Uber, the ride hailing company expected to go public this year, may enjoy the biggest IPO of all time. But the most valued American unicorn faces a more difficult path to profits than Amazon (AMZN) when the e-commerce giant filed its IPO more than a decade ago.
The two companies share a lot in common. Amazon and Uber are platform companies that deliver products to homes and businesses. Both firms burned a lot of cash to completely upend incumbent industries with lower prices and superior service. They both created a truly on-demand experience that redefined what consumers should expect from Internet companies.
It ultimately took Amazon 18 years to turn a profit. Wall Street, though, was willing to wait because Amazon was (and still is) demonstrating robust growth because of two main reasons: the lack of online competition from incumbent brick and mortar retailers and the emergence of Amazon Web Services (AWS). The successful cloud computing unit bought Amazon valuable time to get its core e-commerce business profitable.
Uber has spent about $10.7 billion in venture capital over nearly a decade, losing an astonishing $4.5 billion. In the third quarter 2018, Uber said revenue rose nearly 40 percent year-over-year to $2.95 billion. But the company still lost more than $1 billion on a GAAP basis.
And yet the company is still entirely dependent on its core ride hail business, an industry that already faces stiff competition from Lyft (which also plans to go public in 2019) and other local players.
“Because Uber has little valuable intellectual property, and local companies and VCs have an incentive to gain a ride-sharing monopoly in their own areas, Uber has spent hundreds of millions fighting well-capitalized local competitors, attempting to drive their revenues down and costs up,” according to a recent report by CB Insights research firm.
Uber is making big bets on scooters and autonomous vehicles. However, it’s difficult to predict when these services will contribute to the bottom line. The latter especially requires an enormous amount of cash to develop the technology and will likely face big regulatory hurdles.
“To be a successful public company, Uber must bring down its costs and increase its revenues,” the CB Insights report said. “Whether or not these services can find traction, profitability, and growth — and bring down Uber’s biggest cost centers without driving new expenses up too much — will be key to Uber’s success in the future.”
Revenue is rapidly growing but so are losses
Uber boasts plenty of upside. It controls about 70 percent of the U.S. rideshare market and is rapidly expanding overseas. From 2012 to 2018, Uber’s net revenue per quarter rose from $1.4 million to $3 billion.
The company’s Uber Eats food delivery business is growing nicely and now accounts for 10 to 15 percent of annual revenue.
Uber’s basic business model is capital efficient; since Uber is essentially a software firm, it does not spend lots of money building warehouses, deploying robots and drones, and hiring hundred of thousands of employees like Amazon. In 2017 alone, Amazon’s operating expenses totaled $173.8 billion.
With autonomous cars, Uber could field a global delivery network, especially for the difficult last mile of deliveries in congested urban areas. UBS also estimates replacing human drivers could lower passenger fares by up to 80 percent.
The problem is that Uber is occurring enormous losses right now, mostly to recruit and retain drivers and geographic expansion. CB Insights estimates the company spends an average of $650 to acquire one driver and struggles with a 12.5 percent churn rate per month.
Amazon is the exception, not the rule
Of course, Amazon has spent and lost a lot of money in its lifetime. In 2000 alone, Amazon lost $1.4 billion. When Amazon did generate profits, CEO Jeff Bezos invested all of them back into the business.
But Amazon had two big things going for it. The first is that Amazon had a pretty clear field to itself in retail.
E-commerce was still very much an infant in the late 1990s and the early 2000s. Brick and mortar retailers have been slow to respond to the threat, allowing Amazon to expand into nearly every retail category: books, music, film, consumer electronics, clothing, pharmaceuticals, and food. The company is now operating physical stores in prime real estate locations, thanks to its nearly $14 billion acquisition of Whole Foods Market.
The Internet was well established when Uber launched in 2009. As a result, the company already faces plenty of competition in Lyft, Amazon, Google, and every automaker trying to develop autonomous vehicles.
But the one thing that has really helped Amazon is AWS, a business that has nothing to do with consumer e-commerce.
Launched in 2002, just 5 years after Amazon went public, AWS has been an unqualified success. The unit, which essentially rents excess computing power to companies like Netflix and Airbnb to store and manage data, allowed Amazon to absorb large operating losses from its core e-commerce business. More importantly, AWS shielded Amazon from Wall Street pressure and gave it time to make online retail profitable.
From 2015 to 2017, AWS’s revenue more than doubled to $17.5 billion from $7.89 billion.
Moreover, the company is constantly innovating and expanding into new categories and industries. And unlike Uber, Amazon does not face regulatory problems-- at least not yet.
"Amazon is the exception, not the rule," said Brittain Ladd, a former Amazon strategy executive who is now a retail consultant. "Amazon created innovations that allowed it to expand into multiple businesses, create entirely new industries."
The company pioneered technology and services like robotics, cloud computing, data analytics, Amazon Prime, free shipping, one day delivery, lockers, Kindle, Echo and Alexa.
That's why Wall Street was willing to wait so long because “investors saw the innovation, saw the opportunities,” he said.
The same thing needs to happen for Uber. The company needs to develop an unexpected application from its core business that quickly and cheaply generates revenues and profits from the get go that competitors will find hard to duplicate. In other words, Uber needs to find its AWS.
Investors interested in Uber’s IPO should consider the company’s ability to innovate and immediately develop new revenue opportunities to offset those enormous losses. Amazon accomplished these things and ultimately rewarded its investors for their patience.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.