This is not a case of a company with a reasonably sound operating business that has managed to inflate stock market expectations a bit. This is a case of a massive valuation that has no relationship to any economic fundamentals.
By Hubert Horan and cross-posted from American Affairs Journal
Since it began operations in 2010, Uber has grown to the point where it now collects over $45 billion in gross passenger revenue, and it has seized a major share of the urban car service market. But the widespread belief that it is a highly innovative and successful company has no basis in economic reality.
An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.
Uber’s investors, however, never expected that their returns would come from superior efficiency in competitive markets. Uber pursued a “growth at all costs” strategy financed by a staggering $20 billion in investor funding. This funding subsidized fares and service levels that could not be matched by incumbents who had to cover costs out of actual passenger fares. Uber’s massive subsidies were explicitly anticompetitive—and are ultimately unsustainable—but they made the company enormously popular with passengers who enjoyed not having to pay the full cost of their service.
The resulting rapid growth was also intended to make Uber highly attractive to those segments of the investment world that believed explosive top-line growth was the only important determinant of how start-up companies should be valued. Investors focused narrowly on Uber’s revenue growth and only rarely considered whether the company could ever produce the profits that might someday repay the multibillion dollar subsidies.
Most public criticisms of Uber have focused on narrow behavioral and cultural issues, including deceptive advertising and pricing, algorithmic manipulation, driver exploitation, deep-seated misogyny among executives, and disregard of laws and business norms. Such criticisms are valid, but these problems are not fixable aberrations. They were the inevitable result of pursuing “growth at all costs” without having any ability to fund that growth out of positive cash flow. And while Uber has taken steps to reduce negative publicity, it has not done—and cannot do—anything that could suddenly produce a sustainable, profitable business model.
Uber’s longer-term goal was to eliminate all meaningful competition and then profit from this quasi-monopoly power. While it has already begun using some of this artificial power to suppress driver wages, it has not achieved the Facebook- or Amazon-type “platform” power it hoped to exploit. Given that both sustainable profits and true industry dominance seemed unachievable, Uber’s investors decided to take the company public, based on the hope that enough gullible investors still believe that the company’s rapid growth and popularity are the result of powerfully efficient innovations and do not care about its inability to generate profits…