Shorting Uber

by chancellor-sutler

Uber IPO’d 1 year ago for $42 a share raising $8.1bn with an initial market cap of $70bn. Today the stock trades at $34 and has a market cap of $62bn. It is trading at a 72x it’s 2-year forward P/E ratio. The notion that Uber will be profitable in 2022 at $.48 / share by developing a brand new business line or being first to market with self-driving cars is utterly fanciful.

Uber’s growth stalled even before the Coronavirus. Uber’s revenue grew 100% from 2016 to 2017. Investors were going wild and Uber was taking over the world. Uber bought Otto, a self-driving trucking company that stole data from Google to found the company. In 2017, after many lawsuits, it forgot Otto existed and focused on self-driving cars. Over the past month, Uber laid off 6,700 employees, or 30% of their staff, and shuddered dozens of offices throughout the world to achieve savings of $1bn. Achieving profitability by cost savings is impossible for a business that can only achieve profitability through massive scale. A 30% workforce reduction shows that today they have absolutely no plan to develop new technology or business lines that can move them in the direction of profitability. It basically removes any hope of developing a new future for Uber. Uber will not come out with AWS, buy supermarket to deliver food, nor have the luxury to burn $4bn per year on self-driving cars (Waymo).

As of its last filing, which only had a couple weeks worth of Coronavirus fear, Uber grew just 14.3%. Uber ridership growth is slowing dramatically. Furthermore, the lasting impact of the Coronavirus and an increased acceptance of work from home may forever halt Uber’s growth. Uber themselves admit rides will never be profitable until there are self-driving cars. If you just watched the Tesla 3 crash straight into an overturned big rig, we’re not going to get there in the next few years. Certainly not by 2022. In the mean time, Uber will continue to burn $10bn a year just to stay relevant. Er, maybe $9bn if you believe their recent cost-cutting measures will be effective.

You may think Uber Eats is the next big thing, but remember they lose $3.36 on every order and they don’t expect profitability until 2024. Also, operations behind Eats are much more complex. A self driving car cannot deliver food. Maybe they’ll figure that out, but not any time soon. Growth, while high is slowing. And remember more growth means more lost money.

Could Uber Be the Next Amazon? Fuck no. Uber is not the next Amazon. While Amazon chose to not take any profits and reinvest in their business, it was still a choice. Uber has no magic switch to make money and their business revolves around increasing mobility, not cost cutting and decreased commuting from office workers. Uber’s ‘Other Bets’ account for a paltry $30mm in revenue. Google gets to use ‘Other Bets’ as a line item. Not Uber. But how are they supposed to grow ‘Other Bets’ R&D if they have no business line that makes money? Amazon has always had a profitable ecommerce business. Google has search, Apple makes the highest quality hardware in the world and Microsoft is a combination of Google and Apple (and other stuff that always seems to make money). I see no bright spot in Uber’s future that will allow them to achieve even half of their current valuation.

Uber Has a Serious Cash Problem. $9bn might seem like a lot of money for a company with a $62bn market cap, but somehow, it’s actually a scary number. Over the last 12 months Uber burned through $10bn in cash, funded by high yield debt. Furthermore, Uber has basically zero tangible assets they can use to secure debt. They only have their brand and driver relationships, which are about as toxic as their $900mm in debt coming due in 2025, with a yield of 7.5%. Imagine if your mortgage had a 7.5% rate.

Uber’s Q2 numbers coming out in August are going to be downright scary. Banks are already loading up on high yield notes at the behest of the government. Why would they add Uber to their portfolio of UEDs?

The fact Uber even considered investing in Flying Taxis puts them in the same mental facility as Adam Neumann. The world looked great in 2018 and 2019. Today is different. We won’t have flying taxis anytime soon, I think people would rather increase remote work and live in more affordable areas further from city centers. Taking a flying taxi into work right now is a fantasy we do not need. I just want to have a drink at a bar…

All that said, I don’t think Uber will go bankrupt. In all likelihood, they will merge with Grubhub, achieve some scale in food delivery, and centralize their ride-share programs to large cities with increased pricing at a dramatically lower scale. Business trips will be fewer and Zoom meetings will be more common.

Today I’m buying a few put options expiring on December 18th. That’s plenty of time for there to be bad news about earnings and for earnings to be released. I’d like to see Uber do well in the long-term and I don’t hate the company. I think they’re important to the economy and they take the kind of risks we need to push innovation forward. I just don’t like the current valuation.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.