Uber losing profits amazingly fast: is it heading towards bankruptcy?

Uber losing profits amazingly fast: is it heading towards bankruptcy?

Uber lost over one billion dollars since the beginning of 2019: what is next?

The American transportation network company Uber was founded in 2009, and for the last ten years, it marched on a road to success. Investors and venture capitalists supplied the company with large sums of money, it branched into various related areas of business. While Uber started as a ridesharing company and a taxi aggregator, it also tried its hand in delivery, bicycle sharing and other related activities. The company’s success was so stunning that the term “uberisation” was coined to denote the introduction of a peer-to-peer sharing option to some service.

However, the success of Uber did not last long. The first quarter of 2018 was still a success for the company when it reported a net gain of 3.75 billion dollars. However, the first quarter of 2019 turned out to be far less forgiving. Uber is losing money with incredible speed: it reported a net loss of over 1 billion dollars.

Here are some statistics to digest, provided by CNN :

  • The first quarter of 2018 resulted in a net gain of $3,750,000,000 for Uber;
  • The first quarter of 2019 resulted in a net loss of $1,010,000,000 for the company;
  • The Uber stock lost its value from $45 to $42 during the first day of it being traded;
  • Since then, its value dropped further to $40.

Is it something new?

This is definitely not the first bad quarter in the history of Uber. The company survived steep drops in profit before. However, this one is different. Recently Uber became a public corporation with its stock available for trading at Wall Street. It relied on venture capitalists before, captivating them with brand new ideas and bold plans. The investors of Wall Street, on the other hand, are a different bunch, and their demands are different as well. Wall Street wants stability and reliability from any corporation that wishes to trade its stock there. This is not a quality that Uber is remarkable for.

Therefore, the recent losses of the company are directly related to its transition to its new status as a public company. It is not known whether it can survive in the new environment.

Trade war and Uber

Another reason for Uber’s unprecedented sinking is the intensifying trade war between the United States and the People’s Republic of China. This trade war caused a general ripple among all American markets, and the stock market as a whole is in a tizzy. Uber, however, has a more personal reason to worry about this conflict. Since 2016, Uber is a stockholder in DiDi, a Chinese company with a similar business model. This relationship is reciprocal; DiDi, too, is an investor in Uber Global. If the trade war escalates, this relationship can break, causing further losses.

Just as planned?

On the other hand, many analysts argue that nothing special is going on. The overall strategy of Uber, according to them, is to rely on investors entirely and do not strive for long-term positive revenues until a vast majority of American transportation market shall be controlled by the company. Only then can it start to rush towards high profits, to pay off every possible initial investment. The business model chosen by Uber requires a specific size that is essential for becoming profitable in the long run; only when this size is achieved, the company becomes mature. Until then, it’s expansion, suffering losses and relying on more and more investors.

Uber expands aggressively using subsidies, offering its services below the cost of fuel and vehicle maintenance, spending heavily on promotion campaigns. This caused the company to fall in red many times before. However, this was before Uber achieved public status, and the losses were covered by attracting new investors. It is not known how this strategy accounts for the Wall Street situation. As we already said, the investments from Wall Street are not the same thing as investments from venture capitalists eager to give an initial kick to some bold, cool idea.

Comments from the CEO

The CEO of Uber, Dara Khosrowshahi, suggests that this is indeed not something special. Khosrowshahi’s comments concerning the current situation amount to, basically, that it is just a moment in a long-run strategy. Khosrowshahi acknowledges the current challenges and hard competition in a number of side projects of Uber, such as food delivery services.

Comparisons with competitors

To understand the situation better, let’s compare Uber with another American company working in the same fields, Lyft. Lyft is known as the main competitor to Uber, and currently, it is suffering from the same problems: by the end of the first quarter of 2019, Lyft is losing money amazingly fast as well.

We also know about the business strategies of Lyft from the mouth of the company’s own CEO, Brian Roberts. Mr Roberts stated, as reported by Forbes that after 2019, Lyft must strive towards profitability and a more stable, rational market in the spheres of car-sharing and taxi aggregation. Therefore, we can posit that Lyft, likewise, was aiming for aggressive expansion until the end of 2019, and the current losses are considered acceptable.

What does that mean for the future of Uber?

Summarizing all of the previous points, we can posit that nothing especially dangerous threatens Uber by now. Therefore:

  • This is not a sign of impending bankruptcy;
  • It is unpleasant for Uber’s new status as a public corporation, but it will stay in business;
  • It is uncertain when Uber will reach profitability;
  • World events such as the trade war may affect Uber’s well-being furthermore.

It is thought that Uber’s business strategy might need correction. The current situation on the market no longer allows aggressive expansion, and Uber’s new investors from Wall Street are far less forgiving of revenue losses than the venture capitalists, Arab oil sheikhs and celebrities who tried to invest into Uber before. Perhaps, the suggestion by Lyft’s CEO should be taken as good advice by Uber as well; make the market more sane, more stable, more regulated by profit and brand reputation than by wild publicity campaigns.

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