption is that they can probably grow their /user revenues quite a lot because they're not getting that many new users. I suggest that FB is probably a very viable, very profitable company long term, but that their stock is probably over-valued. From an investors perspective, it may have nothing to do with the reality of underlying fundamentals - but how other investors will perceive them. Ergo - FB may still make a great investment if you think they will come out with some new shiny products to keep other investors hopped up on the juice. Purely by the books, they are about 4x overvalued right now. 10x price/earnings is the normal place for a healthy, strong, reasonably growing company.
  - justapassenger 10y ago
    ~10 P/E is ratio for a well established, stable business - ones that maybe deliver 10% growth. FB revenue growth is still insane - https://www.wolframalpha.com/input/?i=facebook+revenue https://www.wolframalpha.com/input/?i=facebook+revenue - once that stops, honeymoon will be over. But FB is stabilizing - https://www.wolframalpha.com/input/?i=facebook+p%2Fe+ratio+compared+to+stock+price https://www.wolframalpha.com/input/?i=facebook+p%2Fe+ratio+c... - P/E is dropping even as stock is going up. Market is betting that in a couple of years revenue growth should stabilize.
    - edblarney 10y ago
      "FB revenue growth is still insane" Agreed, but in order to justify the massive P/E they would have to be growing quite a lot for the next 10 years. I don't seem them delivering this kind of growth over that time. Maybe. Google was able to do it for a long while.
      - 10y ago
edblarney 10y ago
That 'someone said something about another company' is basically irrelevant. The underlying issues are the facts that need to be addressed. X years ago, what was FB's user base, how much was it growing, could it be disrupted, and how much were they spending on ops/acquisitions ... and of course, how many $ could they squeeze out of each user are the fundamental questions. The article is not unfair. Uber is a great business that is probably wildly over-priced at this point.
- beambot 10y ago
  It's not irrelevant -- it's the same story every time, just with a different company. The "underlying issues" are things Uber management (1) understands better than outsiders looking in; (2) they're actively working to address; and (3) they have vastly-superior metrics to understand their own internal growth rate. They want to stay private precisely for this reason: They don't want to answer whiny questions from people who think they know better. "Wildly overpriced" is speculative on your part (at best). This isn't a publicly traded stock. It's preferred stock, and valuation is ~1 line item in a contract that probably spans dozens of pages. Those other T&C's matter a lot: liquidation preference, participating preferred, etc. Those newest investors are certainly getting superior liquidation preference, and likely getting guaranteed ROI.
  - edblarney 10y ago
    " it's the same story every time, just with a different company." No - it's definitely not the 'same story' :) The same was said about Google and FB, and Amazon - and they are doing very well. It was said about Twitter and they are failing. These companies are all quite different.
TylerE 10y ago
How long is it going to last though? I expect FB to face some very hard questions about it's ad business (click farming, bots, etc) in the next 12-24 months.
- ec109685 10y ago
  Google has weathered those same issues just fine.
- a13n 10y ago
  Really? I don't. Companies aren't blindly paying FB billions of dollars for ads without verifying they actually deliver a return... Clearly it's working, that's the reason so many companies pay for them. Sure, they could probably get better at managing "click farming, bots, etc", but despite these things, advertising on FB has proven incredibly valuable and there's no clear indicator that'll change soon. If anything it'll just grow more valuable across a larger user base, hence their lofty P/E ratio (implying growth).
ithinkinstereo 10y ago
There are significant differences between Uber and FB. Two very important ones: 1) Moat - barriers for entry in the ride-"sharing" space are low. See Austin for example. 2) Economies of scale - the costs for FB to add each incremental user got increasingly cheaper due to cost savings at scale. Not so much for Uber.
- beambot 10y ago
  1) People said the same about FB wrt Myspace. 2) Even if Uber's CAC doesn't decrease, it could have a vastly-higher CLV to justify the crazy spending to capture market share now. It's a calculated strategic decision -- and it's impossible to say if it's "wrong"; only time will tell.
  - ithinkinstereo 10y ago
    2) CLV depends on customer loyalty. In the case of the ride-sharing market, this ultimately comes down to the cost of service. Plus remember that Uber has to satisfy both sides of the coin here: drivers + riders. AND they have to be profitable. Tall order here.
xkcd-sucks 10y ago
The difference is that Uber's network effects aren't as important. As long as a service has a minimum number of users (and there isn't any cost to maintaining accounts on multiple services) they're essentially equivalent. Anecdotally, people in my region refer to these services as "Ubers" like "Kleenex" or "Xerox", or refer them as "cars."

edblarney 10y ago

Uber definitely has some advantages vis-a-vis competitors, because there is a brand and networking effect at play. Everyone knows about Uber, nobody knows anything about that 'local startup'. The real competitor is obviously regular cabs. There is always a cab when I need one in Montreal, I don't care about Uber really. The bit about 'regional profitiability' is valid. I'm suspicious that Uber is running profitably in the US. That said, I'll bet the absolutely could if they wanted to ... but they spend a lot on aggressive tactics/marketing. If they had to 'stop growth' and 'just be a US' company right now - they'd have to lay off, downround etc.. Sure - they'd have screwed over later investors, but that's the point no? The loser in all of this is the later stage dumb money. Mostly everyone else wins.

Animats 10y ago

The real question is whether Uber can ever make money without subsidizing rides with investor capital. At some point, they have to raise prices. This make them vulnerable to competition. The good news is that if Uber goes under, it's easy to replace them. Uber and Lyft pulled out of Austin TX last May over required fingerprinting of drivers. Ten competitors sprang up to replace Uber and Lyft. They're doing fine.[1] [1] http://www.curbed.com/2016/12/7/13828514/uber-lyft-ride-austin-rideshare-get-me http://www.curbed.com/2016/12/7/13828514/uber-lyft-ride-aust...

HillRat 10y ago
Curbed is ... not the best experience I've had in ride-hailing. To be honest, it's easier and more convenient for me to have the office call a cab for those relatively few times when I'm in Austin. They may have ironed out some of the quirks of their platform since then (scheduled cabs being called out immediately, an attempt to get a ride to the airport being denied because the app decided I was trying to be dropped off on the tarmac itself), but there's no killer reason yet for me to try it out again. Having said that, it's definitely true that there are basically no meaningful barriers to entry beyond mindshare (after all, every Uber driver is also running Lyft, and likewise for the drivers -- and Lyft's better driver rates are also why I have to use Lyft when I leave for the airport at 3 AM). Things like UberEATS may provide some stickiness, but I'm far from sold that their basic economics are going to work in the long run, let alone keep them in the market pole position.
- sulam 10y ago
  I'm pretty sure UberEATS must be a horrible customer experience based on the random shit I see happening at registers in places that I get food from. Stuff like the driver having no idea what the customer has ordered and just taking any old order the people behind the cash register are willing to give them. Since both ends of this transaction don't qualify as the sharpest tools in the shed, it's basically the blind leading the blind. I get that it makes sense from Uber's point of view -- increasing driver utilization and smoothing out the supply side of the relationship is probably great for their unit economics. But they actually have to execute it well if they expect people like me to use it.

y_u_no_rust 10y ago

It's funny Uber has been out of Austin for a while and things function pretty well and there are decent alternatives (considering their size) Unless they somehow magically get the jump on driverless cars and even then once that technology develops won't easier to compete with them? they seem pretty worthless long term.

koenigdavidmj 10y ago

Uber's value is this: 1. Same interface in any city. I don't need to figure out what the taxi phone number is (or what they are in case of multiple companies). 2. I can get a car somewhere other than downtown. 3. I can pay with credit, without fear that a driver will (best case) lie that the credit card machine is not working, until I say I don't have cash, or (worst case) kidnap me and take me to an ATM. 4. No silly medallion limits, so I never need to wait for long, even at closing time. They really don't need to do the Ponzi scheme thing, hemorrhaging money and leaving the VC with the bill. Plenty of people will gladly pay more than a cab for the above benefits. In that sense, taxis are not really a competitor.

a13n 10y ago
These are consumer benefits, what does this have to do with Uber being a great business?
- koenigdavidmj 10y ago
  Right now, Uber's business model is throw so much VC money at everything that everybody else goes out of business, and hope the taxis die before you run out of VC money.
  - emilsedgh 10y ago
    So Uber's short/mid term plan is to put all taxis out of business by lowering prices using VC money and their long term plan is to use autopilot cars to leave all drivers jobless. And the other day there was an engineer from Uber commenting how ethical the company was. I'm sure their engineering team is very ethical and responsible. But their business model and plan is actually very questionable. It's like they are hiding the highly questionable business ethics behind the good engineering ethics. Or is there a point I'm missing?
    - ithinkinstereo 10y ago
      Don't forget the whole dodging regulations thing. This aspect of the "sharing" economy I find the most disgusting. Ethics goes out of the window in the pursuit of profit.

jasonlingx 10y ago

Uber is overvalued. It's not rocket science, easily copied, little customer loyalty and consumers will switch quickly to whoever offers the better and cheaper service. The end game here is autonomous vehicles and I'm not sure they are even in the game.

ndirish1842 10y ago
Uber is already running autonomous car tests with customers[1]. They have an entire division devoted to self driving technology[2]. [1] https://techcrunch.com/2016/09/14/1386711/ https://techcrunch.com/2016/09/14/1386711/ [2] https://www.uber.com/info/atc/ https://www.uber.com/info/atc/

makomk 10y ago

The BBC ran an interesting article the other day asking if Uber were getting too big to fail, pointing to the way state-subsidised Uber is replacing public transport in some areas and worrying about what their lack of profitability means for this: http://www.bbc.co.uk/news/technology-38252405 http://www.bbc.co.uk/news/technology-38252405