The Business Of

Sharing | Uber | What Do They Do With Their Profits?

Morning All!

Yesterday we put together Uber’s costs with their revenues. And we’ve covered a fair amount this week. So, let’s have a quick recap…

• Taking Their Share: 4.7 billion rides booked in 2022 is a huge number. But it’s still ~20% below the pre-pandemic 2019 level.

• Incentives + Insurance: Uber shells out an extraordinary 62% of their revenues on ‘cost of revenues’ - with insurance and driver incentives being the majority.

• EBIT Margin: Whilst Uber overall has been unprofitable for years, the Mobility segment has actually been profitable (on an Adjusted EBITDA basis) since 2017!

And speaking of margin - it is a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include Uber. And like with Airbnb, I’ve included a normal EBIT margin figure, and Uber’s reported Adjusted EBITDA margin. Check back to last week’s newsletter to jog your memory on the difference!

But whether you’re looking at the EBIT margin or the Adjusted EBITDA margin - the numbers tell us a similar story. Profitability is incredibly low for Uber! Now, as we saw yesterday, a lot of this is because the company threw so much money into establishing themselves as the #1 ridesharing app. And the question is - now they are #1, will they start raising their margins? Well, that’s something we’re going to be diving into tomorrow!

For now, let’s crack on. We know Uber spend a load of money. But where does all this money come from? And how do investors ever make a return from a company that keeps losing money? Let’s find out…

Raise Money, Spend Money, Raise More Money, Repeat…

So, to kick us off as always, let’s look at the waterfall chart below, which shows us how Uber have spent their cash from operations (CFO) since 2018. And we see something quite unusual.

Cumulative cash from operations (CFO) is negative! And yet we see the company spent ~$2bn on capex and ~$4bn on acquisitions. How on Earth can the company afford to spend cash on capex and acquisitions when it’s not making any cash in the first place?! Well, the answer is the two blue bars at the end – equity and debt.

In 2019, after already selling enough equity to raise $24bn in cash, Uber decided to sell even more equity in order to raise even more cash through their IPO issuance! And this IPO brought the company a further $8.1bn in cash. Further to these equity offerings, the company had also gone through a couple of debt raises. In 2016, Uber received a $1 billion loan from banks including Morgan Stanley and Barclays.

And so, this is how the company’s managed to fund its operations, its capex and acquisitions. Today, we’re going to dive a bit deeper into the equity side and focus on IPOs. So, let’s crack on!

Can Someone Show Me The Exit Please?!

Okay, so first question. Why do an IPO? Well, as we’ve seen above, one reason is to raise money. Companies go through the process of giving away their equity in return for cash throughout their startup journey. And the IPO process is just another time to give away equity in return for more cash.

Usually the IPO raise is the largest raise a company will do. Because up till the IPO moment, public funds and public asset managers haven’t had the chance to invest in the company! And so now the company is going public, these funds with their massive assets under management can invest. I’ve put in the table below to show us the biggest IPO raises in history.

But hold on, why do companies need to go to the public markets to raise more cash? Couldn’t they just do that with private equity investors? And the answer is yes, they probably could. In the chart below we can see the fundraising journey for both Uber and Airbnb. And we can see that yes, the IPO was their highest raise. But they probably could’ve raised as much money via private equity funds. Uber especially - they raised $8bn in the IPO round but raised a mammoth ~$7.7bn in the round before from SoftBank.

But I also have a second question about IPOs. We know Uber was unprofitable at the time of IPO and needed more cash to operate. But that wasn’t the case for Saudi Aramco, Visa and Facebook. Those companies were all high-margin, profitable companies and yet they had huge IPO raises. So why on Earth did they IPO? Well, it’s because the investors who had previously invested into those companies ‘need an exit’.

We touched on this topic in our Huel newsletter. But let’s take Benchmark Capital. This venture capital fund was one of the first investors in Uber. They invested $11m in 2011, in exchange for ~18% of Uber’s shares. And using Benchmark’s cash, Uber grew and grew. But that ~18% of shares that Benchmark owned might be valued at billions on paper… but it’s only paper! Benchmark only realise that value and get cash when Uber has an exit.

And an exit most usually comes in the form of an IPO or acquisition. The one exception is when new investors want to buy shares in the private company and offer to buy shares from existing investors. And this is actually what happened with Uber. SoftBank wanted to buy shares in Uber. And Benchmark gladly sold some shares to get some solid cash…

So, the IPO – Uber needs it to raise more cash and to continue operating. Investors absolutely need it because it means they can sell their shares and realise their gains. And the other party that are incredibly happy with IPOs are the good old investment banks. And the next series on TBO will be The Business Of Banking – so we’ll explore this in detail then!

Walmart Seems To Be Doing Alright…

Last thing for today. I mentioned yesterday that Joe Gebbia (Airbnb’s co-founder) had sold a mammoth $890 million in Airbnb shares in the first half of 2023. But despite that ridiculous figure, he’s still only 4th in the world in terms of shares sold.

The top 3 positions are all occupied by members of Walmart’s founding family - The Walton Family - who are the richest family in America! Rob Walton, Alice Walton and Jim Walton all cashed out a not so shabby $1.1 billion each! And Alice is actually the second richest woman in the world!

12th Oct 2023

Nigel Jacob CFA