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Uber Falling Victim to Investors’ Short-Term Thinking

Uber

Public companies are notorious for something behavioral finance experts like to call ‘Quarterly Capitalism’ i.e. a myopic focus on short-term performance and returns to the detriment of long-term growth. Its proliferation in the corporate world is a key reason why the number of companies going public has reduced dramatically over the past two decades…

It’s the reason why people like Michael Dell and Elon Musk feel the need to take their companies back to private life.

It’s also the reason why president Trump has just asked the SEC to abolish quarterly reports in favor of semi-annual reporting

(Click to enlarge)

But apparently the problem is not confined to the public arena.

Uber Technologies, a private company and the self-styled ‘Amazon of Transportation,’ has come under pressure from its investors who want it to sell its moonshot self-driving car unit. Why? Because it’s dragging down the company’s profitability.

Instead of the company concentrating on its core transportation business and expanding globally at breakneck speed, Uber has been busy investing in a next-generation transportation platform that traverses self-driving cars, scooter-and bike-sharing, flying cars, car rentals and food delivery, among other ventures that are only related tangentially.

Uber has just reported its 2nd quarter revenue. The company is unquestionably still a money magnet, having generated $2.8 billion during the quarter--good for a robust 63-percent Y/Y growth. Related: Saudis Sovereign Wealth Fund Eyes Tesla Rival

Despite the immense growth, Uber lost nearly $900 million during the quarter, mainly due to its numerous cash-burning moonshots.

Chiefly to blame is the self-driving car business which has been incinerating cash at the rate of $125-200 million per quarter over the past one-and-a-half years. Although Uber reports do not provide full transparency into the performance of its non-core businesses, The Information estimates that  the self-driving unit contributes 15-30 percent of the company’s losses, meaning the unit could have lost as much as $300 million last quarter.

Uber Borrowing a Page From the Alphabet Book

Uber seems to have borrowed a page from the book of another self-driving car rival—Alphabet Inc. (NASDAQ:GOOG,GOOGL) and its Waymo subsidiary. Alphabet owns dozens of futuristic projects that have been christened Google X, though the company reports them as ‘Other Bets.’ These businesses include Waymo (self-driving cars), Nest (maker of “smart” thermostats) Verily (Alphabet’s life sciences brand), Google Fiber, Project Loon (internet connectivity with balloons) and Project Wing (drone project), among others.

And just like Uber, Alphabet’s moonshots are cash-siphoning monsters.

During the last quarter, Alphabet’s Other Bets generated revenue of just $145 million but returned an operating loss of $732 million. In contrast, the core ad business generated a healthy operating income of $8.96 billion on revenue of $32.52 billion. Investors tolerate Alphabet’s moonshots for two key reasons:

• Some of them have been showing good potential;

• While not exactly a rounding error, losses booked by these businesses are easily offset by the hugely profitable ad segment.

Unfortunately, Uber doesn’t enjoy that same luxury. The company has never been profitable and lacks a large-margin business like Google’s. It’s sad, too, because Uber and Waymo are generally considered among the frontrunners in the self-driving car revolution, though the jury is still out regarding when the technology will eventually become an everyday reality on our roads.

Related: Inflation Wipes Out Wage Growth

Uber’s ownership structure changed dramatically when the company struck a mammoth deal with Japan’s SoftBank in Dec. 2017.

(Click to enlarge)

Source: Recode

SoftBank, Benchmark, and co-founder Travis Kalanick et al are now the majority shareholders and not the ‘Other’ investors.

Presumably, it’s this group that’s calling for the sale of the self-driving unit. Regardless of who is behind the call, it might turn out to be a big mistake years or even decades down the road if they have their way.

By Alex Kimani for Safehaven.com

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