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Former Uber CFO Admitted The Only Way The Company Can Make Money Is To Gouge Drivers

|Includes: GOOG, GOOGL, Hertz Global Holdings, Inc. (HTZ)

Uber Technologies Inc.'s former CFO admitted that the only way the networked transportation company and investment industry darling can make money is to gouge its drivers, a prominent hedge fund executive alleged on national television.

When Michael Novogratz, the President and Director of the Fortress Investment Group, asked an Uber executive how the company justified its supposed $40 billion valuation, he got a disturbing answer. The unidentified executive, whom Novogratz described as the company's CFO, said Uber would simply cut its drivers' pay by 5-10%.

According to Novogratz, Uber currently takes a 20% to 25% cut of a driver's pay in exchange for its services. He was told that Uber could increase its profits by simply raising the amount it takes to 25% to 30%. When Novogratz asked why Uber would do that to its drivers, the executive supposedly said, "Because we can."

Novogratz made the allegation on The Wall Street Week TV show, and video of his conversation is widely available online. For those that do not believe it, the video is still available at Wall Street Week's website a link to which is posted above.

Mr. Novogratz's accusation provides us with some very disturbing insight into the corporate culture at Uber. Its executives seem to think that Uber can get away with anything. To be fair, the person who allegedly made the remark has been identified by Business Insider as a former CFO who is no longer with the company, yet it is still bothersome as an indicator of a very unethical business culture. I will not name the person here, because Novogratz presented no evidence to back up his story.

The Uber Fantasy Meets Reality

What else is truly bothersome is that Novogratz called Uber "a great company" and "a brilliant idea" after he made the allegation. I just have to ask one thing here: If Uber is "a great company," how come its operating costs do not seem to support its estimated value? That is what is alleged in the supposed statement from the CFO.

Tellingly, Novogratz refused to invest in Uber, and Business Insider reported that Fortress invested in Lyft instead. It is obvious that Novogratz thinks something is very wrong with Uber and perhaps with networked transportation in general, yet he is still acting as a cheerleader for it.

It is also obvious that Mr. Novogratz has refused to do a simple online search for news on Uber. If he had, he might change his tune. Some news stories about Uber that the investment community is ignoring include:

  • Uber's estimations about its drivers' pay ($74,000 a year) are way off, The Washington Post reported. An analysis prepared by Uber itself and Princeton economist Alan Krueger found that the average Uber driver makes around $19 an hour after the Uber fee is taken out. The actual pay is much less because the cost of the vehicle itself (car payment, gas, tires, insurance, etc.) is not included in the estimate. It should also be noted here that Uber drivers only get paid when they carry a fare, so they may only be working for an hour a day. That means some Uber drivers could be making less than the burger flippers at McDonald's after their operating expenses are deducted from their pay.
  • Uber drivers are facing stiff legal action, including heavy fines in many areas. Uber driver Dustin Schlapp was fined $472 for operating at the Greenville-Spartanburg International Airport in South Carolina, TV station WYFF reported. Uber drivers in Fort Lauderdale could face fines of up to $15,000 under a law being considered by the Broward County commissioners.
  • Uber ceased operations in Kansas City, Missouri, after the city council passed an ordinance requiring its drivers to carry adequate insurance, undergo a criminal background check, pass a medical test to ensure they are in good health, and pay a $250 fee. One would think drivers that make $74,000 a year could afford to pay a $250 fee. An Uber spokesperson called the requirements too onerous.
  • Uber drivers' vehicles have been confiscated in Nevada and in Montreal because they were violating taxi cab regulations.
  • Quebec's revenue ministry raided Uber's offices in Montreal, the Canadian Broadcasting Corporation (CBC) reported. When asked why the action was taken, ministry spokesman Stephane Dion said, "Revenu Québec has reason to believe that tax fiscal law has been broken."
  • The number of places around the world where Uber has ceased operations or been declared illegal is staggering. Notable locations where the service has been banned include the entire nation of Spain; Toronto (Canada's largest city); Eugene, Oregon; and Portland, Oregon. Note: Uber has been banned so many times, I have actually lost count.

One has to wonder how this is a great company and a brilliant idea. I also have to wonder how anybody can justify Uber's $41 billion valuation in the face of these news stories.

Is Uber the New Enron?

Instead of being the cutting edge in transportation, Uber might go down in the history books as the Enron of the 2010s. Remember, Enron, like Uber, was supposed to be run by The Smartest Guys in the Room.

Like Uber, Enron promised to revolutionize a market (electricity) with a cutting edge technological solution. Also like Uber, Enron was an investment industry darling that had the corporate culture of a pack of hyenas. At the end of the day, Enron was exposed as a scam and a snake pit. I have a feeling the same thing will happen at Uber.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.