The Weekly - Uber - It could be a bumpy ride

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14/05/2019
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Many will be familiar with the ride hailing app, Uber – a smartphone application that connects passengers to drivers. As far as disruptive technology goes, it doesn’t get any bigger than Uber. Many will remember the protests of traditional black cabs in London that bought the city to a standstill. Understandably they felt threatened by this new technology. Thanks to satellite navigation Uber drivers didn’t need to learn ‘the knowledge’ – the training required to become a London taxi driver. Uber drivers are also cheaper and can pick up passengers from where they want; passengers don’t need to rely on their luck to hail one down or wait in a taxi rank.

Uber has also branched out into delivering food via its ‘Uber Eats’ app, as well as investing heavily in driverless technology. Of course, when technology disrupts it can offer an excellent investment opportunity. However, investors still need to be cautious; you only need to go back to the dot-com bubble to see there is a certain danger when you are investing in an idea or story rather than the fundamentals of a business.

This was brought into sharp focus last week when Uber listed on the New York Stock Exchange, widely expected to be the largest Initial Public Offering (IPO) this year. On its debut last Friday, the share price fell from $45 (its IPO price) down to $41.56 – a fall of 7.62%. Hardly the debut that anyone expected, but one we’re afraid that is not entirely surprising. According to filings submitted to the U.S. Securities and Exchange Commission ahead of its stock market debut Uber has never made a profit. Furthermore, in the prospectus issued by Uber it admitted that it may not ever achieve profitability. This is a staggering admission for a company to make to investors ahead of a stock market debut.

In the UK, depending on how long the driver has been with Uber, the company can expect to collect 20% to 25% of every fare (Source: Uber). This is a staggering margin and so it’s not a surprise that we saw protests from Uber drivers ahead of its IPO about their working conditions and pay. However, things are unlikely to change anytime soon, especially as Uber announced a $3.3 billion loss on revenues of over $11 billion.
When Uber announced it was going to list on the stock exchange some envisaged that the valuation should sit around the $120 billion mark.

Thankfully, this was revised down to $82.4 billion on its IPO. Had it not, the fall upon listing could have been more significant than it was. Some were concerned after looking at Lyft, another ride hailing app that had listed earlier this year, as its share price has fallen significantly around $75 dollars to $51 dollars.

It is easy to see why they call these tech companies Unicorns. The original meaning of this phrase was to describe any tech start-up company that reaches a $1 billion-dollar market value. This isn’t specific to Uber, but perhaps it would be more apt as a term for any tech start-up where profits are as mythical as a unicorn!

The problem Uber has is that it is burning a considerable amount of money on new markets and investing in driverless technology. In an ideal world they would like to keep 100% of each fare, rather than give the majority of each fare to the drivers. This could be significant given that gross bookings for rides was over $50 billion (Source: Uber). While Uber might be the first mover in the ride hailing industry, it certainly isn’t the first mover in driverless technology. Tesla are investing heavily as well as most of the major car manufacturers.

So, essentially the question that needs answering is whether Uber is going to be the dominant force in driverless technology? Can it be more dominant than perhaps Tesla, BMW, Ford, Toyota, Mercedes, Volkswagen to name a few. We have heard people speculate that nobody will own cars in the future and babies born today won’t need a driving licence, so it’s hard to imagine many of the major car manufactures sinking into the abyss. Although car manufactures are not currently Uber’s competitors it is inevitable that the two industries will slowly merge over time. It is hard to imagine that Uber is going to be as dominant in the driverless technology arena as it is in the ride hailing industry. Thereinto lies the risk of investing in companies like Uber, you are buying the future and hoping that the company you invest in becomes the dominant force. This could well be the case with Uber and any investment made today could well reap rewards for investors in the future.

However, investors need to be cautious of the fact that Uber is taking a bet on the future, not the present. If Uber simply focused on ride hailing, in our opinion it would be profitable business. However, its cash burn might be a risk too far for some. After all, revenue is vanity, profit is sanity, but fundamentally cash is king. Uber might have deep pockets after raising money from other investors such as PayPal, Softbank, and the sovereign wealth fund of Saudi Arabia, but unless Uber do become the dominant force it could well be a bumpy ride for investors.

Equities suffer as Trump hikes tariffs

Most major equity indices trended lower over the course of the week as the Trump administration increased tariffs on $200bn worth of Chinese goods after trade talks broke down once again. The US S&P 500 index fell -2.2% over the course of the week, whilst Asian markets made bigger losses with the Shanghai Composite closing -4.5% lower and the Hang Seng was down -5.1%.

Chinese officials reportedly stepped back from a number of expected concessions in negotiations toward a comprehensive trade agreement with the United States. Such was the reversal in China's negotiating stance, President Trump reacted with an increase levy from 10% to 25% on $200bn of goods imported from China and threatened to impose the same 25% tariff on an additional $325bn. China have in-turn said they will prepare appropriate countermeasures. Clearly, this dents hopes for a trade agreement in the near term, however talks are ongoing.

Meanwhile, strong inventory build helped UK Gross Domestic Product (GDP) pick up in the first quarter according to figures announced last week. The economy strengthened with growth of 0.5% in the first three months of the year, helped by apparent stockpiling by manufacturers ahead of a looming no-deal Brexit at the end of March. Most sectors slowed considerably during March in comparison to January and February. The UK’s FTSE 100 meanwhile ended the week with a -2.4% loss.

Economic growth in Germany meanwhile, Europe's largest economy, is forecast to grow just 0.5% in 2019 following a downgrade from the European Union's earlier estimate of 1.1%. The German government on Wednesday announced it expected significantly lower economic growth for 2019 than previously announced. Germany’s DAX 30 index slipped to a weekly loss of -2.8%.

The price of oil closed the week broadly flat after a somewhat volatile week of news as tensions between the US and Iran intensified. Iran had also threatened to rebuild nuclear facilities unless Europe, China and Russia agreed to facilitate Iranian oil sales within 60 days. European leaders were quick to reject the ultimatum. Brent Crude oil ended the week at $70.82 per barrel and the West Texas Intermediate closed at $61.75.


The week ahead

UK employment data, due on Wednesday, will top the list of domestic data releases this week. The unemployment rate is forecast to hold at just 3.9% whilst the Average Earnings Index is anticipated to show wage growth at 3.4%.

In the US, Retail Sales figures will give an indication as to the strength of American consumer spending on Wednesday. Sales in March were very strong, posting its best reading since September 2017, so estimates for April are modest. Elsewhere, European GDP data is due from a number of member states this week and Friday will see updated core and headline inflation rates according to the Consumer Price Index (CPI) on Friday.

The value of shares and dividends may fall as well as rise. You may get back less than you invested.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

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