Uber Is Seeking A $91 Billion IPO. The Long Term Bullish Case for Uber Shares
Uber Technologies Inc. announced Friday it will be seeking an initial public offering with a valuation of $80 – 91 billion. That figure is a revision from earlier expectations that would have valued the 21st century taxi company in excess of $100 billion at the time of the IPO. The company may have settled for the lower number knowing that it lost another billion on operations in the last quarter.
The ride hailing service giant posted the $1 billion loss the same day it announced the expected valuation for the upcoming IPO. The steep losses for Q1 of 2019 come after a year in which Uber spent $1.8 billion more on operations than it took in from bookings and other sources of income. Uber bears say the company is just too unprofitable heading into its IPO to be a good investment.
But it’s important to keep in mind how conventional a path to profitability Uber is following for a massive tech monopoly. When keeping in mind 1) the sheer vastness of Uber’s reach and infrastructure, with 85% market dominance over the mobile ride sharing industry; 2) the incredible value of its brand; 3) how its “losses” represent massive capital investments; 4) and its impressive ability to consistently rake in absolutely massive receipts every quarter to cover its debts…
Uber stock remains a promising long term investment in both a winning, disruptive tech monopoly, and the underlying emerging technologies and trends that are likely to drive Uber to a position of massive monopoly profitability in a few years, should the company continue on its current trajectory.
Uber’s Unmatchable Market Dominance
An 85% market share puts Uber in the league of the great tech monopolies like Google (91% market dominance in online search), Microsoft in 2000 (a godlike 97% market dominance in PC operating systems), or Amazon* (49% market dominance of the $394 billion U.S. e-commerce market). Monopolies on that scale of market share over industries that lucrative end up with their hands on more profits than they know what to do with. With $245 billion cash on hand at the beginning of the year, Apple’s just stacking cash to the Moon in savings accounts.
For some time Apple Inc. had $252 billion in foreign bank accounts until the GOP tax bill discounted tax rates from as high as 35% to as low as 8% for a limited time for American companies to repatriate their ocean of cash. The point is the kind of business you want to invest in for massive profits is a monopoly. Companies that compete break even. Companies that dominate make profits so incomparably vast that many people instinctively feel like it’s obscene to win that hard while most everyone else doesn’t.
This is the approach to investing that Silicon Valley billionaire Peter Thiel takes as a venture capitalist. The PayPal and Palantir founder knows something about the overwhelming advantage of designing a business to be a monopoly from Day 1. He says “Competition is for losers,” and the flip side of his message is that companies with the kind of market dominance Uber has are massive winners at capitalism.
Uber’s “Losses” Are Capital Investments In A Lucrative Tech Monopoly
Critics are quick to point out that Uber isn’t merely not profitable yet, but that it’s massively unprofitable. For instance this article in The Drive that says the company’s adjusted EBITDA loss of $1.8 billion for 2018 is “bad news for Uber as the company looks to charm investors into an initial public offering (IPO) later this year.” But don’t forget that Uber’s top and bottom lines both improved markedly in 2018. Investors had to feed $2.2 billion to the behemoth in 2017 to keep it growing. That’s a trend toward profitability.
Uber has had no trouble raking in investor cash because it has even less trouble vacuuming up cash from ride bookings at a furious pace. The ride share app founded in 2009 posted a mind-boggling $50 billion in bookings in 2018. Its $11.3 billion in revenue from these bookings were a 43 percent increase in Uber’s top line over 2017’s $7.9 billion. Many enormously profitable tech companies have been down this path before. They’re fundamentally solid companies operating at a reasonable loss with a clear and likely path to monopolistic profits. Investors love opportunities like this.
Examples of companies like this include Facebook, notable for its own blockbuster IPO, at the time the largest IPO in history, and still the 4th largest in history today. Facebook’s pre-IPO revenue was a comparatively paltry $3.7 billion. And Twitter wasn’t profitable at its IPO either, operating at net losses of $143 million.
Amazon burned through $1.4 billion in 2000, three years after its IPO. That didn’t stop nature from taking its course as Amazon’s unique value and market share dominance pulled the company through with help from investors. IPO AMZN stock turned out to be one of the greatest investments in history. $100 worth of it in 1997 was worth $120,000 twenty years later. Uber stock will debut at $44 to $50 a share.
Investing in Autonomous Vehicles Through Uber
An investment in Uber shares, or those of Lyft, its distant second-place competitor for market share in the ride hailing arena, is an investment in autonomous vehicle technology. It’s a pretty safe bet that on top of the massive profits that can be unlocked by refining its business model, Uber will make even more profits when it automates a fleet of driverless cars. For all its ability to haul cash, Uber does have a notoriously high cost structure. The corporate cut of its $50 billion in bookings last year was $11.3 billion.
In Peter Thiel’s model of disruptive business enterprise, a truly profitable company is one that both creates an off the charts amount of value, and captures most of that value as profit. Automation is the ride sharing industry’s biggest and most conspicuous opportunity to capture more of the value it creates.
Drivers will have a number of years left to make a living (in the case of long haul truck drivers, for which there is a shortage in the United States, a very good living), but at the rate of advancements in automated driving technology, their years in this service business are numbered. But technological disruption will also save them time and money. And disruption inevitably creates myriad new opportunities.
*It may be a stretch to call Amazon a monopoly in comparison to Google search or Microsoft PC operating systems in the 90s. Though its incredible market share dominance and correspondingly massive profitability are illustrative of a good investment to buy as early as possible and hold onto forever. Here’s a statement from Jack Evans, a PR rep at Amazon:
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