By Stephen McBride
“Never get in cars with strangers…”
Did your parents tell you that when you were a kid?
These days, people get in cars with strangers all the time… only they use a smartphone “app” to match them with a specific stranger to drive them around.
As you may have guessed, I’m referring to Uber, the world’s biggest ride-sharing company.
It’s like a taxi company except it doesn’t own any cars. It doesn’t employ any drivers either. Instead, it runs an app that connects drivers with people who need a ride.
Since 2009, Uber has grown into a hundred-billion-dollar company. It’s become so big and popular that it’s hard to imagine the world without it.
Hardly anyone “takes a taxi” anymore. Everyone “Ubers”…
The most-hyped IPO since Facebook…
After years of extraordinary growth, Uber launched an IPO on May 10.
An IPO, as you may know, is when a company first sells shares in the public markets. It marks the first time individual investors can buy the stock.
Uber’s debut on the stock market was one of the most hyped financial events since Facebook went public in 2012.
It was on every financial TV. The headlines screamed “this is the next Facebook.”
Everyone was talking about it… I even heard stories of people putting half of their savings in this single stock.
I understand, Uber is a colossal technology company that has become part of everyone’s lives.
It has changed the way we commute. It even disrupted culture.
Who would have thought we would take rides from strangers in their personal cars on a regular basis?
But while Uber is a disruptive company, it’s a terrible business… and its stock is a horrendous investment.
You don’t need a master’s degree in business to understand this…
Every business has to eventually make more money than it spends. Period.
Yes, you can sacrifice profit to win customers at the beginning… but eventually you have to make money to cover your expenses and reward investors.
The thing is, after 10 years, Uber is still highly unprofitable. Worse, its losses are growing at astronomical levels.
Last year, it lost $1.8 billion… while last quarter, it lost a whopping $5 billion.
To put this in perspective…
In its IPO, Uber raised $9 billion…
… five of which it has already burned. IN A SINGLE QUARTER.
It’s burning money so fast that it lost more in the nine months leading up to the IPO than Amazon did in its first seven years!
Now, here’s simple math.
If you are losing money as a business, you have two options: cut your expenses or raise prices.
Uber’s biggest expense is driver pay. It pays back to drivers about 80% of all the money it generates.
That means to turn profit, Uber has to cut driver pay… or raise its fares.
And as I’ll explain, neither is possible.
Days before Uber’s IPO, Uber drivers boycotted the company and turned off the app…
They marched the streets in protests demanding higher pay and better working conditions.
Uber drivers now earn an average of $10 to $12 an hour in the US after expenses, according to researchers.
No surprise they are unhappy. The current pay is almost on par with the federal minimum wage.
Uber has no room to cut driver pay. Its drivers would just quit or migrate to Uber’s competitors.