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Yves here. If you haven’t see it already, Mother Jones devoted a full article to Hubert Horan’s relentless documentation of Uber’s irredeemable business model: The man who called bullshit on Uber. It’s about as good as you get from this sort of piece: positive plus generally accurate on Hubert’s thesis and supporting evidence. It also credits Naked Capitalism!

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). 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

Uber’s 3Q financial gains were exclusively due to extracting wealth from drivers and restaurants, not market or performance improvements

Uber’s third quarter financial results, released on November 4th, included an operating loss of $572 million (a negative 12% operating margin) and an official GAAP loss of $2.4 billion (a negative 50% net margin).

As noted numerous times in this series, Uber’s financial reports do not properly segregate the fluctuating value of the securities it received after shutting down failed and abandoned businesses from the marketplace results of its ongoing operations. [1] As documented in Part Twenty-Six, its second quarter GAAP net income numbers had been inflated by a sudden June $1.4 billion gain in the value of the Didi Chuxing stock Uber held. The subsequent collapse of Didi’s stock value in July and August drove $2 billion of Uber’s third quarter GAAP net loss. [2] These were entirely paper gains and losses and had no impact on Uber’s cash flow or operating results.

Uber reduced its operating loss by $616 million versus the second quarter. This was entirely explained by a $618 million gain from increasing its share of gross customer payments from 18% to 21%. Uber’s operations continued to produce negative cash flow ($338 million). [3] Once again, Uber’s reduction in operating cash drain versus the second quarter–$614 million—was entirely explained by its ability to pocket a higher share of the customer dollar, at the expense of drivers and restaurants. None of these operating P&L and cash flow gains had anything to do with improvements in efficiency, competitiveness or service.

Uber’s claim that the operating P&L gains demonstrate the profit leverage of pandemic demand recovery is refuted by its own data. Both its gross revenues and operating expenses increased 6% versus the second quarter, so the increased volumes had no material impact on profitability. This is another confirmation that Uber has never had significant scale economies. In contrast to other unicorns that rapidly “grew into profitability” Uber’s extremely strong pre-pandemic volume growth led to higher losses, and Uber has never disclosed any productivity data demonstrating powerful scale economies.

Uber’s gross volumes increased 9% versus the second quarter but gross customer payments per trip declined 3%. All of Uber’s P&L gains came from increasing the revenue it retained per trip by 14% and forcing drivers and restaurants to accept smaller shares. Uber service levels collapsed in the first quarter when drivers could not survive in a lower demand environment with the pay Uber was offering. $250 million in bonuses restored some of the lost driver supply in the second quarter but hurt Uber’s P&L. With stronger demand in the third quarter, Uber jacked up passenger fares but shared none of the increases with drivers. [4]  The $618 million gain Uber’s shareholders achieved was a direct wealth transfer from its workers and suppliers.

The wealth transfers achieved by taking a larger share of each passenger dollar is a longstanding Uber practice and explains the vast majority of the margin improvements Uber ever produced.

In 2016, the very first article in this series documented how P&L gains that Uber attributed to increased efficiency were entirely explained by the same type of reductions in the driver share of gross revenue seen in the most recent quarter. [5] Unlike true efficiency improvements, the ability to improve margins by squeezing workers and suppliers has sharp limits and cannot drive long-term profit improvement. In 2016-17 Uber managed to push driver take home pay well below the already dismal pre-Uber levels, to (and sometimes below) minimum wage levels. When Uber’s multiple 2018 crises hit, it was forced to rescind many of the reductions in the drivers’ share of passenger fares.

Nothing in Uber’s 3Q results suggests any progress towards achieving longer-term sustainable profitability

To understand the recent financial results, one should put them in the context of the three most important questions for anyone following Uber:

(a) Whether it ever plans to implement the business model that fueled its initial growth and was central to its 2019 IPO prospectus

(b) Whether pre-pandemic demand conditions might fully return and how even somewhat improved market conditions could affect profitability  and

(c) Whether it could ever achieve the sustainable and rapidly growing profitability that could justify its current valuation ($89 billion at the close of business on November 5th) or the even larger valuations it had long been pursuing.

Uber’s original business model. Uber’s historic growth was fueled by the promise that it could provide much higher quality, more reliable and lower cost car services than the traditional taxi operators it drove out of business. Uber would massively increase jobs, wages and the overall quality of urban transport. Efficiency gains driven by its powerful technology would drive many years of ridesharing growth, which would massively reduce urban congestion and pollution and eventually displace car ownership. It would be operating robotaxis by 2018. The popularity of Uber’s low prices and expanded service would make its app platform globally ubiquitous and facilitate profitable growth beyond ridesharing, allowing it to become the “Amazon of Transportation”. Dara Khosrowshahi’s hiring restored Uber’s focus on this business model and eliminated the “cultural” distractions that arose under Travis Kalanick.

As this series has documented in detail, nothing in Uber’s original model had any basis in economic reality. It was always less efficient than the traditional operators it had bankrupted. Its popularity was entirely due to massive, predatory subsidies. Uber’s large passenger base was totally unwilling to pay the true cost of the service. Uber had none of the growth economics critical to the large valuations of other unicorns.

Uber’s original business model was completely dead prior to the pandemic, as the massive subsidies that fueled growth and a strong brand image produced over $28 billion in losses.

When pandemic made its financial crisis even worse [6] those subsidies were significantly reduced, and all the investment in future growth and new businesses other than food delivery (AVs, “Amazon of Transportation” expansion) was terminated, although Uber’s public statements continue to suggest that the original model remains completely intact.

Uber told investors that it had developed a service vastly superior to what the Yellow Cabs of the world had offered and had many years of profitable growth ahead. But Uber is now operating a Yellow Cab calibre service and its much higher prices precludes meaningful growth.

Recovery to pre-pandemic conditions. There is clear evidence that demand has improved in 2021, but the percentage gains Uber touts were relative to catastrophic levels. Dozens of other industries (airlines, hotels, restaurants, schools, public transit, etc.) experienced similar devasting demand drops when Coronavirus hit and are similarly hoping that substantial parts of their pre-2020 revenue base eventually return.

The critical difference is that those industries previously earned healthy profits so restoring 2019 demand could plausibly restore 2019 profits. Since Uber was losing billions pre-pandemic, increased external demand alone cannot solve Uber’s problems.

Additionally, there is little prospect that pre-2020 car service economics will fully return. Both the travel and entertainment patterns in Uber’s major markets and the labor market conditions that allowed Uber to call on hundreds of thousands of drivers willing to accept precarious work with poor compensation have fundamentally changed.

Future path to sustainable, growing profits. Uber’s focus on short-term actions to reduce cash drains is understandable. But none of Uber’s recent moves to reduce its cash drain are scalable, and thus cannot serve as the basis for sustainable profitable growth. It cannot demand that drivers and restaurants accept smaller and smaller shares of customer payments. Driver supply has increased from weak first-quarter levels, but drivers know the $250 million in increased bonuses were temporary and driver supply will shrink when they are reduced. [7] Political pressures to protect driver rights and to limit the fees delivery services charge restaurants won’t stop Uber from pursuing purely extractive income gains but will make them more difficult.

Many businesses have been able to impose major price increases given current economic chaos. But there is growing awareness that Uber fares have massively increased in many cities, to levels far higher than Uber’s Yellow Cab predecessors ever charged, and Uber service has deteriorated to the levels that made Yellow Cab type operators deeply unpopular and ripe for “disruption.” [8]

Prior to the pandemic Uber found major fare increases were quickly offset by traffic losses, and as awareness of Uber’s significantly reduced value proposition increases, there is no reason to think similar losses won’t occur. Deliberately shrinking the ridesharing business to only serve higher yielding customers would make operations less efficient and reduce profitability even more.

The economics of Uber’s food delivery (nearly half of Uber’s total business) are far worse than ridesharing. Uber Eats faces a cutthroat environment including a competitor with a much larger market position. The restaurants delivery services depend on remain crippled, major cities are considering new laws to protect restaurants from the delivery services’ most exploitative practices, and there is little reason to think that consumers use of delivery services will remain at lockdown levels, especially after the huge subsidies for these services disappear. [9]

Uber’s future existence depends entirely on finding the sustainable, growing profits that could justify a massive unicorn-level valuation. Additional short term cost cuts and price increases might well improve margins a bit. But current shareholders will not tolerate a plan that just gets Uber to or slightly above breakeven, and if Uber’s share price collapses, the company is unsustainable. Nothing in Uber’s 3Q results suggests Uber is making any progress towards a plan that could produce sustainably stronger profits.

Instead of developing a new strategy to drive profits and corporate valuation, Uber focuses on narrative claims designed to deceive the mainstream media

As this series has extensively documented, one of Uber’s greatest strengths—perhaps its single greatest competitive advantage—is its proven ability to construct favorable PR narratives and to get the mainstream business press to uncritically promulgate them.

Uber successfully got major financial outlets to badly misrepresent the 3Q results they published and to make no attempt to understand the actual causes of the P&L gains. Uber’s PR efforts also successfully blocked any media analysis or discussion of the bigger picture questions Uber faces, including the collapse of its original business model, its failure to keep any of its IPO prospectus promises about future growth and its failure to articulate a plan that might produce the sustainable profits needed to justify its valuation.

The starting point of this willful media misrepresentation is its active support for Uber’s efforts to mislead investors as to whether it is actually profitable and to how much money its ongoing ridesharing and food delivery businesses are actually losing.

The mainstream press has continually told its readers that Uber’s “adjusted EBITDA profitability” is a legitimate profit measure when it doesn’t measure profitability or even EBITDA. [10] Uber claimed an $8 million 3Q “adjusted EBITDA profit” (a “profit” margin of 0.001%). Although many ledes also noted the Didi driven net loss, every major news report highlighted that Uber was now “profitable” that its 3Q results were a major breakthrough for the company, and that the breakthrough had been driven by pandemic recovery driven demand growth.

The Wall Street Journal headline was “Uber Reaches Income Milestone as Rides Recover, Delivery Grows.” Barron’s was “Uber Posted Its First Profitable Quarter.” The Financial Times was “Uber delivers first adjusted profit but Didi stake hits earnings.” Bloomberg’s headline was “Uber Gains After Posting First Adjusted Profit on Ride Recovery.” Yahoo was “Uber Reaches First Profitable Quarter.” Reuters was “Uber makes first operating profit as driver shortage eases.” [11]

Preetika Rana’s Wall Street Journal reporting provides the most egregious example of willful misrepresentation. She falsely claimed that Uber’s metric only “excluded interest, taxes, depreciation and amortization” and was intended to help investors by “stripping out expenses such as asset write-downs, gains from investments and stock-based compensation that executives and many investors consider to be outside a company’s fundamental operations.” Rana failed to quote any investors who actually believed that the $6 billion in stock-based compensation Uber has excluded from this metric since the IPO, or the additional $5 billion in IT platform and corporate expense excluded from the “Segment Adjusted EBITDA Profit” measure of its ridesharing and food delivery profitability were expenses outside Uber’s fundamental operations.

Uber’s reduced 3Q operating losses were legitimately newsworthy, but every MSM story uncritically accepted Uber’s false explanation of what caused it. Uber’s <pandemic recovery will solve our profit problems> narrative is designed to lead people to think that further pandemic recovery would continue to drive strong profit improvements, and to distract attention from Dara Khosrowshahi’s failure to articulate a plan for achieving longer-term profitability. “Things honestly are great. As the world is opening up, so is our business…All signals right now are pointing to green.” [12]

The failure to identify the real cause (Uber’s capture of over $600 million in income previously paid to drivers and restaurants) is perhaps understandable given how aggressively Khosrowshahi’s pushed the pandemic recovery theme, and because the very limited data in Uber’s financial releases makes it very difficult for a reporter (or investor) to independently analyze underlying business performance or trends. But all of the stories cited above reported the pandemic/demand explanation as if it was a fact the reporter had independently investigated and confirmed, instead of simply reporting them as unverified claims that Uber’s management had made. [13]

None of the stories highlighting “profitability” mentioned that Uber’s operations have still never generated any positive cash flow. None of the stories that presented the pandemic recovery explanation bothered to note that ridesharing volumes still remained significantly below 2019 levels, failed to tell readers that the partial recovery in aggregate Uber volumes was depended on much less profitable food delivery trips, and failed to point out that Uber had been losing billions before any pandemic related demand declines.

Uber customers are now paying much higher fares for a service notably inferior to what Uber previously provided. Uber is still producing lousy financial results. Even if they can manage to squeeze customers, workers and suppliers further and produce an actual breakeven P&L, it still has no plan for producing the large and sustainable profits needed to justify its valuation. Thus Uber management continues to hammer on fake profitability metrics and deliberately misleading narratives. But one should not underestimate the role of the mainstream business media in preventing investors from understanding Uber’s actual economic performance.

_________

[1] Uber’s problematic accounting practices were documented in Part Thirteen: Even After 4Q Cost Cuts, Uber Lost $4.5 Billion in 2017, 16 February 2018 and Part Twenty-Two: Profits and Cash Flow Keep Deteriorating as Uber’s GAAP Losses Hit $8.5 Billion, February 7, 2020.

[2] Part Twenty-Six: With No Hope of Real Profits, Uber and Lyft Double Down on Fake Profit Metrics, 9 August 2011. Uber received Didi stock when it shut down its failed China operations in August 2016. Uber’s second-quarter results had also been inflated by claimed valuation increases in Aurora, which acquired Uber’s failed autonomous vehicle division, and Uber’s third quarter GAAP results would have been even worse without the ability to claim paper gains in (largely untradeable) external securities as corporate profit. Issues related to Didi’s previously inflated and now depressed corporate value were discussed in Part Twenty-Five: Didi’s IPO Illustrates Why Uber’s Business Model Was Always Hopeless, 2 August 2021.

[3] Total cash on hand increased by $3.3 billion but this was due to $3.9 billion in securities sales and term loan proceeds, not proceeds from marketplace operations.

[4] Lizette Chapman, Uber to Spend $250 Million to Boost Number of U.S. Drivers, Bloomberg 7 April 2021, Andrew J. Hawkins, Uber and Lyft have a driver shortage problem, and it’s costing them a lot of money, The Verge, 7 April 2021, Faiz Siddiqui, You may be paying more for Uber, but drivers aren’t getting their cut of the fare hike, Washington Post, June 9, 2021

[5] The impact of labor to capital wealth transfers on Uber margin improvements in the first half of 2016 were documented in Part One – Understanding Uber’s Bleak Operating Economics, 30 November 2016; impacts in the second half of 2016 in Part Six: Latest Data Confirms Bleak P&L Performance While Stephen Levitt Makes Indefensible Consumer Welfare Claims, 2 January 2017

[6] Part Twenty-Three: Uber’s Already Hopelessly Unprofitable Economics Take a Major Coronavirus Hit, 10 August 2020.

[7] Preetika Rana, Uber, Lyft Sweeten Job Perks Amid Driver Shortage, Lofty Fares, Wall Street Journal, July 2, 2021, Jessica Bursztynsky, Why many Uber and Lyft drivers aren’t coming back, CNBC, Jul 4 2021, Johana Bhuiyan,  Carly Olson, Uber and Lyft drivers strike over pay, gig-work conditions, Los Angeles Times, 21 July 2021, Rebecca Bellan, How Uber plans to rebound from massive Q2 losses stemming from driver incentives, TechCrunch, 5 August 2021

[8] Kate Conger, Prepare to Pay More for Uber and Lyft Rides, New York Times, May 30, 2021, Winnie Hu, Patrick McGeehan and Sean Piccoli, You Can’t Find a Cab. Uber Prices Are Soaring. Here’s Why, New York Times, June 15, 2021, Whizy Kim, Let’s Talk About The Real Reason Ubers Are So Expensive Now, Refinery29.com, July 7, 2021, Preetika Rana, Uber, Lyft Prices at Records Even as Drivers Return, Wall Street Journal, Aug. 7, 2021, Bobby Allyn, Lyft And Uber Prices Are High. Wait Times Are Long And Drivers Are Scarce, NPR, 7 August 2021, Laura Forman, At Uber and Lyft, Ride-Price Inflation Is Here to Stay, Wall Journal, 4 October 2021, Kim Mackrael, Uber and Lyft Thought Prices Would Normalize by Now. Here’s Why They Are Still High., Wall Street Journal, 30 October 2021

[9] Heather Haddon, DoorDash and Uber Eats Are Hot. They’re Still Not Making Money, Wall Street Journal, May 28, 2021, Maureen Tkacik, Restaurants are barely surviving. Delivery apps will kill them, Washington Post, May 29, 2020, Helen Rosner, The Fight to Rein in Delivery Apps, New Yorker, 5 October 2021

[10] Uber’s use of “Adjusted EBITDA” to deceive reporters and investors was discussed in detail in Part Nineteen: Uber’s IPO Prospectus Overstates Its 2018 Profit Improvement by $5 Billion” April 15, 2019

[11] These stories were all published on November 4.

[12] Uber CEO on earnings: We expect profitability to increase in Q4, Dara Khosrowshahi Interview with Jim Cramer, CNBC, 5 Nov 2021

[13] A rare MSM exception, where traditional journalist norms were properly observed, was Kate Conger’s New York Times report, where headlines did not highlight Uber’s claimed “profitability” and the explanations of 3Q changes were correctly portrayed as just the views of management. Non-mainstream outlets put the Didi impacts in proper context, explained Uber’s 3Q results in light of twelve years of huge losses, and (to use the example of TechCrunch) were openly critical that “a company of Uber’s scale and age for still forecasting with kids-table metrics like adjusted EBITDA instead of grown-up stats.”