Uber: The Biggest Investment Flop of Your Lifetime

Here’s the news flash: Uber is bound to fail. And so if Lyft, Uber’s little sibling with better PR. The sooner we all understand this, the better.

That’s what Gabe wrote, a part-time Uber and Lyft driver.

I’m not about to predict when this ‘New Economy’ will go belly up, or if it will at all.

But surely a US$120 billion valuation is a bit much?

I guess we’ll soon find out.

Uber is going public.

You can bet the initial public offering will be overhyped. Oversold.

The investment bankers will pump out extremely juicy projections. They’ll tell stories of how investors like Lance Armstrong made 200 times his money on the investment.

It’ll be the next big thing. The one stock you should have bought in hindsight.

Everyone will want to get their hands on the business that has captivated their kids.

But it’s probably best if you steer clear of this one.

Investment expert’s top picks: The three ASX stocks with the biggest potential for 2018. Get your free report now.

[We shot a video all about Uber and its potential as an investment. You can watch that video by clicking the picture below.] 

Competing for unprofitable growth

Do you think Uber is profitable?

With so many Uber drivers on the road you’d think they’d be doing something right.

But Uber is not profitable.

After a decade from their onset, Uber still loses close to a billion a quarter.

This might seem a little strange at first.

Uber has massive volumes. The company is everywhere. The technology they use can’t cost that much to maintain and update.

Maybe Uber has had to pay some fines here and there. But those costs aren’t all that high either.

So, why does Uber keep losing money?

A couple of reasons.

First, let’s again hear from our passionate part-time Uber driver, Gabe.

Uber calls itself a “technology” company instead of a taxi company. This is because unlike a traditional cab company, for which you use your phone to call for a cab, you use your phone to call for a cab. See? The difference is obvious. Uber/Lyft’s business model is to lose money for years or decades to grow its market and then, suddenly, replace all its human drivers with robots. And then we’ll all be rich, because volume. How’s that working for you, fellas? Oh, Uber has lost more money than any start-up in human history? What? How can this be?! Uber makes so much money! Look at all the Uber/Lyft cars clogging our streets! We use it so much! How could it not be profitable?

Money Morning

Source: the Bloomberg
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The problem with Uber is their low prices and their whole business model in general.

It used to be that only taxi and chauffeur services, who had licenses to pick people up and drive them around could do so.

With Uber and alike, anyone can be a driver.

What they’ve done is destroyed the supply and demand dynamic of the market. There are far too many drivers on the roads now.

But Uber needs those drivers. They need high volumes to hopefully — eventually — maybe one day become profitable.

I’ve seen figures as low as $1.15 per km for an Uber ride in Oz.

This $1.15 not only has to cover the driver’s fee, the technology of the app, but also everyone else at headquarters coming up with new ways to spend more money.

You can only stretch this small fare so far. The rest has to be paid out of Uber’s pocket.

And that’s exactly why Uber, more than a decade after creation, is still unprofitable. The company has to spend so much money to subsidies rides, more bookings add very little to earnings.

Again from Gabe:

The short answer is that they don’t charge enough. Uber’s rates in most of the USA are less than $1 a mile and 10 cents a minute. How long ago were taximeter rates that low?

‘…Correct for inflation, and you’d have to go back to…well, an alternate reality, because regulated taximeter rates have probably never been so low in the USA.

Go back to the Great Depression, when SF meter rates were 30 cents a milethats $4.68 adjusting for inflation per the US Bureau of Labor Statistics. How can Uber/Lyft make money charging 20 percent of that?

The answer is they can’t. So how are they still functioning? By looking like successful operations. The companies keep their massive driver presence (and quick, cheap service) by offering large subsidies. I won’t tell you what I made in 2017, ’cuz a lady has to have her secrets, but more than a third of it came from incentives, bonuses and referral payments.

Problem is, Uber couldn’t raise priced even if they tried. The competition has followed Uber’s model. They subsidise rides and compete for the same unprofitable growth.

The only way this works out for Uber is if they radically reduce costs.

Did someone say driverless Uber?

Let’s say Uber removed the cost of the driver.

That’ll surely bring costs down?

While driverless car technology might be another cash drain, in time profits could emerge.

I’m highly suspicious of such a scenario, though.

For one, Uber is not even close to developing driverless technology. The best estimate for Uber having driverless cars (just the technology not cars on the road) is five years behind the leader.

Money Morning

Source: the Bloomberg
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Yet even if Uber could catch up to the leader, they’d be back to square one. They’re be competing for market share by lowering costs, subsidising rides and losing more money.

In such a world, the business with the lowest cost structure wins. I just can’t see Uber pulling it off.

It’s why I’m warning you to watch Uber’s IPO from afar.

People will hype it up. They’ll show you projections that look mouth-watering.

But what is Uber’s advantage? What can they do that other competitors can’t?

If the answer is nothing, then it’s not an investment worth making.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: You don’t need to go after elephants like Uber to generate returns. In fact, it’s probably better if you didn’t. It’s why I tell readers to fish in the smaller end of the market.

The waters are less crowed. There’s less competition. Plus it’s easier to find investments that go from 1 to 10 (due to their size).

If you’re interested check out our analyst Sam Volkering’s top three small-cap picks here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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