Uber operates several businesses including Uber eats, freight, and personal mobility businesses. The personal mobility business includes but is not limited to rental scooters and the like. In the S1 Uber claims to have about 2% market share in the 700+ cities where it operates.
Uber is a household name. It is well known everywhere weather or not there is an Uber Driver in a town. The excellent brand recognition bodes well for Uber’s ability to take market share over Lyft. The total market opportunity is undeniable. The problem is that Uber will have to overcome severe financial and operational issues to even come close to being profitable. I believe that Uber heavily manipulated its financial statements to look as “good” as they do now.
Starting with Uber’s revenue we see that last year Uber posted over $11 Billion in gross revenue. This is not a small feat but the expenses are bloated and limit their ability to ever become profitable. The gross margin is 50% not including depreciation and amortization.
The biggest problem is in sales and marketing combined with general and administrative expenses. These two lines combined equal about 46% of revenue. The massive advertising expenses that drive the revenue growth are bankrupting the company. Sales and marketing alone cost Uber $3.1 Billion. The bloated expenses drove Uber to a operating loss of just over $3 Billion.
Uber stated other income was $4.9 Billion. This is the only reason that they posted a profit of $987 Million. This revenue was from the divestiture of two foreign business units. When you look at the pro-forma income statement after the divestitures Uber posted a loss of $2 Billion.
Here is where the manipulation begins. First you start with the net income not including the pro-forma adjustment. The pro-forma net loss was $2 Billion. Without the pro-forma adjustment the free cash burn was $2 Billion. If we assume the pro-forma adjustments are correct, the true free cash burn would be closer to $4 or $5 Billion. It seems as though they sold the business units to dress up the income statement and balance sheet just in time to go public.
Some notable cash generators for the past year were the divestitures bringing in $3.2 Billion. $3.5 Billion in senior notes and term loans were issued and $1.75 Billion of preferred convertible stock was sold. All together this brought in about $8.45 Billion in cash.
Uber’s balance sheet is not that bad. They have a current ratio of 2 and net assets of $6.7 Billion. The total current assets of $8.7 Billion can almost completely be accounted for by the cash changes noted in the last paragraph. I believe that if it was not for the debt issued, equity sold, and divestitures this company would be in severe financial distress.
While the current ration seems to imply that the company will be fairly stable in the short term the free cash burn will likely deplete the reserves in less than 2 years. I believe that the IPO will only extend the lively hood of Uber by about 6 months and within the next 2 years they will need to have a large dilutive capital raise to maintain operations.
The only way I see Uber being sustainable is through severe spending cuts and or massive gross margin expansion. In my opinion this IPO is not worth the paper it was written on as the company stands right now.
The initial Uber S1 Review is that Uber’s financial statements are a mess. SG&A expenses are bloated, margin is small, and the cash flow is horrible. This company should not be allowed to go public. The concept that they want a $100 billion valuation is obscene. I will start with the least bad part first.
Uber S1 Balance Sheet
The balance sheet is not so bad. They have a decent current ratio (current assets divided by current liabilities) of 2.03. This means they have enough cash on hand to pay their short term bills for the next 2 years. They actually have net assets of $6.792 Billion.
This is where things start to get confusing. Uber posted 2 different P&L Statements. One statement contained the GAAP accounting method and the other shows the pro-forma. Uber released the Pro-Forma income statement because it divested 2 business that have a material effect on the company financials. The pro-forma P&L statement shows a $2 Billion loss.
I will be using the GAAP financials for equal comparison plus they actually look better than the pro-forma. Uber did gross revenue of $11.270 Billion. They did have a 50% gross margin that is acceptable considering the competition. The problem is that the Selling and Marketing expenses plus the general and administrative expenses come out to $5.233 Billion or about 46% of revenues. This does not include operations support or R&D. Uber has a maximum operating margin of about 4% unless they cut all of their expenses across the board. I do not see any road to profitability without severe spending cuts.
Cash Flow Statement
I saved the worst for last. Uber’s cash flow statement shows a cash gain of $2.285 Billion. The falsehoods start with the net income. The $987 Billion dollar profit. The pro-forma income statement shows a loss of about $2.2 Billion. We will go with the better numbers any way. When you back out the cash received through debt and equity issuance they had a cash loss of $3.069 Billion. Uber will need a large cash raise within 2 years. I do not believe they will be able to raise debt so you are looking at a dilutive equity offering shortly after the lock up period is over.
Uber should not be public. If it does go public it should be at around 4x revenue or about $44 Billion. I will stay away and hope that you do too.