Is Uber the perfect short?

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by Slothman2

 

Full disclosure: I own a short position.

It makes no difference to me if Uber succeeds or fails, I’m not a stakeholder of the company. I’ve never shorted a stock due to high risks but Uber almost seems too perfect not to do so. Below are my reasons for shorting Uber, please let me know if I’m missing anything.

1) Declining revenue growth rate: Revenue growth fell from 106% in 2017 to 42% in 2018. Q4 revenue was a mere 2% higher than Q3.

2) Unprofitability in ride-hailing: Take rate declined from 22% in Q1 to 18% in Q4 (2018) Drivers are already going on strike, increasing take rate doesn’t seem like an option. They could increase prices but customers will find alternatives and hence they lose market share.

3) UberEats isn’t the top food delivery business by market share in the US, Doordash is. Doordash is also growing at a quicker rate. Amazon recently invested half a billion in Deliveroo, which is a big player in the UK and the EU.

4) No economic moat: What’s fundamentally wrong about all of Uber’s businesses is that anyone can do them given enough funding. Market share is bought with infinite expenditure like promotions, subsidies, discounts and marketing. These fake gains last only as long as cash is being burnt funding these expenditures.

5) Not the leader in autonomous vehicles: Toyota among other companies have funded Uber’s self driving unit. Toyota, a company that hasn’t produced a full electric vehicle. In no particular order, companies like Waymo (partnered with Lyft), GM and Tesla are the leaders in AV tech. These companies have the power to produce fleets of EVs and Tesla EVs already have the hardware required for OTA FSD software upgrades when Tesla does achieve FSD. Where are Uber’s factories? They are 3-5 years behind in my opinion.

6) Weak bull case: I’ve been hearing Bulls use the words ‘network effect’ over and over again, citing Uber’s huge global platform. The reality is 70% of on-demand Drivers in the US drive for both Lyft and Uber. I’ll bet a much higher percentage of customers use both Lyft and Uber, not doing so would be outright financially irresponsible. It doesn’t even take 20 seconds to check which are offering better discounts for the day. If the network effect is so strong, Uber wouldn’t have sold it’s market share to Grab in SEA, Yandex in Russia and Didi in China. There is no customer loyalty when it comes to rideshare apps. Bulls tend to shift focus to Uber’s more potentially profitable businesses like Eats and Freight as though Uber’s valuation isn’t entirely based off the fact that it has the biggest rideshare platform. However successful Eats and Freight might be in the future, Uber stock will be due for a big correction if rideshare proofs to never be profitable.

7) Business model attracts lawsuits: Disrupting the highly regulated cab industry has brought Uber tons of lawsuits. Uber is facing a class action lawsuit in Australia. It’s lack of background checks in hiring drivers and attitude of taking no responsibility for customer well-being is causing itself to be sued left, right and center.

8) Losses: No company has ever lost so much money and yet be further away from profitability like Uber. The company openly admits to the possibility of never being profitable. 4.5b operating loss in 2017, 3b in 2018. When asked if 2019 will mark a record year of losses for Uber, CEO Dara replied “That is the intent”. Not to be taken out of context, he certainly means record losses incurred trying to gain the most market share but it also means that if Uber does not show better than expected revenue gains, its stock is finished.

For a company with no clear path to profitability, has a long-term debt of $8b, slowing revenue growth, how is the stock trading at 7x revenue? I think we would really see a huge correction if Uber reports a decline in revenue from Q4 to Q1. If you’re bullish on rideshare, choose Lyft (which I don’t have a position in), Lyft has no long term debt and they are partnered with Waymo for AVs. Why would anyone touch Uber stock with a 100ft pole?! Am willing to listen to any bull cases or anything I might have missed out.

 

 

Disclaimer: Consult your financial professional before making any investment decision.

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