Uber confident: is the transportation disruptor worth investing into?
Most people know that Uber loses money, but few know that in 2018, its losses amounted to $3 billion. And yet, last Friday, the company set its initial share price range at £44 to £50 and is predicted to reach a valuation of up to $91 billion. While some way off the previously rumoured $120bn, this is still a very ambitious figure and the biggest IPO since Facebook. How does Uber justify this very high valuation to investors?
The largest network in each market
The story Uber tells is that it's still in the early stages of what they estimate to be a $12 trillion (yes, that's twelve zeros – $12,000,000,000,000) market which includes transporting people, food and goods. When it comes to personal mobility, Uber is not stopping at taxis; instead, its plans, revealed in the regulatory filing for the IPO, include competing with public transportation. The company also has interests in logistics, restaurant delivery, bike-sharing services and self-driving cars. To quote them directly, Uber’s strategy is to "create the largest network in each market so that we can have the greatest liquidity network effect, which we believe leads to a margin advantage". It's playing the long game for ultimate market domination.
How likely is the not-yet-profitable giant to achieve the ambitious valuation it has in its sights? This depends, broadly, on two key factors:
- Long-term: the rise of autonomous vehicles. Currently, Uber lets drivers keep all of the fare and pays for central costs from investor money. In fact, it even has to subsidise drivers on competitive routes. The company is betting on being an established market leader by the time autonomous vehicles replace drivers.
- Short term: will the legal framework – or frameworks, as laws vary wildly between various countries Uber operates in - support Uber’s ambitions?
The gig economy
You may not be surprised to hear that, according to Deloitte, in the US, more than 40% of the workforce now operates within the gig economy. But what's the story here in the UK?
In February 2018, the Department for Business, Energy & Industrial Strategy (BEIS) published its report on the gig economy in the UK. The research had three key aims: to develop a working definition of the gig economy; to provide an estimate of the number of individuals who have found work via the gig economy; and to provide information on the characteristics of gig economy workers.
In consultation with BEIS and the Institute for Employment Studies, the research created this working definition of the gig economy:
"The gig economy involves the exchange of labour for money between individuals or companies via digital platforms that actively facilitate matching between providers and customers, on a short-term and payment by task basis."
The NatCen panel found that 4.4 per cent of the population in Great Britain had worked in the gig economy in the last 12 months. Not surprisingly, a lot of gig workers were younger that the rest of the population and lived in and around London. Uber was the most commonly mentioned platform.
The gig economy is set to grow. Entrepreneur, writer and regular contributor to Forbes and The Huffington Post, Abdullahi Muhammed, talks about the four reasons why:
- The educational gap: it is predicted that by 2020, most developed economies will have fewer college educated workers than they need.
- Changing attitudes towards work: as millennials become managers and Gen Z enters the workforce, existing attitudes about work are changing. For some, the lack of a 9-to-5 week and regular salary will be discomforting, but others will enjoy the flexibility and the ability to structure the work-life balance that is high on their list of concerns.
- Employers are increasingly using gig workers to lower costs and meet project needs: the gig worker is often viewed as an 'economy' hire, and the desire to cut down the overheads is unlikely to disappear in the next few years.
- Technology and infrastructure is developing rapidly to accommodate freelancers: cloud computing, advanced networks and other technologies are making remote working a possibility for people across the globe.
The legal framework
Investing into Uber is betting not just on the gig economy, but also on the fact that legal frameworks would allow it to develop, grow and become profitable in the foreseeable future.
Uber's treatment of drivers has long been the subject of discussion, with the legal battle between the platform and its British possibly-employees-possibly-not ongoing since 2016.
In the IPO disclosures, the company itself acknowledges that many of its drivers are unhappy, writing: "While we aim to provide an earnings opportunity comparable to that available in retail, wholesale, or restaurant services or other similar work, we continue to experience dissatisfaction with our platform from a significant number of drivers."
What's more, Uber is likely to make the drivers even more unhappy in the future, both because it is investing in self-driving cars to reduce the numbers of drivers it needs, and because it plans to reduce payments to drivers in order to increase its chances of turning a profit: "As we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase."
"Dissatisfaction" is putting it mildly: last week, Uber drivers in seven major US cities announced planned protests to highlight what they claim are poor working conditions and low wages. The protests, organised by the aptly named Gig Workers Rising, are scheduled to coincide Uber's stock market debut.
This is not a one-off either: the Organisation for Economic Co-operation and Development (OECD), whose mission is to promote policies that improve the economic and social well-being of people around the world, is calling for union membership and collective bargaining for gig economy workers. OECD, which represents 36 nations across the globe, estimates that 14% of jobs could be lost due to automation and a further 32% change radically in the next 15 years. These major challenges to the future of work need to be addressed by governments whose mission should be to prepare both workers and companies.
Closer to home in the UK, in December 2018, Uber lost an appeal against a ruling that its drivers should be treated as workers rather than self-employed. The essential question the Court of Appeal had to answer with regards to worker status was whether, as the drivers argued, Uber contracts with the passengers to provide driving services with which the drivers perform; or whether, as Uber argued, it only acts as an intermediary with the drivers acting as independent contractors. The majority held that drivers are under a positive obligation to be available to drive whilst the Uber application is on and that amounts to "work" for the purposes of the Regulations. Uber was, however, given leave to challenge this latest ruling at the Supreme Court and stated that it would do so.
How would that affect Uber’s future?
It’s not just in the UK that Uber is facing legal challenges. Its IPO filing admits that the platform’s approach is being challenged in "numerous legal proceedings globally" and that losing these fights would mean it could have to take on additional costs, such as benefits, payroll tax contributions, minimum wages and paid breaks. "Any such reclassification would require us to fundamentally change our business model," Uber writes.