Uber. WeWork. I’m at a Loss – The Real ‘Growth’ Story

Ahead of its much hyped IPO (Initial Public Offering), Uber was being touted in some circles as a US$120 billion business.

Thankfully, common sense (and I use that term lightly) prevailed. In May 2019, Uber hit the market at a more ‘realistic’ value of…US$76.5 billion.

What does that sort of money buy you?

In Uber’s case, it appears to be a whole lot of red ink.

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This is part of Financial Times Alphaville’s coverage of Uber’s second quarter 2019 results (emphasis is mine)…

The quarterly net loss, which hit $5.2bn vs $878m a year ago and included $3.9bn in stock based compensation expenses related to the IPO, was spectacular in its own right. (On an adjusted basis the EBITDA loss came in at $656m, which marks an improvement on Q1.)

But the thing that really hit market sentiment was the slowdown in revenue growth at 14 per cent to $3.2bn. Analysts had been expecting a 20 per cent rate which would have taken the top line to $3.4bn.

This is important because Uber’s investment case is based on the thesis that the continuous net losses don’t matter because it’s still a growth company, and its pathway to profitability is through market domination and, of course, revenue growth.

Uber tears up — in adjusted terms — US$656 million in a three-month period, but the real bummer is a modest slowdown in revenue growth.

Talk about skewed priorities.

But that tells you all you need to know about the ‘value’ proposition associated with these so-called unicorns.

As long as it’s a ‘growth’ story, we’ll keep placing an over-over-over inflated price to these perpetual cash burners.

The punters expressed their disappointment with Uber’s slowdown in revenue growth. Shares in the ride-sharer fell almost 25%.

When it comes to value, I’m a little old school. Just to humour myself, I had a look at what the US 10-year government bond was yielding in May 2019. The rate was 2.4%.

If you’d entrusted Uber’s value of US$76.5 billion to Uncle Sam, you’d be paid US$1.84 billion annually…without lifting a finger.

But I digress, Uber is a growth story.

Therefore, any comparison with something so boring and staid as a government bond is completely irrelevant…at least that’s the narrative during this period of complete and utter disconnect from reality.

So how does Uber increase revenue growth?

More people hailing an Uber? More people wanting lukewarm food to be delivered? That’s one way.

But there’s a fair bit of competition out there.

Lyft. DiDi. Ola. GoCatch. Taxify. Scoot. HOP. Deliveroo.

Each of these is offering loss-leading deals to attract customers.

Bump up prices? Not so easy with all that aforementioned competition.

Another way is to take a greater cut from your ‘independent contractors’.

It appears that’s already happening.

An investigative report published by Jalopnik (an auto-based website) on 26 August 2019, found that…

Of all the [14,756] fares Jalopnik examined, Uber kept 35 percent of the revenue, while Lyft kept 38 percent. These numbers are roughly in line with a previous study by Lawrence Mishel at the Economic Policy Institute which concluded Uber’s take rate to be roughly one-third, or 33 percent.

Uber refutes the findings…surprise, surprise.

With consumers tightening their belts and looking for better and cheaper deals, that trend in slower revenue growth looks set to continue.

If you’re an Uber shareholder who needs a dose of reality, or you have a passing interest in reading a common sense perspective on this ‘confidence trick’, then you should read Hubert Horan’s ‘Uber’s Path of Destruction’.

The report is prefaced with…

…based on Horan’s 40 years of experience in the management and regulation of transportation companies. Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants.’

For those who don’t have the time or inclination to read the 26-page report, here’s a couple of extracts…

An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate.

And

Uber pursued a “growth at all costs” strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares.

As a beneficiary of those subsidised rides, I’d like to personally thank the punters who’ve ponied up US$20 billion. But will they continue to be taken for mugs?

While the fanciful growth story is still their reality, you bet they will.

When Uber rattles the tin, those who are destined to learn that ‘a fool and their money are soon parted’ will pony up again.

And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard-earned money.

The WeWork ‘Growth’ Story and IPO

This ‘fluff’ is from the company’s IPO S-1 filing…

We are a community company committed to maximum global impact. Our mission is to elevate the world’s consciousness. We have built a worldwide platform that supports growth, shared experiences and true success. We provide our members with flexible access to beautiful spaces, a culture of inclusivity and the energy of an inspired community, all connected by our extensive technology infrastructure. We believe our company has the power to elevate how people work, live and grow.

Have you ever read anything so PC nauseating? Where’s the bucket?

WeWork is a company that rents space long term and sublets it short term. Full stop. End of story.

But WeWork is different…it’s a ‘growth’ story. And like all other stories in this land of fantasy, it’s written in large RED ink.

As reported by CNBC on 17 August 2019:

WeWork’s revenue for the first half of 2019 may have been more than double that of a year earlier, but its losses are accelerating just as rapidly. The company indicated in its IPO filing that losses ballooned to more than $900 million in the first six months of the year, which follows full-year net losses of $1.9 billion in 2018.

So how much do you reckon WeWork is worth?

Me…I put it at $0. But you can’t really do an IPO for $0.

In growth story land, there’s an odd relationship between losses and (dare I say) value.

The greater the losses, the greater the value. Apparently, big losses means the company is building the foundations for growth.

Personally, I think they are just digging a big hole into which investor funds will be buried.

Anyway, back to the ‘growth’ story.

WeWork’s IPO valuation is…US$47 billion.

Is it worth it?

You be the judge.

Regus is the leading global workspace provider. We have built an unparalleled network of office, co-working and meeting spaces for companies to use in every city in the world. It’s an infrastructure to support every business opportunity.

Regus is part of IWG (International Workplace Group). An almost identical business model to WeWork…almost.

Here’s a comparison between the two businesses…

GDP per capita in England since 1270 - 29-08-19

[Click to open in a new window]

When I said ‘almost’, IWG is almost eight times the size of WeWork. There’s almost US$2 billion difference in profits between the two businesses. And, yet, WeWork is valued almost 13 times more than IWG.

You just gotta love the brilliance of the bullshi**ers behind these growth stories.

But continuing with the fool theme, you can’t fool all the people all the time. The sun will set on this period of insanity.

Which is why Kathleen Smith, co-founder of Renaissance Capital, told CNBC on 28 June 2019…

Any private company that is not proceeding to go public in this market should have their head examined. The market is wide open, and it’s not always going to be.

In other words, if you want to capitalise on people’s stupidity…do it now.

I am truly at a loss to understand how people can be so gullible.

But thankfully, unlike the investors who bought into this nonsense, my losses will be contained to my thoughts and words only.

Regards,

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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